<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 24, 1996)
[LOGO]
$341,961,200
(APPROXIMATE)
NORWEST ASSET SECURITIES CORPORATION
("NASCOR")
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-5
PRINCIPAL AND INTEREST PAYABLE MONTHLY, COMMENCING IN NOVEMBER 1996
The Series 1996-5 Mortgage Pass-Through Certificates (the "Series 1996-5
Certificates") will consist of one class of senior certificates (the "Class A
Certificates") and two classes of subordinated certificates (the "Class M
Certificates" and the "Class B Certificates," respectively, and together, the
"Subordinated Certificates"). The Class A Certificates are entitled to a certain
priority, relative to the Class M and Class B Certificates, in right of
distributions on the Mortgage Loans. As between the Class M Certificates and the
Class B Certificates, the Class M Certificates are entitled to a certain
priority in right of distributions on the Mortgage Loans. The Class A
Certificates will consist of nineteen subclasses of Certificates designated as
the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7,
Class A-8, Class A-9, Class A-10, Class A-11, Class A-12, Class A-13, Class
A-14, Class A-15, Class A-16, Class A-17, Class A-R and Class A-LR Certificates.
The Class M Certificates will not be divided into subclasses. The Class B
Certificates will consist of five subclasses of Certificates designated as the
Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates. Each
subclass of Class A and Class B Certificates is referred to herein as a
"Subclass." The Class A Certificates, other than the Class A-16 Certificates,
the Class M Certificates and the Class B-1 and Class B-2 Certificates are the
only Series 1996-5 Certificates being offered hereby and are referred to herein
collectively as the "Offered Certificates." The Class B-1 and Class B-2
Certificates are referred to herein collectively as the "Offered Class B
Certificates."
(CONTINUED ON NEXT PAGE)
---------------------------
THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF NORWEST ASSET
SECURITIES CORPORATION OR ANY AFFILIATE THEREOF. NEITHER THESE SECURITIES NOR
THE UNDERLYING MORTGAGE LOANS WILL BE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
SUBCLASS OR INITIAL SUBCLASS OR CLASS PASS-THROUGH SUBCLASS OR
CLASS DESIGNATION PRINCIPAL BALANCE(1) RATE CLASS DESIGNATION
<S> <C> <C> <C>
Class A-1............................... $60,299,000 7.25% Class A-12..............................
Class A-2............................... $21,922,000 7.25% Class A-13..............................
Class A-3............................... $ 5,952,000 7.25% Class A-14..............................
Class A-4............................... $36,427,000 7.25% Class A-15..............................
Class A-5............................... $13,948,000 8.00% Class A-17..............................
Class A-6............................... $12,955,000 7.50% Class A-R...............................
Class A-7............................... $40,568,000 (2) Class A-LR..............................
Class A-8............................... (3) (4) Class M.................................
Class A-9............................... $16,433,000 7.25% Class B-1...............................
Class A-10.............................. $ 3,487,000 7.25% Class B-2...............................
Class A-11.............................. $17,024,000 7.50%
<CAPTION>
SUBCLASS OR INITIAL SUBCLASS OR CLASS PASS-THROUGH
CLASS DESIGNATION PRINCIPAL BALANCE(1) RATE
<S> <C> <C>
Class A-1............................... $10,279,000 8.00%
Class A-2............................... $12,312,000 7.50%
Class A-3............................... $12,416,000 8.00%
Class A-4............................... $12,567,000 8.00%
Class A-5............................... $45,656,000 8.00%
Class A-6............................... $ 100 8.00%
Class A-7............................... $ 100 8.00%
Class A-8............................... $ 9,339,000 8.00%
Class A-9............................... $ 6,226,000 8.00%
Class A-10.............................. $ 4,151,000 8.00%
Class A-11..............................
</TABLE>
(1) Approximate. The initial Subclass or Class Principal Balances are subject to
adjustment as described herein.
(2) During the initial LIBOR Based Interest Accrual Period, interest will accrue
on the Class A-7 Certificates at the rate of 6.1375% per annum. During each
LIBOR Based Interest Accrual Period thereafter, interest will accrue on the
Class A-7 Certificates at a per annum rate equal to the lesser of (i) 0.70%
plus the arithmetic mean of the London interbank offered rate quotations for
one-month Eurodollar ("LIBOR") deposits determined monthly as set forth in
this Prospectus Supplement and (ii) 9.00%. See "Description of Certificates
-- Interest" herein.
(3) The Class A-8 Certificates are interest-only certificates, have no principal
balance and will bear interest on the Class A-8 Notional Amount (initially,
approximately $40,568,000) as described herein under "Description of
Certificates -- Interest."
(4) During the initial LIBOR Based Interest Accrual Period, interest will accrue
on the Class A-8 Notional Amount at the rate of 2.8625% per annum. During
each LIBOR Based Interest Accrual Period thereafter, interest will accrue on
the Class A-8 Notional Amount at a per annum rate, subject to a minimum rate
of 0.00% and a maximum rate of 8.30%, equal to 8.30% minus LIBOR. See
"Description of Certificates -- Interest" herein.
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE
FACTORS DISCUSSED UNDER "RISK FACTORS" IN THIS PROSPECTUS SUPPLEMENT ON PAGE
S-34 AND IN THE PROSPECTUS ON PAGE 13.
-------------------
The Offered Certificates will be purchased by PaineWebber Incorporated (the
"Underwriter") from the Seller and will be offered by the Underwriter from time
to time to the public in negotiated transactions or otherwise at varying prices
to be determined, in each case, at the time of sale. Proceeds to the Seller from
the sale of the Offered Certificates will be approximately 99.57% of the
aggregate initial principal balance of the Class A Certificates (other than the
Class A-16 Certificates), approximately 98.92% of the aggregate initial
principal balance of the Class M Certificates, approximately 97.71% of the
aggregate initial principal balance of the Class B-1 Certificates and
approximately 94.64% of the aggregate initial principal balance of the Class B-2
Certificates, plus, in each case, accrued interest thereon at the rate of 8.00%
per annum from October 1, 1996 to (but not including) October 30, 1996, before
deducting expenses payable by the Seller estimated to be $415,000. The price to
be paid to the Seller for the Class A Certificates offered hereby has not been
allocated among such Subclasses of Class A Certificates. See "Underwriting"
herein.
The Offered Certificates are offered subject to receipt and acceptance by
the Underwriter, to prior sale and to the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Offered Certificates (other than the
Class A-8, Class A-R, Class A-LR, Class M, Class B-1 and Class B-2 Certificates)
will be made in book-entry form through the Same Day Funds Settlement System of
The Depository Trust Company, and that delivery of the Class A-8, Class A-R,
Class A-LR, Class M, Class B-1 and Class B-2 Certificates will be made at the
office of PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New
York 10019, in each case, on or about October 30, 1996.
---------------------------
PAINEWEBBER INCORPORATED
----------------
The date of this Prospectus Supplement is October 25, 1996.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Class A-9, Class A-10 and Class A-11 Certificates are planned
amortization class certificates and are referred to herein collectively as the
"PAC Certificates." The Class A-12 Certificates are companion certificates and
are referred to herein as the "Companion Certificates." The Class A-13
Certificates are referred to herein as the "Accretion Directed Certificates."
The Class A-16 Certificates, which are not offered hereby, will be deemed to
consist of six components (each, a "Component" or a "Class A-16 Component")
consisting of an interest-only Component (the "Class A-16 IO Component"), a
planned amortization class Component (the "Class A-16 PAC Component"), a
targeted amortization class Component (the "Class A-16 TAC Component"), an
accretion directed Component (the "Class A-16 Accretion Directed Component"), an
accrual Component (the "Class A-16 Accrual Component") and a principal-only
Component (the "Class A-16 PO Component"). The beneficial owner of a Class A-16
Certificate will not have a severable interest in any Component, but will have
an undivided interest in the entire Subclass.
The credit enhancement for the Series 1996-5 Certificates is provided
through the use of a "shifting interest" type subordination, which has the
effect of allocating all or a disproportionate amount of principal prepayments
and other unscheduled receipts of principal to the Class A Certificates (other
than the Class A-16 Certificates with respect to the Class A-16 PO Component) in
the aggregate for at least nine years beginning on the first Distribution Date.
See "Summary Information -- Credit Enhancement " and "-- Effects of Prepayments
on Investment Expectations," "Description of the Certificates" and "Prepayment
and Yield Considerations" herein.
The Series 1996-5 Certificates will evidence in the aggregate the entire
beneficial ownership interest in a trust fund (the "Trust Estate") established
by Norwest Asset Securities Corporation (the "Seller" or "NASCOR") and
consisting of a pool of fixed interest rate, conventional, monthly pay, fully
amortizing, one- to four-family, residential first mortgage loans having
original terms to stated maturity ranging from approximately 20 to approximately
30 years (the "Mortgage Loans"), other than the Fixed Retained Yield described
herein, together with certain related property. Certain of the Mortgage Loans
may be secured primarily by shares issued by cooperative housing corporations.
The servicing of the Mortgage Loans will be performed by various servicers
identified herein (each, a "Servicer"), including Norwest Mortgage, Inc.
("Norwest Mortgage"), an affiliate of both the Seller and Norwest Bank
Minnesota, National Association ("Norwest Bank"), and will be supervised by
Norwest Bank (in such capacity, the "Master Servicer"). The Mortgage Loans will
be acquired by the Seller on the date of issuance of the Series 1996-5
Certificates from Norwest Mortgage, and will have been originated by Norwest
Mortgage or acquired by Norwest Mortgage from The Prudential Home Mortgage
Company, Inc. ("PHMC") or various other entities (each such other entity, a
"Norwest Mortgage Correspondent"). The Mortgage Loans not originated by Norwest
Mortgage or acquired from PHMC were originated by the Norwest Mortgage
Correspondents or acquired by the Norwest Mortgage Correspondents pursuant to
mortgage loan purchase programs operated by such Norwest Mortgage
Correspondents. See "Description of the Mortgage Loans" herein. The Class A
Certificates will initially evidence in the aggregate an approximate 94.00%
undivided interest in the principal balance of the Mortgage Loans. The Class M
Certificates will initially evidence in the aggregate an approximate 2.25%
undivided interest in the principal balance of the Mortgage Loans. The Class B-1
Certificates will initially evidence in the aggregate an approximate 1.50%
undivided interest in the principal balance of the Mortgage Loans. The Class B-2
Certificates will initially evidence in the aggregate an approximate 1.00%
undivided interest in the principal balance of the Mortgage Loans. The remaining
approximate 1.25% undivided interest in the principal balance of the Mortgage
Loans will be evidenced by the Class B-3, Class B-4 and Class B-5 Certificates.
Distributions in respect of interest and principal will be made on the 25th
day of each month or, if such day is not a business day, on the succeeding
business day (each a "Distribution Date"), commencing in November 1996, to the
holders of Offered Certificates, as described herein. The Class A-16 Accrual
Component will accrete interest as described herein. Holders of the Class A-16
Certificates with respect to the Class A-16 Accrual Component will not be
entitled to current distributions of interest until the Accretion Termination
Date. Prior to such time, an amount equal to the accrued and unpaid interest on
the Class A-16 Accrual Component will be added to the Component Principal
Balance thereof, and will be distributed in reduction of the principal balance
of the Accretion Directed Certificates and the Component Principal Balances of
the Class A-16 Accretion Directed Component and the Class A-16 Accrual Component
to the extent described herein under "Description of the Certificates --
Principal (Including Prepayments) -- Allocation of Amount to be Distributed."
The amount of interest accrued on any
S-2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Subclass or Class of Offered Certificates will be reduced by any prepayment
interest shortfalls and certain other shortfalls in the collection of interest
from mortgagors, as well as certain losses, as described herein under
"Description of the Certificates -- Interest." On any Distribution Date, the
holders of the Class M Certificates will receive distributions of interest only
if the holders of the Class A Certificates have received all amounts due them
(other than the Class A-16 PO Component Deferred Amount) on such date.
Distributions of principal to holders of the Class M Certificates will be made
only after holders of the Class A Certificates have received all distributions
to which they are entitled (including, in the case of the Class A-16
Certificates, the Class A-16 PO Component Deferred Amount) and the holders of
the Class M Certificates have received the amount of interest due them with
respect to such Distribution Date. On any Distribution Date, the holders of a
Subclass of Class B Certificates will receive distributions of interest only if
the holders of the Class A Certificates and Class M Certificates and each
Subclass of Class B Certificates with a lower numerical designation have
received all amounts due them (other than the Class A-16 PO Component Deferred
Amount) on such date. Distributions of principal to holders of a Subclass of
Class B Certificates will be made only after the Class A Certificates, the Class
M Certificates and each Subclass of Class B Certificates with a lower numerical
designation have received all distributions to which they are entitled
(including, in the case of the Class A-16 Certificates, the Class A-16 PO
Component Deferred Amount) and such Subclass has received the amount of interest
due with respect to such Distribution Date. Distributions in reduction of the
principal balance of the Class A Certificates on any Distribution Date will be
allocated among the Subclasses of the Class A Certificates in the manner
described herein under "Description of the Certificates -- Principal (Including
Prepayments)." Distributions to each Subclass or undivided Class of Offered
Certificates will be made pro rata among Certificateholders of such Subclass or
Class.
The Offered Certificates may not be an appropriate investment for individual
investors who do not have sufficient resources or expertise to evaluate the
particular characteristics of the applicable Subclass or Class of Offered
Certificates. This may be the case because:
- The yield to maturity of Offered Certificates purchased at a price other
than par will be sensitive to the uncertain rate and timing of principal
prepayments on the Mortgage Loans;
- The rate of principal distributions on, and the weighted average life of,
the Offered Certificates will be sensitive to the uncertain rate and
timing of principal prepayments on the Mortgage Loans and as such the
Offered Certificates may be inappropriate investments for an investor
requiring a distribution of a particular amount of principal on a specific
date or an otherwise predictable stream of distributions;
- There can be no assurance that an investor will be able to reinvest
amounts distributed in respect of principal on an Offered Certificate
(which, in general, are expected to be greater during periods of
relatively low interest rates) at a rate at least as high as the
Pass-Through Rate applicable thereto;
- As discussed below, there can be no assurance that a secondary market for
the Offered Certificates will develop or provide Certificateholders with
liquidity of investment; and
- The Offered Certificates are subject to the further risks and other
special considerations discussed herein and in the Prospectus under the
heading "Risk Factors."
THE YIELD TO MATURITY OF THE OFFERED CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS, WHICH MAY BE MADE AT ANY TIME WITHOUT PENALTY) ON THE MORTGAGE
LOANS. INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE ASSOCIATED
RISKS, INCLUDING, IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT,
THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL
(INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD
THAT IS LOWER THAN ANTICIPATED AND, IN THE CASE OF THE OFFERED CERTIFICATES
PURCHASED AT A PREMIUM, OR IN THE CASE OF THE CLASS A-8 CERTIFICATES, WHICH HAVE
NO PRINCIPAL BALANCE, THAT A FASTER THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT
OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN AN
ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED. INVESTORS PURCHASING OFFERED
CERTIFICATES AT A PREMIUM, OR INVESTORS IN THE CLASS A-8 CERTIFICATES, SHOULD
ALSO CONSIDER THE RISK THAT A RAPID RATE OF PAYMENTS IN RESPECT OF PRINCIPAL
(INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF
SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. THE YIELD TO
INVESTORS IN THE CLASS A-8 CERTIFICATES WILL BE HIGHLY SENSITIVE TO LIBOR SUCH
THAT RELATIVELY SMALL INCREASES IN LIBOR WILL HAVE A NEGATIVE EFFECT ON THE
YIELD TO INVESTORS IN THE CLASS A-8 CERTIFICATES AND COULD RESULT IN THE FAILURE
OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENT. THE YIELD TO
MATURITY OF THE CLASS M
S-3
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
CERTIFICATES WILL BE MORE SENSITIVE THAN THAT OF THE CLASS A CERTIFICATES TO THE
AMOUNT AND TIMING OF LOSSES DUE TO LIQUIDATIONS OF THE MORTGAGE LOANS, IN THE
EVENT THAT THE CLASS B PRINCIPAL BALANCE HAS BEEN REDUCED TO ZERO. THE YIELD TO
MATURITY OF EACH SUBCLASS OF OFFERED CLASS B CERTIFICATES WILL BE MORE SENSITIVE
THAN THAT OF THE CLASS A CERTIFICATES, THE CLASS M CERTIFICATES AND, IN THE CASE
OF THE CLASS B-2 CERTIFICATES, THE CLASS B-1 CERTIFICATES, TO THE AMOUNT AND
TIMING OF LOSSES DUE TO LIQUIDATIONS OF THE MORTGAGE LOANS IN THE EVENT THAT THE
PRINCIPAL BALANCES OF THE SUBCLASSES OF CLASS B CERTIFICATES WITH HIGHER
NUMERICAL DESIGNATIONS HAVE BEEN REDUCED TO ZERO. SEE "DESCRIPTION OF THE
CERTIFICATES -- INTEREST," "-- PRINCIPAL (INCLUDING PREPAYMENTS)" AND "--
SUBORDINATION OF CLASS M AND CLASS B CERTIFICATES" HEREIN AND "PREPAYMENT AND
YIELD CONSIDERATIONS" HEREIN AND IN THE PROSPECTUS.
THE WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFICATES WILL BE HIGHLY
SENSITIVE TO THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS. AT RATES ABOVE
CERTAIN PREPAYMENT LEVELS, PAYMENTS OF PRINCIPAL ALLOCATED TO THE CLASS A
CERTIFICATES (OTHER THAN THE CLASS A-16 PO COMPONENT) IN EXCESS OF AMOUNTS
RESULTING FROM SUCH PREPAYMENT LEVELS WILL BE PAID TO THE HOLDERS OF THE
COMPANION CERTIFICATES PRIOR TO BEING PAID TO THE HOLDERS OF THE PAC
CERTIFICATES AND THE CLASS A-16 CERTIFICATES WITH RESPECT TO THE CLASS A-16 PAC
COMPONENT AND THE CLASS A-16 TAC COMPONENT, RESULTING IN A REDUCTION IN THE
WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFICATES. AT OR BELOW CERTAIN
PREPAYMENT LEVELS, THE COMPANION CERTIFICATES MAY RECEIVE NO PRINCIPAL PAYMENTS
FOR EXTENDED PERIODS OF TIME RESULTING IN AN EXTENSION OF THE WEIGHTED AVERAGE
LIFE OF THE COMPANION CERTIFICATES. SEE "PREPAYMENT AND YIELD CONSIDERATIONS"
HEREIN.
The Offered Certificates, other than the Class A-8, Class A-R, Class A-LR,
Class M and Offered Class B Certificates, will be issued only in book-entry form
(the "Book-Entry Certificates"), and purchasers thereof will not be entitled to
receive definitive certificates except in the limited circumstances set forth
herein. The Book-Entry Certificates will be registered in the name of Cede &
Co., as nominee of The Depository Trust Company, which will be the "holder" or
"Certificateholder" of such Certificates, as such terms are used herein. See
"Description of the Certificates" herein.
Each Subclass and Class of Offered Certificates is offered in the minimum
denominations described herein under "Summary Information -- Forms of
Certificates; Denominations." It is intended that the Offered Certificates not
be directly or indirectly held or beneficially owned in amounts lower than such
minimum denominations.
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market will develop or, if such a
market does develop, that it will provide Certificateholders with liquidity of
investment at any particular time or for the life of the Offered Certificates.
The Underwriter intends to act as a market maker in the Offered Certificates,
subject to applicable provisions of federal and state securities laws and other
regulatory requirements, but is under no obligation to do so and any such market
making may be discontinued at any time. There can be no assurance that any
investor will be able to sell an Offered Certificate at a price equal to or
greater than the price at which such Certificate was purchased. THE CLASS M AND
OFFERED CLASS B CERTIFICATES MAY NOT BE TRANSFERRED UNLESS THE TRANSFEREE HAS
DELIVERED (I) A REPRESENTATION LETTER TO THE TRUSTEE AND THE SELLER STATING
EITHER (A) THAT THE TRANSFEREE IS NOT A PLAN AND IS NOT ACTING ON BEHALF OF A
PLAN OR USING THE ASSETS OF A PLAN TO EFFECT SUCH PURCHASE OR (B) SUBJECT TO
CERTAIN CONDITIONS DESCRIBED HEREIN, THAT THE SOURCE OF FUNDS USED TO PURCHASE
THE CLASS M OR OFFERED CLASS B CERTIFICATES IS AN "INSURANCE COMPANY GENERAL
ACCOUNT" OR (II) AN OPINION OF COUNSEL AS PROVIDED IN THIS PROSPECTUS
SUPPLEMENT. IN ADDITION, THE CLASS A-R AND CLASS A-LR CERTIFICATES MAY NOT BE
PURCHASED BY OR TRANSFERRED TO (I) A "DISQUALIFIED ORGANIZATION," (II) EXCEPT
UNDER CERTAIN LIMITED CIRCUMSTANCES, A PERSON WHO IS NOT A "U.S. PERSON," (III)
A PLAN OR (IV) ANY PERSON OR ENTITY WHO THE TRANSFEROR KNOWS OR HAS REASON TO
KNOW WILL BE UNWILLING OR UNABLE TO PAY WHEN DUE FEDERAL, STATE OR LOCAL TAXES
WITH RESPECT THERETO. See "ERISA Considerations" and "Description of the
Certificates -- Restrictions on Transfer of the Class A-R, Class A-LR, Class M
and Offered Class B Certificates" herein and "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates --
Tax-Related Restrictions on Transfer of Residual Certificates" in the
Prospectus.
For federal income tax purposes, the Trust Estate will consist of two real
estate mortgage investment conduits (each, a "REMIC" or, in the alternative, the
"Upper-Tier REMIC" and the "Lower-Tier REMIC," respectively). As described more
fully herein and in the Prospectus, the Class A-1, Class A-2, Class A-3,
S-4
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Class A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class A-9, Class A-10,
Class A-11, Class A-12, Class A-13, Class A-14, Class A-15 and Class A-17
Certificates, the Class A-16 IO Component, the Class A-16 PAC Component, the
Class A-16 TAC Component, the Class A-16 Accretion Directed Component, the Class
A-16 Accrual Component, the Class A-16 PO Component, the Class M Certificates
and the Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates
will constitute "regular interests" in the Upper-Tier REMIC and the Class A-R
and Class A-LR Certificates will constitute the "residual interest" in the
Upper-Tier REMIC and Lower-Tier REMIC, respectively. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT THE CLASS A-R AND CLASS A-LR CERTIFICATEHOLDERS' REMIC TAXABLE
INCOME AND THE LIABILITY THEREON MAY EXCEED, AND MAY SUBSTANTIALLY EXCEED, CASH
DISTRIBUTIONS TO SUCH HOLDERS DURING CERTAIN PERIODS, IN WHICH EVENT SUCH
HOLDERS MUST HAVE SUFFICIENT ALTERNATIVE SOURCES OF FUNDS TO PAY SUCH TAX
LIABILITY. See "Summary Information -- Federal Income Tax Status" and "Federal
Income Tax Considerations" herein and "Certain Federal Income Tax Consequences
- -- Federal Income Tax Consequences for REMIC Certificates" in the Prospectus.
The Class A Certificates (other than the Class A-16 Certificates) represent
eighteen Subclasses of a Class, the Class M Certificates represent a Class and
the Offered Class B Certificates represent two Subclasses of a Class, all of
which are part of a separate Series of Certificates being offered by the Seller
pursuant to the Prospectus dated October 24, 1996 accompanying this Prospectus
Supplement. Any prospective investor should not purchase any Offered
Certificates described herein unless it has received the Prospectus and this
Prospectus Supplement. The Prospectus shall not be considered complete without
this Prospectus Supplement. The Prospectus contains important information
regarding this offering which is not contained herein, and prospective investors
are urged to read, in full, the Prospectus and this Prospectus Supplement.
---------------------
UNTIL JANUARY 27, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. 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-5
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SUMMARY INFORMATION............................ S-7
RISK FACTORS................................... S-34
General...................................... S-34
Subordination................................ S-34
Book-Entry System for Certain Subclasses of
Class A Certificates........................ S-34
DESCRIPTION OF THE CERTIFICATES................ S-35
Denominations................................ S-35
Definitive Form.............................. S-35
Book-Entry Form.............................. S-35
Distributions................................ S-35
Interest..................................... S-39
Determination of LIBOR....................... S-47
Principal (Including Prepayments)............ S-48
Calculation of Amount to be Distributed to
the Class A Certificates.................. S-48
Calculation of Amount to be Distributed to
the Class A-16 PO Component............... S-52
Calculation of Amount to be Distributed to
the Class M and Class B Certificates...... S-53
Allocation of Amount to be Distributed..... S-56
Principle Payment Characteristics of the
PAC Certificates, the Class A-16 PAC
Component, the Class A-16 TAC Component
and the Companion Certificates............ S-63
Additional Rights of the Class A-R and Class
A-LR Certificateholders..................... S-65
Periodic Advances............................ S-65
Restrictions on Transfer of the Class A-R,
Class A-LR, Class M and Offered Class B
Certificates................................ S-66
Reports...................................... S-67
Subordination of Class M and Class B
Certificates................................ S-68
Allocation of Losses....................... S-69
DESCRIPTION OF THE MORTGAGE LOANS.............. S-73
General...................................... S-73
Mortgage Loan Data........................... S-76
Mandatory Repurchase or Substitution of
Mortgage Loans.............................. S-79
Optional Repurchase of Defaulted Mortgage
Loans....................................... S-79
<CAPTION>
PAGE
---------
<S> <C>
DELINQUENCY AND FORECLOSURE EXPERIENCE......... S-80
PREPAYMENT AND YIELD CONSIDERATIONS............ S-84
Historic Loss Experience of Securitized
Mortgage Loans.............................. S-95
Sensitivity of the Class A-8 Certificates.... S-96
Yield Considerations with Respect to the
Class B-1 and Class B-2 Certificates........ S-97
POOLING AND SERVICING AGREEMENT................ S-100
General...................................... S-100
Distributions................................ S-100
Voting....................................... S-100
Trust Administrator.......................... S-101
Trustee...................................... S-101
Master Servicer.............................. S-101
Special Servicing Agreements................. S-101
Optional Termination......................... S-102
SERVICING OF THE MORTGAGE LOANS................ S-102
The Servicers................................ S-102
Servicer Custodial Accounts.................. S-103
Unscheduled Principal Receipts............... S-103
Anticipated Changes in Servicing............. S-104
Fixed Retained Yield; Servicing Compensation
and Payment of Expenses..................... S-105
Servicer Defaults............................ S-105
FEDERAL INCOME TAX CONSIDERATIONS.............. S-106
Regular Certificates......................... S-106
Residual Certificates........................ S-107
ERISA CONSIDERATIONS........................... S-108
LEGAL INVESTMENT............................... S-110
SECONDARY MARKET............................... S-110
UNDERWRITING................................... S-110
LEGAL MATTERS.................................. S-111
USE OF PROCEEDS................................ S-111
RATINGS........................................ S-111
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT
DEFINITIONS................................... S-113
</TABLE>
S-6
<PAGE>
SUMMARY INFORMATION
THE FOLLOWING IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN THE
ACCOMPANYING PROSPECTUS (THE "PROSPECTUS"). CAPITALIZED TERMS USED IN THIS
PROSPECTUS SUPPLEMENT AND NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS
ASSIGNED IN THE PROSPECTUS. SEE "INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT
DEFINITIONS" HEREIN AND "INDEX OF SIGNIFICANT DEFINITIONS" IN THE PROSPECTUS.
<TABLE>
<S> <C>
Title of Securities............. Mortgage Pass-Through Certificates, Series 1996-5
Certificates (the "Series 1996-5 Certificates" or the
"Certificates").
Seller.......................... Norwest Asset Securities Corporation (the "Seller"). The
Mortgage Loans will have been acquired by the Seller from
Norwest Mortgage, Inc. ("Norwest Mortgage"), an affiliate
of the Seller and the Master Servicer. The Mortgage Loans
that the Seller acquires from Norwest Mortgage will either
have been originated by Norwest Mortgage or acquired by
Norwest Mortgage, or an affiliate of Norwest Mortgage,
from The Prudential Home Mortgage Company, Inc. ("PHMC")
or various other entities (each other such entity, a
"Norwest Mortgage Correspondent"), which either originated
the Mortgage Loans or acquired the Mortgage Loans pursuant
to mortgage loan purchase programs operated by the Norwest
Mortgage Correspondents. The Mortgage Loans acquired by
Norwest Mortgage from PHMC will either have been
originated by PHMC or acquired by PHMC from various other
entities (each a "PHMC Correspondent"). None of the
Norwest Mortgage Correspondents or PHMC Correspondents is
an affiliate of Norwest Mortgage.
Servicing/Servicers............. Norwest Mortgage and one or more other Servicers (which
will be Norwest Mortgage Correspondents or PHMC Correspon-
dents) approved by the Master Servicer will provide
customary servicing functions with respect to the Mortgage
Loans pursuant to servicing agreements (each, an
"Underlying Servicing Agreement") assigned to the Trust
Estate. Among other things, the Servicers are obligated
under certain circumstances to advance delinquent payments
of principal and interest with respect to the Mortgage
Loans. Each of the Servicers will be entitled to (i) a
monthly Servicing Fee with respect to each Mortgage Loan
it services payable on each Distribution Date that is ex-
pressed as one-twelfth of 0.25% multiplied by the
scheduled principal balance of such Mortgage Loan on the
first day of the month and (ii) other additional servicing
compensation described herein. See "Servicing of the
Mortgage Loans" herein and in the Prospectus.
Master Servicer................. Norwest Bank Minnesota, National Association ("Norwest
Bank" and, in its capacity as master servicer, the "Master
Servicer"). Norwest Bank is a direct, wholly owned
subsidiary of Norwest Corporation and is an affiliate of
the Seller and Norwest Mortgage. The Master Servicer will
(a) monitor certain aspects of the servicing of the
Mortgage Loans, (b) cause the Mortgage Loans to be
serviced in the event that a Servicer is terminated and a
successor Servicer is not appointed, (c) provide
administrative services with respect to the Certificates,
(d) provide certain reports to the Trustee regarding the
Mortgage
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
Loans and the Certificates, (e) make advances, to the
extent described herein, with respect to the Mortgage
Loans if a Servicer (other than Norwest Mortgage) fails to
make a required advance and (f) make payments to cover
certain prepayment interest shortfalls. The Master
Servicer will be entitled to (i) a monthly Master
Servicing Fee with respect to each Mortgage Loan, payable
on each Distribution Date, in an amount equal to
one-twelfth of 0.02% multiplied by the scheduled principal
balance of such Mortgage Loan on the first day of the
preceding month and (ii) any interest earned on funds in
the Certificate Account. See "Description of the
Certificates -- Interest" and "The Pooling and Servicing
Agreement -- Master Servicer" herein and "Norwest Bank,"
"Servicing of the Mortgage Loans -- The Master Servicer"
and "Certain Matters Regarding the Master Servicer" in the
Prospectus.
Trustee......................... Firstar Trust Company, a banking corporation organized
under the laws of Wisconsin (the "Trustee"). See "Pooling
and Servicing Agreement -- Trustee" in this Prospectus
Supplement.
Trust Administrator............. First Union National Bank of North Carolina (the "Trust
Administrator"). The Trust Administrator will perform
certain administrative functions on behalf of the Trustee
and will act as the initial paying agent, certificate
registrar and custodian. The Trust Administrator will be
required to make advances, to the extent described herein,
with respect to the Mortgage Loans if Norwest Mortgage, as
Servicer, fails to make a required advance. See "Pooling
and Servicing Agreement -- Trust Administrator" in this
Prospectus Supplement.
Rating of Certificates.......... It is a condition to the issuance of the Class A
Certificates offered by this Prospectus Supplement and the
Prospectus that they shall have been rated "AAA" by Fitch
Investors Service, L.P. ("Fitch"). It is a condition to
the issuance of the Class A Certificates offered by this
Prospectus Supplement and the Prospectus (other than the
Class A-8 Certificates) that they will have been rated
"AAA" by Standard & Poor's ("S&P"). It is a condition to
the issuance of the Class A-8 Certificates that they shall
have been rated "AAAr" by S&P. S&P assigns the additional
rating of "r" to highlight classes of securities that S&P
believes may experience high volatility or high
variability in expected returns due to non-credit risks.
It is a condition to the issuance of the Class M
Certificates that they shall have been rated at least "AA"
by Fitch and S&P. It is a condition to the issuance of the
Class B-1 and Class B-2 Certificates that they shall have
been rated at least "A" and "BBB," respectively, by Fitch.
The ratings of Fitch on mortgage pass-through certifi-
cates address the likelihood of the receipt by the
certificateholders of all distributions of principal and
interest to which such certificateholders are entitled.
The ratings of S&P on mortgage pass-through certificates
address the likelihood of receipt by the
certificateholders of timely payment of interest and the
ultimate return of principal. The ratings by Fitch and S&P
are not recommendations to buy, sell or hold such
Certificates and may be subject to revision or withdrawal
at any time by the
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
assigning rating agency. The ratings do not address the
possibility that, as a result of principal prepayments,
holders of such Certificates may receive a lower than
anticipated yield. The ratings also do not address the
possibility that holders of the Class A-8 Certificates may
not fully recover their initial investments. See
"-- Effects of Prepayments on Investment Expectations"
below and "Ratings" in this Prospectus Supplement.
Description of Certificates..... The Series 1996-5 Certificates will consist of the Class A
Certificates, the Class M Certificates and the Class B
Certificates. The Class A Certificates represent a type of
interest referred to in the Prospectus as "Senior
Certificates" and the Class M and Class B Certificates
represent a type of interest referred to in the Pro-
spectus as "Subordinated Certificates." As these
designations suggest, the Class A Certificates are
entitled to a certain priority, relative to the Class M
and Class B Certificates, in right of distributions on the
mortgage loans underlying the Series 1996-5 Certificates
(the "Mortgage Loans"). As between the Class M
Certificates and the Class B Certificates, the Class M
Certificates are entitled to a certain priority in right
of distributions on the Mortgage Loans and, as among the
Subclasses of Class B Certificates, the Subclasses with
lower numerical designations are entitled to a certain
priority in right of distributions on the Mortgage Loans
relative to those Subclasses with higher numerical
designations. See "-- Distributions of Principal and
Interest" below.
The Class A Certificates will consist of nineteen
Subclasses designated as the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class
A-8, Class A-9, Class A-10, Class A-11, Class A-12, Class
A-13, Class A-14, Class A-15, Class A-16, Class A-17,
Class A-R and Class A-LR Certificates. The Class M
Certificates will not be divided into Subclasses. The
Class B Certificates will consist of five Subclasses,
designated as the Class B-1, Class B-2, Class B-3, Class
B-4 and Class B-5. The Class A Certificates (other than
the Class A-16 Certificates), the Class M Certificates and
the Class B-1 and Class B-2 Certificates are referred to
in this Prospectus Supplement collectively as the "Offered
Certificates." The Class B-1 and Class B-2 Certificates
are referred to in this Prospectus Supplement collectively
as the "Offered Class B Certificates." The Class A-16
Certificates and the Class B-3, Class B-4 and Class B-5
Certificates are not offered hereby and may be retained or
sold by the Seller.
The Offered Certificates have the approximate aggregate
initial principal balances set forth on the cover of this
Prospectus Supplement, except that the Class A-8
Certificates will have no principal balance. Any
difference between the aggregate principal balance of the
Class A, Class M and Offered Class B Certificates as of
the date of issuance of the Series 1996-5 Certificates and
the approximate initial aggregate principal balance of
such Subclass and Class as of the date of this Prospectus
Supplement will not, with respect to the Class A
Certificates, exceed 5% of the initial aggregate principal
balance of the Class A Certificates as stated on the cover
of this Prospectus Supplement plus the
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
expected initial principal balance of the Class A-16
Certificates and, with respect to the Class M Certificates
and Offered Class B Certificates, will depend on the final
subordination levels for the Series 1996-5 Certificates.
Any difference allocated to the Class A Certificates will
be allocated to one or more of the Subclasses of Class A
Certificates, other than the Class A-8,
Class A-R and Class A-LR Certificates.
The following table sets forth for each Class and Subclass
indicated and for the Class A-16 PO Component the
approximate undivided interest in the principal balance of
the Mortgage Loans that is expected to be evidenced in the
aggregate by such Class, Subclass and the Class A-16 PO
Component as of the Closing Date.
</TABLE>
<TABLE>
<CAPTION>
APPROXIMATE INITIAL
CLASS, SUBCLASS OR COMPONENT UNDIVIDED INTEREST
---------------------------------------------- ---------------------
<S> <C> <C> <C>
Class A (other than the Class A-16 PO 93.13%
Component)
Class A-16 PO Component* 0.87%
---------
Class A (including the Class A-16 PO 94.00%
Component)
Class M 2.25%
Class B-1 1.50%
Class B-2 1.00%
Classes B-3, B-4 and B-5 1.25%
----------
Total 100.00%
----------
----------
</TABLE>
<TABLE>
<S> <C>
* The Class A-16 PO Component represents an approximate
2.92% initial interest in the principal balances of the
Mortgage Loans (such interest in the aggregate, the "Pool
Balance (PO Portion)") that have Net Mortgage Interest
Rates as defined on page S-43, of less than 8.00% (the
"Discount Mortgage Loans").
</TABLE>
------------------------------------------------------------------------
<TABLE>
<S> <C>
By virtue of the subordination of the Class M and Class B
Certificates, it is possible that the Class A-16 PO
Component may also receive support from certain payments
made with respect to the other Mortgage Loans in the Trust
Estate. The Class A Certificates (other than the Class
A-16 PO Component), the Class M Certificates and the Class
B Certificates will evidence the entire remaining interest
in the principal balance of the Mortgage Loans (the "Pool
Balance (Non-PO Portion)").
The following table sets forth for each Class indicated
the approximate undivided interest in the Pool Balance
(Non-PO Portion) that is expected to be evidenced in the
aggregate by such Class as of the Closing Date.
APPROXIMATE
INITIAL
UNDIVIDED
INTEREST
CLASS PERCENTAGE IN DOLLARS
--------------------------------------- ---------- ----------------
Class A (other than the Class A-16 PO 93.95% $ 386,565,200
Component)
Class M 2.27% $ 9,339,000
Class B 3.78% $ 15,565,604
---------- ----------------
Totals 100.00% $ 411,469,804
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
The relative interests in the initial Pool Balance (Non-PO
Portion) represented by the Class A Certificates (other
than the Class A-16 PO Component), the Class M
Certificates and the Class B Certificates are subject to
change over time because of the disproportionate
allocation of certain unscheduled principal payments to
the Class A Certificates (other than the Class A-16 PO
Component) for a specified period and the allocation of
certain losses and certain shortfalls first to the
Subclasses of Class B Certificates in reverse numerical
order, and then to the Class M Certificates prior to the
allocation of such losses and shortfalls to the Class A
Certificates, as discussed in "-- Distributions of
Principal and Interest" and "-- Credit Enhancement" below.
The Class A-16 Certificates, which are not offered hereby,
will be deemed to consist of six components (each a
"Component" or a "Class A-16 Component"), consisting of an
interest-only Component (the "Class A-16 IO Component"), a
planned amortization class Component (the "Class A-16 PAC
Component"), a targeted amortization class Component (the
"Class A-16 TAC Component"), an accretion directed
Component (the "Class A-16 Accretion Directed Component"),
an accrual Component (the "Class A-16 Accrual Component")
and a principal-only Component (the "Class A-16 PO
Component").
</TABLE>
- --------------------------------------------------------------------------------
COMPONENT PRINCIPAL BALANCES AND COMPONENT RATES
<TABLE>
<CAPTION>
APPROXIMATE
INITIAL COMPONENT PRINCIPAL COMPONENT
COMPONENT BALANCE RATE
- ------------------------------------------------------------- --------------------------------- -----------------
<S> <C> <C>
Class A-16 TAC Component..................................... $ 36,850,000 8.00%
Class A-16 PAC Component $ 5,863,000 12.00%
Class A-16 PO Component...................................... $ 3,592,430 (1)
Class A-16 IO Component...................................... (2) 1.50%
Class A-16 Accretion Directed Component...................... $ 3,078,000 10.00%
Class A-16 Accrual Component................................. $ 18,529,000 8.00%
</TABLE>
- ------------------------------
(1) The Class A-16 PO Component is a principal-only Component and will not
accrue interest on its component principal balance.
(2) The Class A-16 IO Component is an interest-only Component, has no principal
balance and will bear interest on its notional amount (initially,
approximately $39,573,000).
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The principal balance of the Class A-16 Certificates will
equal the sum of the component principal balances of the
Components. The holder of a Class A-16 Certificate will
not have a severable interest in any Component but will
have an undivided interest in the entire Subclass.
The Class A-9, Class A-10 and Class A-11 Certificates are
planned amortization class certificates (referred to
herein collectively as the "PAC Certificates") and the
Class A-16 PAC Component is a planned amortization class
Component because, based on certain assumptions described
in the first full paragraph on page S-89, if prepayments
on the Mortgage Loans occur at any constant rate between
approximately 100% SPA (as
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
defined herein under "Prepayment and Yield
Considerations") and approximately 375% SPA, it is
expected that their principal balances or component
principal balance would be reduced to the percentages of
their initial principal balances and initial component
principal balance for each Distribution Date indicated in
the tables beginning on page S-60. The Class A-16 TAC
Component is a targeted amortization Component because,
based on certain assumptions described in the first full
paragraph on page S-89, at a constant prepayment level of
approximately 245% SPA, it is expected that its component
principal balance would be reduced to the percentages of
its initial component principal balance indicated in the
table on page S-62. However, IT IS HIGHLY UNLIKELY THAT
PRINCIPAL PREPAYMENTS ON THE MORTGAGE LOANS WILL OCCUR AT
ANY CONSTANT RATE OR THAT THE MORTGAGE LOANS WILL PREPAY
AT THE SAME RATE. The Class A-12 Certificates are called
companion certificates (referred to herein as the
"Companion Certificates") because payments of principal
allocated to the Class A Certificates (other than the
Class A-16 PO Component) in excess of amounts resulting
from certain prepayment levels will be paid first to the
holders of the Companion Certificates, for so long as such
Certificates remain outstanding, prior to being paid to
the holders of the PAC Certificates and the Class A-16
Certificates with respect to the Class A-16 PAC Component
and the Class A-16 TAC Component. See "Description of the
Certificates -- Principal (Including
Prepayments) -- Allocation of Amount to be Distributed"
and " -- Principal Payment Characteristics of the PAC
Certificates, the Class A-16 PAC Component, the Class A-16
TAC Component and the Companion Certificates" in this
Prospectus Supplement.
Prior to the Accretion Termination Date (as defined on
page S-45), interest due to the holders of the Class A-16
Certificates with respect to the Class A-16 Accrual
Component will not be paid currently as interest on any
Distribution Date, but, instead, such amounts will be
added to the component principal balance thereof. On each
Distribution Date, prior to the Accretion Termination
Date, an amount equal to the accrued and unpaid interest
on the Class A-16 Accrual Component will be distributed in
reduction of the principal balance of the Class A-13
Certificates (referred to herein as the "Accretion
Directed Certificates") and the component principal
balances of the Class A-16 Accretion Directed Component
and the Class A-16 Accrual Component to the extent
described herein under "Description of the
Certificates -- Principal (Including
Prepayments) -- Allocation of Amount to be Distributed."
Forms of Certificates;
Denominations.................. The Offered Certificates will be issued either in
book-entry form or in fully registered, certificated form
("Definitive Certificates"). The following table sets
forth the original certificate form, the minimum
denomination and the incremental denomination of the
Offered Certificates. The Offered Certificates are not
intended to be directly or indirectly held or beneficially
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
owned in amounts lower than such minimum denominations.
See "Descriptions of the Certificates -- Denominations" in
this Prospectus Supplement.
</TABLE>
- --------------------------------------------------------------------------------
FORM AND DENOMINATIONS OF OFFERED CERTIFICATES
<TABLE>
<CAPTION>
ORIGINAL CERTIFICATE MINIMUM INCREMENTAL
CLASS OR SUBCLASS FORM DENOMINATION DENOMINATION
- --------------------------------------------------------- ----------------------- -------------- -------------
<S> <C> <C> <C>
Classes A-1, A-2, A-3, A-4, A-5, A-6, A-7, A-9, A-10,
A-11, A-13, A-14 and A-15............................... Book-Entry $ 25,000 $ 1,000
Classes A-12 and A-17.................................... Book-Entry $ 100,000 $ 1,000
Class A-8................................................ Definitive $ 14,000,000* $ 1,000*
Class M.................................................. Definitive $ 100,000 $ 1,000
Classes B-1 and B-2...................................... Definitive $ 100,000 $ 1,000
Classes A-R and A-LR..................................... Definitive $ 100 N/A
</TABLE>
- ------------------------------
* Initial notional amount.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BOOK-ENTRY FORM. The Offered Certificates, other than
the Class A-8, Class A-R, Class A-LR, Class M and
Offered Class B Certificates, will be issued in
book-entry form, through the facilities of The
Depository Trust Company ("DTC"). These Certificates are
referred to collectively in this Prospectus Supplement
as the "Book-Entry Certificates." An investor in a
Subclass of Book-Entry Certificates will not receive a
physical certificate representing its ownership interest
in such Book-Entry Certificates, except under
extraordinary circumstances which are discussed in
"Description of the Certificates -- Book-Entry Form" in
the Prospectus. Instead, DTC will effect payments and
transfers by means of its electronic recordkeeping
services, acting through certain participating
organizations. This may result in certain delays in
receipt of distributions by an investor and may restrict
an investor's ability to pledge its securities. The
rights of investors in the Book-Entry Certificates may
generally only be exercised through DTC and its
participating organizations. See "Description of the
Certificates -- Denominations" and "-- Book-Entry Form"
in this Prospectus Supplement and "Description of the
Certificates -- Book-Entry Form" in the Prospectus.
DEFINITIVE FORM. The Class A-8, Class A-R, Class A-LR,
Class M and Offered Class B Certificates will each be
issued as Definitive Certificates. See "Description of
the Certificates -- Denominations" and "-- Definitive
Form" in this Prospectus Supplement and "Description of
the Certificates -- Definitive Form" in the Prospectus.
Mortgage Loans.................... GENERAL. The Mortgage Loans, which are the source of
distributions to holders of the Series 1996-5
Certificates, will consist of conventional, fixed
interest rate, monthly pay, fully amortizing, one- to
four-family, residential first mortgage loans, having
original terms to stated maturity ranging from
approximately 20 to approximately 30 years, which may
include loans secured by shares issued by cooperative
housing
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
corporations. The Mortgage Loans are expected to have
the further specifications set forth in the following
table and under the heading "Description of the Mortgage
Loans" in this Prospectus Supplement.
</TABLE>
- --------------------------------------------------------------------------------
SELECTED MORTGAGE LOAN DATA(1)
(AS OF THE CUT-OFF DATE)
<TABLE>
<S> <C>
Cut-Off Date: October 1, 1996
Number of Mortgage Loans: 1,425
Aggregate Unpaid Principal Balance(2): $415,062,234
Range of Unpaid Principal Balances(2): $39,750 to $1,098,261
Average Unpaid Principal Balance(2): $291,272
Range of Mortgage Interest Rates: 7.125% to 9.875%
Weighted Average Mortgage Interest Rate(2): 8.472%
Range of Remaining Terms to Stated Maturity: 236 months to 360 months
Weighted Average Remaining Term to Stated Maturity(2): 357 months
Range of Original Loan-to-Value Ratios(2): 15.00% to 95.00%
Weighted Average Original Loan-to-Value Ratio(2): 77.63%
Geographic Concentration of Mortgaged Properties
Securing Mortgage Loans in Excess of 5% of the
Aggregate Unpaid Principal Balance(2): California 27.13%
New York 8.14%
New Jersey 6.85%
Colorado 5.46%
Maximum Five-Digit Zip Code Concentration(2): 0.79%
</TABLE>
- ------------------------------
(1) Information concerning the Discount Mortgage Loans and Premium Mortgage
Loans is set forth under "Description of the Mortgage Loans -- General."
(2) Approximate.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PHMC ACQUISITION. On May 7, 1996 Norwest Mortgage and an
affiliate acquired from PHMC certain mortgage loans and a
substantial portion of PHMC's mortgage servicing portfolio
(such transaction the "PHMC Acquisition"). The Mortgage
Loans included in the Trust Estate consist of (i) Mortgage
Loans originated by Norwest Mortgage or an affiliate or
purchased by Norwest Mortgage or an affiliate from
originators other than PHMC and (ii) Mortgage Loans
originated or purchased by PHMC and acquired by Norwest
Mortgage or an affiliate from PHMC as part of the PHMC
Acquisition. See "Norwest Mortgage" in the prospectus.
CHANGES TO POOL. Mortgage Loans may be removed from the
pool, or a substitution may be made for certain Mortgage
Loans, in advance of the issuance of the Series 1996-5
Certificates (which is expected to occur on or about
October 30, 1996) (the "Closing Date"). Any of such
Mortgage Loans may be excluded from the Trust Estate (i)
as a result of principal prepayment thereof in full or
(ii) if, as a result of delinquencies or otherwise, the
Seller otherwise deems such exclusion necessary or
desirable. In either event, other Mortgage Loans may be
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
included in the Trust Estate. This may result in changes
in certain of the pool characteristics set forth in the
table above and elsewhere in this Prospectus Supplement.
In the event that any of the characteristics as of the
Cut-Off Date of the Mortgage Loans that constitute the
Trust Estate on the date of initial issuance of the Series
1996-5 Certificates vary materially from those described
herein, revised information regarding the Mortgage Loans
will be made available to purchasers of the Offered
Certificates on or before such issuance date, and a
Current Report on Form 8-K containing such information
will be filed with the Securities and Exchange Commission
within 15 days following such issuance date. See
"Description of the Mortgage Loans" in this Prospectus
Supplement.
Subsequent to the issuance of the Series 1996-5
Certificates, certain Mortgage Loans may be removed from
the pool through repurchase or, under certain
circumstances, through substitution by the Seller, if the
Mortgage Loans are discovered to have defective
documentation or if they otherwise do not conform to the
standards established by the Seller's representations and
warranties concerning the Mortgage Loans. See "Description
of the Mortgage Loans -- Mandatory Repurchase or
Substitution of Mortgage Loans" in this Prospectus
Supplement.
Optional Termination............ The Seller is entitled, subject to certain conditions
relating to the then-remaining size of the pool, to
purchase all outstanding Mortgage Loans in the pool and
thereby effect early retirement of the Series 1996-5
Certificates. See "Pooling and Servicing Agreement --
Optional Termination" in this Prospectus Supplement.
Underwriting Standards.......... Approximately 96.94% (by Cut-Off Date Aggregate Principal
Balance) of the Mortgage Loans were generally originated
in conformity with the underwriting standards described in
the Prospectus under the heading "The Mortgage Loan
Programs -- Mortgage Loan Underwriting -- Norwest Mortgage
Underwriting" (the "Underwriting Standards"). In certain
instances, exceptions to the Underwriting Standards may
have been granted by Norwest Mortgage or PHMC. See "The
Mortgage Loan Programs -- Mortgage Loan Underwriting" in
the Prospectus. Approximately 0.17% (by Cut-Off Date
Aggregate Principal Balance) of the Mortgage Loans were
reviewed by United Guaranty Residential Insurance Company
("UGRIC") to ensure compliance with its credit, appraisal
and underwriting standards (the "Pool Certification
Underwritten Loans"). Neither the Series 1996-5
Certificates nor the Mortgage Loans are insured or
guaranteed under a mortgage pool insurance policy issued
by UGRIC. The Pool Certification Underwritten Loans were
evaluated using credit scoring as described in the
Prospectus under "The Mortgage Loan Programs -- Mortgage
Loan Underwriting -- Pool Certification Underwriting" and,
based on the credit scores of such Mortgage Loans, some of
such Mortgage Loans were re-underwritten. The remaining
approximate 2.89% (by Cut-Off
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
Date Aggregate Principal Balance) of the Mortgage Loans
were purchased by Norwest Mortgage or PHMC in bulk
purchase transactions and were underwritten using
underwriting standards which may vary from the
Underwriting Standards (the "Bulk Purchase Underwritten
Loans"). However, Norwest Mortgage or PHMC has in each
case reviewed the underwriting standards applied for such
Bulk Purchase Underwritten Loans and determined that such
variances did not depart materially from the Underwriting
Standards. See "Description of the Mortgage Loans" in this
Prospectus Supplement and "The Mortgage Loan Programs --
Mortgage Loan Underwriting" in the Prospectus.
Distributions of Principal and
Interest....................... DISTRIBUTIONS IN GENERAL. Distributions on the Series
1996-5 Certificates will be made on the 25th day of each
month, or, if such day is not a business day, on the
succeeding business day (each such date is referred to in
this Prospectus Supplement as a "Distribution Date"),
commencing in November 1996, to holders of record at the
close of business on the last business day of the
preceding month. In the case of the Book-Entry
Certificates, the holder of record will be Cede & Co., as
nominee of DTC.
The amount available for distribution on any Distribution
Date is primarily a function of (i) the amount remitted by
mortgagors of the Mortgage Loans in payment of their
scheduled installments of principal and interest, (ii) the
amount of prepayments made by the mortgagors and (iii)
proceeds from liquidations of defaulted Mortgage Loans.
On any Distribution Date, holders of the Class A
Certificates will be entitled to receive all amounts due
them (other than the Class A-16 PO Component Deferred
Amount, as defined on page S-52) before any distributions
are made to holders of the Class M and Class B
Certificates on that Distribution Date. The Class A-16
Certificates, with respect to Class A-16 PO Component,
will be entitled to receive the Class A-16 PO Component
Deferred Amount as described below. The amount that is
available to be distributed on any Distribution Date will
be allocated first to pay interest due holders of the
Class A Certificates (including the amount added to the
principal balance of the Class A-16 Certificates with
respect to the Class A-16 Accrual Component) and then, if
the amount available for distribution exceeds the amount
of interest due holders of the Class A Certificates, to
pay the principal due to the Class A Certificates. As
described under "-- Interest Distributions" below, prior
to the Accretion Termination Date an amount equal to the
amount accrued in respect of interest on the Class A-16
Accrual Component will be distributed in reduction of the
principal balance of the Accretion Directed Certificates
and the component principal balances of the Class A-16
Accretion Directed Component and the Class A-16 Accrual
Component to the extent described herein under
"Description of the Certificates -- Principal (Including
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
Prepayments) -- Allocation of Amount to be Distributed,"
rather than as interest to the holders of the Class A-16
Certificates with respect to the Class A-16 Accrual
Component. The likelihood that a holder of a particular
Subclass of Class A Certificates will receive principal
distributions on any Distribution Date will depend on the
priority in which such Subclass is entitled to principal
distributions, as set forth under the heading "Description
of the Certificates -- Principal (Including Prepayments)
-- Allocation of Amount to be Distributed" and "--
Calculation of Amount to be Distributed to the Class A
Certificates" in this Prospectus Supplement.
After all amounts due on the Class A Certificates (other
than the Class A-16 PO Component Deferred Amount) have
been paid, the amount remaining will be distributed, in
the following order, to pay (i) any Class A-16 PO
Component Deferred Amount first from amounts otherwise
distributable as principal on the Subclasses of Class B
Certificates in reverse numerical order (I.E., first from
amounts otherwise distributable as principal on the Class
B-5 Certificates, then from amounts otherwise
distributable as principal on the Class B-4 Certificates,
and so on), and then from amounts otherwise distributable
as principal on the Class M Certificates, (ii) interest
due to the holders of the Class M Certificates, (iii)
principal due to the holders of the Class M Certificates
less any amounts used to pay the Class A-16 PO Component
Deferred Amount and (iv) with respect to each Subclass of
Class B Certificates sequentially in numerical order
interest due and then principal due to the holders of each
such Subclass of Class B Certificates before any
Subclasses of Class B Certificates with higher numerical
designations receive any payments in respect of interest
or principal, provided that the principal due any Subclass
will be reduced by any amount used to pay the Class A-16
PO Component Deferred Amount. See "Description of the
Certificates -- Distributions" in this Prospectus
Supplement.
If any mortgagor is delinquent in the payment of principal
or interest on a Mortgage Loan in any month, the
respective Servicer is required to advance such payment
unless such Servicer determines that the delinquent amount
will not be recoverable by such Servicer from insurance
proceeds, liquidation proceeds or other recoveries on the
related Mortgage Loan. The Master Servicer or Trust
Administrator may, in certain circumstances, be required
to make such advances upon a Servicer's default on its
obligation to advance. See "Description of the
Certificates -- Periodic Advances" in this Prospectus
Supplement.
INTEREST DISTRIBUTIONS. The amount of interest to which
holders of each Subclass or Class of Offered Certificates,
other than the Class A-8 Certificates, will be entitled
each month is calculated based on the outstanding
principal balance of such Subclass or Class, as of the
related Distribution Date. Interest will accrue during
each one-month period on each such Subclass or Class
according to the following formula: 1/12th of the
Pass-Through
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
Rate for such Subclass or Class multiplied by the
outstanding principal balance of such Subclass or Class as
of the related Distribution Date.
The amount of interest to which the holders of the Class
A-8 Certificates are entitled each month is calculated
based on a "notional amount." A notional amount is an
amount other than the actual outstanding principal balance
of a Subclass and is solely used for the purpose of
computing the amount of interest accrued on such Subclass.
A notional amount does not entitle holders to receive
distributions of principal on the basis of such notional
amount. The notional amount of the Class A-8 Certificates
will equal the outstanding principal balance of the Class
A-7 Certificates. Interest will accrue on the Class A-8
Certificates during each one-month period according to the
following formula: 1/12th of the Pass-Through Rate for
such Subclass multiplied by the notional amount of such
Subclass as of the related Distribution Date.
The "Pass-Through Rate" for each Subclass or Class of
Offered Certificates, other than the Class A-7 and Class
A-8 Certificates, is the percentage set forth on the cover
of this Prospectus Supplement. The Pass-Through Rates for
the Class A-7 and Class A-8 Certificates will be
determined as described below.
Interest will accrue on the Offered Certificates, other
than the Class A-7 and Class A-8 Certificates, during each
one-month period ending on the last day of the month
preceding the month in which each Distribution Date occurs
(each, a "Regular Interest Accrual Period"). The initial
Regular Interest Accrual Period will be deemed to have
commenced on October 1, 1996. Interest will accrue on the
Class A-7 and Class A-8 Certificates during each one-month
period commencing on the 25th day of each month and ending
on the 24th day of the following month (each, a "LIBOR
Based Interest Accrual Period"). The initial LIBOR Based
Interest Accrual Period will commence on October 25, 1996.
No interest will accrue on the Class A-7 and Class A-8
Certificates prior to the commencement of the initial
LIBOR Based Interest Accrual Period.
During the initial LIBOR Based Interest Accrual Period,
the Pass-Through Rates for the Class A-7 and Class A-8
Certificates will be the initial Pass-Through Rates set
forth in the following table. During each subsequent LIBOR
Based Interest Accrual Period, the Pass-Through Rates for
the Class A-7 and Class A-8 Certificates will be the per
annum rates calculated based on the Pass-Through Rate
formulas, subject to the minimum and maximum Pass-Through
Rates set forth in the following table. As a result of
these calculations, a decrease in LIBOR will produce a
reduced Pass-Through Rate for the Class A-7 Certificates
(subject to the minimum rate), and an increase in LIBOR
will produce an increased Pass-Through Rate for such
Subclass (subject to the maximum rate) while an increase
in LIBOR will produce a reduced Pass-Through Rate for the
</TABLE>
S-18
<PAGE>
<TABLE>
<S> <C>
Class A-8 Certificates (subject to the minimum rate), and
a decrease in LIBOR will produce an increased Pass-Through
Rate for such Subclass (subject to the maximum rate).
The following table sets forth the initial Pass-Through
Rates, Pass-Through Rate formulas and the minimum and
maximum Pass-Through Rates for the Class A-7 and Class A-8
Certificates.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
FLOATING RATE AND INVERSE FLOATING RATE CERTIFICATES
<CAPTION>
INITIAL MINIMUM MAXIMUM
PASS-THROUGH PASS-THROUGH PASS-THROUGH PASS-THROUGH
SUBCLASS RATE RATE FORMULA RATE (1) RATE
- -------------- ------------- ----------------------------------------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Class A-7..... 6.1375 % LIBOR + 0.70% 0.70 % 9.00 %
Class A-8..... 2.8625 % 8.30% - LIBOR 0.00 % 8.30 %
</TABLE>
- ------------------------------
(1)Investors, and in particular investors in the Class A-8 Certificates, should
consider the effect of different rates of LIBOR and principal prepayments on
yield. See "Prepayment and Yield Considerations" in this Prospectus
Supplement.
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Interest will accrue on the Class A-16 Certificates during
each Regular Interest Accrual Period in an amount equal to
the sum of the interest accrued on the Class A-16 Accrual
Component, the Class A-16 PAC Component, the Class A-16 TAC
Component, the Class A-16 Accretion Directed Component and
the Class A-16 IO Component. Interest will accrue on each
Component (other than the Class A-16 IO Component and the
Class A-16 PO Component) at the rate of 1/12th of the
Component Rate for such Component on the outstanding
component principal balance of such Component.
Interest will accrue on the Class A-16 IO Component at the
rate of 1/12th of the Component Rate for such Component on
the notional amount for such Component. The notional amount
for the Class A-16 IO Component on any date is equal to the
product of approximately 28.77% and the sum of the
outstanding principal balances of the Class A-1, Class A-2,
Class A-3, Class A-4 and Class A-6 Certificates. The Class
A-16 PO Component is a principal-only Component and is not
entitled to interest.
Holders of each Subclass or Class of Certificates will be
entitled to receive distributions of interest on each
Distribution Date. Holders of the Class A-16 Certificates
(i) will not be entitled to receive distributions of
interest with respect to the Class A-16 PO Component and
(ii) will not be entitled to receive distributions of
interest with respect to the Class A-16 Accrual Component
until the Accretion Termination Date. See "Description of
the Certificates -- Interest" in this Prospectus Supplement.
Until the Accretion Termination Date, the amount of interest
to which the holders of the Class A-16 Certificates with
respect to the Class A-16 Accrual Component are entitled
will not be distributed as interest to such holders but
instead will be added to the component principal balance of
the Class A-16 Accrual Component. An amount equal to the
amount of interest that has
</TABLE>
S-19
<PAGE>
<TABLE>
<S> <C>
accrued but is not currently distributable on the Class A-16
Certificates with respect to the Class A-16 Accrual
Component will instead be distributed in reduction of the
principal balance of the Accretion Directed Certificates and
the component principal balances of the Class A-16 Accretion
Directed Component and the Class A-16 Accrual Component to
the extent described under the heading "Description of the
Certificates -- Principal (Including Prepayments) --
Allocation of Amount to be Distributed" in this Prospectus
Supplement.
When mortgagors prepay principal or when principal is recov-
ered through foreclosures or other liquidations of defaulted
Mortgage Loans, a full month's interest for the month of
payment or recovery may not be paid or recovered, resulting
in interest shortfalls. These interest shortfalls are
variously handled, depending on the nature of the event
resulting in the interest shortfall.
In the case of principal prepayments IN FULL, the Master
Servicer will be obligated to cover resulting interest
shortfalls with respect to a Distribution Date in an amount
(such amount, "Compensating Interest") up to the lesser of
(a) the product of (i) 1/12th of 0.20% and (ii) the
aggregate scheduled principal balance of the Mortgage Loans
with respect to such Distribution Date and (b) the Available
Master Servicing Compensation for such Distribution Date.
Shortfalls in collection of interest resulting from
principal prepayments in full, to the extent they exceed the
amount of Compensating Interest with respect to a
Distribution Date ("Non-Supported Interest Shortfalls"),
will be allocated pro rata among the Class A Certificates
(other than the Class A-16 PO Component), the Class M
Certificates and the Class B Certificates, based on their
then-outstanding principal balances. The amount allocated to
the Class A or Class B Certificates will be allocated pro
rata among the Subclasses of Class A or Class B
Certificates, as the case may be, based on interest accrued.
Interest shortfalls resulting from partial principal
prepayments will not be covered by the Master Servicer, but
instead will be borne first by the Subclasses of Class B
Certificates in reverse numerical order, second by the Class
M Certificates and finally, pro rata by the Class A
Certificates based on interest accrued. See "Description of
the Certificates -- Subordination of Class M and Class B
Certificates" in this Prospectus Supplement.
In addition, the amount of interest required to be
distributed to holders of the Series 1996-5 Certificates
will be reduced by a portion of certain Special Hazard
Losses, Fraud Losses and Bankruptcy Losses attributable to
interest. See "-- Credit Enhancement -- Extent of Loss
Coverage" below and "Description of the Certificates --
Interest" in this Prospectus Supplement.
To the extent that the amount available for distribution on
any Distribution Date is insufficient to permit the
distribution of the applicable amount of accrued interest on
the Class A Certificates (including any interest to be added
to the component principal
</TABLE>
S-20
<PAGE>
<TABLE>
<S> <C>
balance of the Class A-16 Accrual Component) (net of any
Non-Supported Interest Shortfall, other shortfalls and
losses allocable to the Class A Certificates as described
above), the amount of interest to be distributed will be
allocated among the outstanding Subclasses of Class A
Certificates in accordance with their respective
entitlements to interest. The amount of any deficiency will
be added to the amount of interest that the Class A
Certificates are entitled to receive on subsequent
Distribution Dates. No interest will accrue on such
deficiencies.
To the extent that the amount available for distribution on
any Distribution Date, after the payment of all amounts due
the Class A Certificates (other than any Class A-16 PO
Component Deferred Amount) has been made, is insufficient to
permit distribution in full of accrued interest on the Class
M Certificates (net of any Non-Supported Interest Shortfall,
other shortfalls and losses allocable to the Class M
Certificates as described above), the amount of any
deficiency will be added to the amount of interest that such
Class M Certificates are entitled to receive on subsequent
Distribution Dates. No interest will accrue on such
deficiencies.
To the extent that the amount available for distribution on
any Distribution Date, after the payment of all amounts due
the Class A Certificates (other than any Class A-16 PO
Component Deferred Amount), the Class M Certificates and
each Subclass of Class B Certificates with a lower numerical
designation has been made, is insufficient to permit
distribution in full of accrued interest on a Subclass of
Class B Certificates (net of any Non-Supported Interest
Shortfall, other shortfalls and losses allocable to such
Subclass of Class B Certificates as described above), the
amount of any deficiency will be added to the amount of
interest that such Subclass of Class B Certificates is
entitled to receive on subsequent Distribution Dates. No
interest will accrue on such deficiencies.
Interest on the Class A Certificates, the Class M
Certificates and the Class B Certificates will be calculated
on the basis of a 360-day year consisting of twelve 30-day
months.
See "Description of the Certificates -- Interest" in this
Prospectus Supplement.
PRINCIPAL DISTRIBUTIONS. The aggregate amount of principal
to which the holders of the Class A Certificates (other than
the holders of the Class A-16 Certificates with respect to
the Class A-16 PO Component) are entitled each month will
equal the sum for each Mortgage Loan of the product of (a)
the Non-PO Fraction applicable to such Mortgage Loan and (b)
the sum of (i) a percentage (the "Class A Percentage") of
scheduled payments of principal on each Mortgage Loan and
(ii) a percentage (the "Class A Prepayment Percentage") of
certain unscheduled payments of principal on each Mortgage
Loan. The "Non-PO Fraction" with respect to any Mortgage
Loan will equal the Net Mortgage Interest Rate for such
Mortgage Loan divided by
</TABLE>
S-21
<PAGE>
<TABLE>
<S> <C>
8.00%. The Class A Percentage will be equal, on each
Distribution Date, to the percentage corresponding to the
fraction that represents the ratio of the then-outstanding
principal balance of the Class A Certificates (other than
the Class A-16 PO Component) to the Pool Balance (Non-PO
Portion). The Class A Prepayment Percentage will be equal to
the percentage described in the preceding sentence plus an
additional amount equal to a percentage of the principal
otherwise distributable to the holders of the Subordinated
Certificates. As a result, the percentage of certain
unscheduled principal payments otherwise distributable to
the holders of the Subordinated Certificates that is instead
distributable to the holders of the Class A Certificates
(other than the Class A-16 Certificates with respect to the
Class A-16 PO Component) will be equal to 100% during the
first five years beginning on the first Distribution Date
and, subject to meeting certain conditions, will likely
decline during the subsequent four years, as described under
the heading "Description of the Certificates -- Principal
(Including Prepayments) -- Calculation of Amount to be
Distributed to the Class A Certificates" in this Prospectus
Supplement, until the ninth anniversary of the first
Distribution Date and thereafter will likely be equal to
zero. On each Distribution Date, the Subordinated
Certificates will collectively be entitled to receive the
percentages of the scheduled and certain unscheduled
payments of principal on the portion of each Mortgage Loan
representing the Non-PO Fraction of such Mortgage Loan
equal, in each case, to 100% less the applicable percentage
for the Class A Certificates described above.
The aggregate amount of principal to which holders of the
Class A-16 Certificates are entitled each month with respect
to the Class A-16 PO Component will equal the sum for each
Discount Mortgage Loan of the product of (a) the PO Fraction
for such Mortgage Loan and (b) the sum of (i) scheduled
principal payments on such Mortgage Loan and (ii) certain
unscheduled payments of principal on such Mortgage Loan. See
"Description of the Certificates -- Principal (Including
Prepayments) -- Calculation of Amount to be Distributed to
the Class A-16 PO Component." In addition, the Class A-16
Certificates will be entitled to receive any previously
unpaid amounts of principal to which such Certificates were
entitled on prior Distribution Dates as part of the Class
A-16 PO Component Deferred Amount. The "PO Fraction" with
respect to any Discount Mortgage Loan will equal the
difference between 1.0 and the Non-PO Fraction for such
Discount Mortgage Loan. The PO Fraction with respect to each
Mortgage Loan that is not a Discount Mortgage Loan will be
equal to zero. See "Description of the Certificates --
Principal (Including Prepayments)" in this Prospectus
Supplement.
The holders of the Class A-16 Certificates will also be
entitled each month to an amount equal to the Class A-16 PO
Component Deferred Amount. The Class A-16 PO Component
Deferred Amount will be paid to holders of the Class A-16
Certificates only from amounts otherwise distributable as
principal to the
</TABLE>
S-22
<PAGE>
<TABLE>
<S> <C>
Subclasses of Class B Certificates in reverse numerical
order and then from amounts otherwise distributable as
principal to the Class M Certificates. No interest will
accrue on any Class A-16 PO Component Deferred Amount.
Except as described below under "-- Effect of Subordination
Level on Principal Distributions," on each Distribution
Date, the Class M, Class B-1 and Class B-2 Certificates will
be entitled to a portion of scheduled payments and certain
unscheduled payments of principal on the Mortgage Loans
allocable to the Subordinated Certificates that represents
the ratio of the then-outstanding principal balance of the
Class M, Class B-1 or Class B-2 Certificates, as the case
may be, to the then-outstanding principal balance of the
Subordinated Certificates.
The amount that is available for distribution to the holders
of the Class A Certificates on any Distribution Date as a
distribution of principal (other than any Class A-16 PO
Component Deferred Amount) is the sum of (i) the amount
remaining after deducting the amount of interest
distributable on the Class A Certificates (including the
amount added to the component principal balance of the Class
A-16 Accrual Component) from the total amount collected that
is available to be distributed to holders of the Series
1996-5 Certificates on such Distribution Date and (ii) the
amount of interest, if any, added to the component principal
balance of the Class A-16 Accrual Component with respect to
such Distribution Date. Accordingly, even though the Class A
Certificates may not receive all accrued interest to which
they are entitled on a given Distribution Date, the
Accretion Directed Certificates, the Class A-16 Accretion
Directed Component and the Class A-16 Accrual Component may
receive distributions of principal as a result of the
application of clause (ii) above. Principal will be
distributed to the holders of the Class A Certificates in
accordance with the payment priorities described under the
heading "Description of the Certificates -- Principal
(Including Prepayments) -- Allocation of Amount to be
Distributed."
The amount that is available for distribution to the holders
of the Class M Certificates on any Distribution Date as a
distribution of principal is the amount remaining after all
interest and principal distributions due on the Class A
Certificates (including any Class A-16 PO Component Deferred
Amount) and interest due on the Class M Certificates have
been deducted from the total amount collected that is
available to be distributed to holders of the Series 1996-5
Certificates.
The amount that is available for distribution to the holders
of a Subclass of Class B Certificates on any Distribution
Date as a distribution of principal is the amount remaining
after all interest and principal distributions due on the
Class A Certificates (including any Class A-16 PO Component
Deferred Amount), all interest and principal distributions
on the Class M Certificates and the Subclasses of Class B
Certificates with lower numerical
</TABLE>
S-23
<PAGE>
<TABLE>
<S> <C>
designations and interest due on such Subclass of Class B
Certificates have been deducted from the total amount
collected that is available to be distributed to holders of
the Series 1996-5 Certificates.
EFFECT OF SUBORDINATION LEVEL ON PRINCIPAL DISTRIBUTIONS.
In order to preserve the availability of the original
subordination level as protection against losses on the
Class M Certificates, the Class B-1 Certificates, the Class
B-2 Certificates, the Class B-3 Certificates and the Class
B-4 Certificates, some or all of the Subclasses of Class B
Certificates, as described below, may not be entitled to
distributions of principal on certain Distribution Dates and
the principal balances of such Subclasses will not be
considered for purposes of allocation of principal among the
Subordinated Certificates.
In the case of the Class M Certificates, if on any
Distribution Date the percentage obtained by dividing the
outstanding principal balance of the Class B Certificates by
the sum of the outstanding principal balances of the Class A
Certificates (other than the Class A-16 PO Component), the
Class M Certificates and the Class B Certificates is less
than such percentage was upon the initial issuance of the
Series 1996-5 Certificates, then the Class B Certificates
will not be entitled to distributions of principal on such
Distribution Date and the Class M Certificates will be
entitled to all distributions of principal allocable to the
Subordinated Certificates for such Distribution Date.
In the case of the Class B-1, Class B-2, Class B-3 or Class
B-4 Certificates, if on any Distribution Date the percentage
obtained by dividing the then-outstanding principal balances
of the Subclasses of Class B Certificates with higher
numerical designations by the sum of the then-outstanding
principal balances of the Class A Certificates (other than
the Class A-16 PO Component), the Class M Certificates and
the Class B Certificates is less than such percentage at the
time of the initial issuance of the Series 1996-5
Certificates, then such Subclasses of Class B Certificates
with higher numerical designations will not be entitled to
distributions of principal and the principal balances of
such Subclasses will not be taken into account for purposes
of calculating the portions of scheduled and unscheduled
principal payments allocable to the Class M Certificates and
to the Subclasses of Class B Certificates with lower
numerical designations.
In either of the cases described above, the Class M
Certificates and those Subclasses of Class B Certificates
with lower numerical designations will receive a greater
portion of scheduled and unscheduled payments of principal
on the Mortgage Loans allocable to the Subordinated
Certificates than the Class M Certificates and those
Subclasses of Class B Certificates with lower numerical
designations would have received had all Subclasses of Class
B Certificates been entitled to their portion of such
</TABLE>
S-24
<PAGE>
<TABLE>
<S> <C>
principal payments. See "Description of the Certificates --
Principal (Including Prepayments) -- Calculation of Amount
to be Distributed to the Class M and Class B Certificates"
in this Prospectus Supplement.
Credit Enhancement...................... DESCRIPTION OF "SHIFTING-INTEREST" SUBORDINATION. The
rights of the holders of the Class M Certificates to receive
distributions will be subordinated to the rights of the
holders of the Class A Certificates to receive
distributions, to the extent described herein. The rights of
the holders of a Subclass of Class B Certificates to receive
distributions will be subordinated to the rights of the
holders of the Class A Certificates, the Class M Certifi-
cates and the Subclasses of Class B Certificates with lower
numerical designations to receive distributions, to the
extent described herein. This subordination provides a
certain amount of protection to the holders of the Class A
Certificates (to the extent of the subordination of the
Class M and Class B Certificates), the Class M Certificates
(to the extent of the subordination of the Class B
Certificates) and the Subclasses of Class B Certificates
(other than the Class B-5 Certificates) (to the extent of
the subordination of the Subclasses of Class B Certificates
with higher numerical designations) against delays in the
receipt of scheduled payments of interest and principal and
against losses associated with the liquidation of defaulted
Mortgage Loans and certain losses resulting from the
bankruptcy of a mortgagor.
In general, the protection afforded the holders of the Class
A Certificates by means of this subordination will be
effected in two ways: (i) by the preferential right of the
holders of the Class A Certificates to receive, prior to any
distribution being made on any Distribution Date in respect
of the Class M and Class B Certificates, the amounts of
interest and principal due the holders of the Class A
Certificates (other than the Class A-16 PO Component
Deferred Amount) and, if necessary, by the right of such
holders to receive future distributions on the Mortgage
Loans that would otherwise have been allocated to the
holders of the Class M and Class B Certificates and (ii) by
the allocation to the Class M and Class B Certificates,
until their respective principal balances have been reduced
to zero, of certain losses resulting from the liquidation of
defaulted Mortgage Loans or the bankruptcy of mortgagors
prior to the allocation of such losses to the Class A
Certificates. See "Description of the Certificates --
Distributions" in this Prospectus Supplement.
In general, the protection afforded the holders of the Class
M Certificates by means of this subordination will also be
effected in two ways: (i) by the preferential right of the
holders of the Class M Certificates to receive, prior to any
distribution being made on any Distribution Date in respect
of the Class B Certificates, the amounts of interest and
principal due the holders of the Class M Certificates on
such date and, if necessary, by the right of such holders to
receive future distributions on the Mortgage Loans that
would otherwise have been allocated to the holders of the
Class B Certificates and (ii) by the allocation to
</TABLE>
S-25
<PAGE>
<TABLE>
<S> <C>
the Class B Certificates, until their principal balance has
been reduced to zero, of certain losses resulting from the
liquidation of defaulted Mortgage Loans or the bankruptcy of
mortgagors prior to the allocation of such losses to the
Class M Certificates. See "Description of the Certificates
-- Distributions" in this Prospectus Supplement.
In general, the protection afforded the holders of a
Subclass of Class B Certificates by means of this
subordination will also be effected in two ways: (i) by the
preferential right of the holders of such Subclass to
receive, prior to any distribution being made on any
Distribution Date in respect of the Subclasses of Class B
Certificates with higher numerical designations, the amounts
of interest and principal due the holders of such Subclass
on such date and, if necessary, by the right of such holders
to receive future distributions on the Mortgage Loans that
would otherwise have been allocated to the holders of the
Subclasses of Class B Certificates with higher numerical
designations and (ii) by the allocation to the Subclasses of
Class B Certificates with higher numerical designations,
until their principal balances have been reduced to zero, of
certain losses resulting from the liquidation of defaulted
Mortgage Loans or the bankruptcy of mortgagors prior to the
allocation of such losses to such Subclass. See "Description
of the Certificates -- Distributions" in this Prospectus
Supplement.
In addition, in order to increase the period during which
the principal balances of the Class M and Class B
Certificates remain available as credit enhancement to the
Class A Certificates, a disproportionate amount of
prepayments and certain unscheduled recoveries with respect
to the Mortgage Loans will be allocated to the Class A
Certificates (other than the Class A-16 Certificates with
respect to the Class A-16 PO Component). This allocation has
the effect of accelerating the amortization of the Class A
Certificates (other than the Class A-16 Certificates with
respect to the Class A-16 PO Component) while, in the
absence of losses in respect of the liquidation of defaulted
Mortgage Loans or losses resulting from the bankruptcy of
mortgagors, increasing the respective percentage interests
in the principal balance of the Mortgage Loans evidenced by
the Class M and Class B Certificates. As a result of the
method of calculating the Class A-17 Priority Amount (as de-
fined herein) and the priorities for the allocation of the
Class A Non-PO Principal Amount (as defined herein), it is
expected that, absent an exceptionally high rate of
principal prepayments on the Mortgage Loans, no principal
payments will be made on the Class A-17 Certificates during
the first five years following the issuance of the Series
1996-5 Certificates. Thereafter, with respect to principal
prepayments, while the percentage of principal prepayments
allocated to the Class A-17 Certificates during the four
years thereafter will gradually increase, such percentage,
until the tenth year following the issuance of the Series
1996-5 Certificates, will be disproportionately lower than
the percentage of such principal prepayments allocated to
the other
</TABLE>
S-26
<PAGE>
<TABLE>
<S> <C>
Class A Certificates (other than the Class A-16 Certificates
with respect to the Class A-16 PO Component). See
"Description of the Certificates -- Principal (Including
Prepayments) -- Allocation of Amount to be Distributed" and
"Prepayment and Yield Considerations" in this Prospectus
Supplement.
EXTENT OF LOSS COVERAGE. Realized losses on Mortgage Loans,
other than losses that are (i) attributable to "special
hazards" not insured against under a standard hazard
insurance policy, (ii) incurred on defaulted Mortgage Loans
as to which there was fraud in the origination of such
Mortgage Loans or (iii) 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 of or the interest rate on a
Mortgage Loan or an extension of its maturity, will not be
allocated to the Class A Certificates until the date on
which the aggregate principal balance of the Class M and
Class B Certificates (which aggregate balance is expected
initially to be approximately $24,904,604) has been reduced
to zero; will not be allocated to the Class M Certificates
until the date on which the aggregate principal balance of
the Class B Certificates (which aggregate balance is
expected initially to be approximately $15,565,604) has been
reduced to zero; and will not be allocated to the Class B-1
or Class B-2 Certificates until the date on which the
aggregate principal balance of the Subclasses of Class B
Certificates with higher numerical designations has been
reduced to zero (which aggregate balance is expected
initially to be approximately $9,339,604 with respect to the
Class B-1 Certificates and approximately $5,188,604 with
respect to the Class B-2 Certificates). Such losses will be
allocated first among the Subclasses of Class B
Certificates, in reverse numerical order (that is, to the
Class B-5, Class B-4, Class B-3, Class B-2 and Class B-1
Certificates, respectively).
With respect to any Distribution Date subsequent to the
first Distribution Date, the availability of the credit
enhancement provided by the Class M Certificates and the
Subclasses of Class B Certificates will be affected by the
prior reduction of the principal balance of the Class M
Certificates and such Subclasses of Class B Certificates.
Reduction of the principal balance of the Class M
Certificates and any Subclass of Class B Certificates will
result from (i) the prior allocation of losses due to the
liquidation of defaulted Mortgage Loans, including losses
due to special hazards and fraud losses up to the respective
limits referred to below, (ii) the prior allocation of
bankruptcy losses up to the limit referred to below and
(iii) the prior receipt of principal distributions by the
holders of such Certificates.
As of the date of issuance of the Series 1996-5
Certificates, the amount of losses attributable to special
hazards, fraud and bankruptcy that will be absorbed solely
by the holders of the Subclasses of Class B Certificates in
reverse numerical order and then solely by the holders of
the Class M Certificates will be approximately 1.00%, 2.00%
and 0.04%, respectively, of the Cut-Off Date Aggregate
Principal Balance of the Mortgage Loans
</TABLE>
S-27
<PAGE>
<TABLE>
<S> <C>
(approximately $4,150,622, $8,301,245 and $169,705, respec-
tively). If losses due to special hazards, fraud or
bankruptcy exceed any of such amounts prior to the principal
balances of the Class M and Class B Certificates being
reduced to zero, (a) the principal portion of any such
excess losses with respect to the Mortgage Loans will
generally be shared pro rata by (i) the Class A Certificates
(other than the Class A-16 Certificates with respect to the
Class A-16 PO Component) and the Class M and Class B
Certificates and (ii) to the extent such losses arise with
respect to Discount Mortgage Loans, the Class A-16 PO Compo-
nent, in each case according to their respective interests
in such Mortgage Loans and (b) the interest portion of any
such losses with respect to the Mortgage Loans will
generally be shared pro rata by the Class A, Class M and
Class B Certificates based on their respective interest
accrual amounts. Under certain circumstances, the limits set
forth above may be reduced as described under "Description
of the Certificates -- Subordination of Class M and Class B
Certificates -- Allocation of Losses" in this Prospectus
Supplement.
After the principal balances of the Class M and Class B
Certificates have been reduced to zero, the principal
portion of all losses (other than the portion attributable
to the Class A-16 PO Component of the Class A-16
Certificates, if any) will be allocated to the Class A
Certificates (other than the Class A-16 Certificates with
respect to the Class A-16 PO Component). To the extent such
losses arise with respect to Discount Mortgage Loans,
principal losses will be shared among the Class A Certifi-
cates, according to their respective interests in such
Mortgage Loans. The principal portion of any losses borne by
the Class A Certificates (other than losses borne by the
Class A-16 Certificates with respect to the Class A-16 PO
Component) will be shared pro rata by the Subclasses of
Class A Certificates (other than the Class A-8 and the Class
A-16 Certificates) and the Components (other than the Class
A-16 IO Component and the Class A-16 PO Component) based on
their then-outstanding principal balances or component
principal balances or, in the case of the Class A-16 Accrual
Component, the initial component principal balance of the
Class A-16 Accrual Component, if lower. The interest portion
of such losses borne by the Class A Certificates will be
shared pro rata by the Subclasses of Class A Certificates
based upon interest accrued. See "Description of the Cer-
tificates -- Interest" and "-- Subordination of Class M and
Class B Certificates -- Allocation of Losses" in this
Prospectus Supplement.
THE YIELD TO MATURITY ON THE CLASS M CERTIFICATES WILL BE
MORE SENSITIVE TO LOSSES DUE TO LIQUIDATIONS OF THE MORTGAGE
LOANS (AND THE TIMING THEREOF) THAN THE CLASS A
CERTIFICATES, IN THE EVENT THAT THE AGGREGATE PRINCIPAL
BALANCE OF THE CLASS B CERTIFICATES HAS BEEN REDUCED TO
ZERO.
THE YIELD TO MATURITY ON EACH SUBCLASS OF OFFERED CLASS B
CERTIFICATES WILL BE MORE SENSITIVE TO LOSSES DUE TO
LIQUIDATIONS OF THE
</TABLE>
S-28
<PAGE>
<TABLE>
<S> <C>
MORTGAGE LOANS (AND THE TIMING THEREOF) THAN THE CLASS A
CERTIFICATES AND THE CLASS M CERTIFICATES AND, IN THE CASE
OF THE CLASS B-2 CERTIFICATES, THE CLASS B-1 CERTIFICATES,
IN THE EVENT THAT THE PRINCIPAL BALANCES OF THE SUBCLASSES
OF CLASS B CERTIFICATES WITH HIGHER NUMERICAL DESIGNATIONS
HAVE BEEN REDUCED TO ZERO.
See "Description of the Certificates -- Subordination of
Class M and Class B Certificates" in this Prospectus
Supplement.
Effects of Prepayments on Investment
Expectations........................... The actual rate of prepayment of principal on the Mortgage
Loans cannot be predicted. The investment performance of the
Offered Certificates may vary materially and adversely from
the investment expectations of investors due to prepayments
on the Mortgage Loans being higher or lower than anticipated
by investors. In addition, the Class A Certificates in the
aggregate will be more sensitive to prepayments on the
Mortgage Loans than the Subordinated Certificates due to the
disproportionate allocation of such prepayments to investors
in the Class A Certificates (other than the Class A-16
Certificates with respect to the Class A-16 PO Component)
then entitled to principal distributions during the nine
years beginning on the first Distribution Date. The actual
yield to the holder of an Offered Certificate may not be
equal to the yield anticipated at the time of purchase of
the Certificate or, notwithstanding that the actual yield is
equal to the yield anticipated at that time, the total
return on investment expected by the investor or the
expected weighted average life of the Certificate may not be
realized. These effects are summarized below. IN DECIDING
WHETHER TO PURCHASE ANY OFFERED CERTIFICATES, AN INVESTOR
SHOULD MAKE AN INDEPENDENT DECISION AS TO THE APPROPRIATE
PREPAYMENT ASSUMPTIONS TO BE USED.
YIELD. If an investor purchases an Offered Certificate at
an amount equal to its unpaid principal balance (that is, at
"par"), the effective yield to that investor (assuming that
there are no interest shortfalls and assuming the full
return of the investor's invested principal) will
approximate the Pass-Through Rate on that Certificate. If an
investor pays less or more than the unpaid principal balance
of an Offered Certificate (that is, buys the Certificate at
a "discount" or "premium," respectively), then, based on the
assumptions set forth in the preceding sentence, the
effective yield to the investor will be higher or lower,
respectively, than the stated interest rate on the
Certificate, because such discount or premium will be
amortized over the life of the Certificate. Any deviation in
the actual rate of prepayments on the Mortgage Loans from
the rate assumed by the investor will affect the period of
time over which, or the rate at which, the discount or
premium will be amortized and, consequently, will change the
investor's actual yield from that anticipated. The timing of
receipt of prepayments may also affect the investor's actual
yield. AN INVESTOR THAT PURCHASES ANY OFFERED CERTIFICATES
AT A DISCOUNT SHOULD CONSIDER THE RISK THAT A SLOWER THAN
ANTICIPATED RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS
WILL RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN SUCH
INVESTOR'S EXPECTED YIELD. AN INVESTOR THAT PURCHASES ANY
OFFERED CERTIFICATES AT A PREMIUM, OR
</TABLE>
S-29
<PAGE>
<TABLE>
<S> <C>
THAT PURCHASES THE CLASS A-8 CERTIFICATES, WHICH HAVE NO
PRINCIPAL BALANCE, SHOULD CONSIDER THE RISK THAT A FASTER
THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE
LOANS WILL RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN SUCH
INVESTOR'S EXPECTED YIELD AND SHOULD CONSIDER THE RISK THAT
A RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS
COULD RESULT IN THE FAILURE OF SUCH INVESTOR TO FULLY
RECOVER ITS INITIAL INVESTMENT.
The yield to investors in the Class A-8 Certificates, which
have no principal balance, will be sensitive to both the
timing of receipt of prepayments and the overall rate of
prepayment on the Mortgage Loans. The yield to investors in
the Class A-8 Certificates will also be highly sensitive to
the level of LIBOR and relatively small increases in the
level of LIBOR will have a material negative effect on the
yield to investors in the Class A-8 Certificates. The
particular sensitivity of the Class A-8 Certificates is
separately displayed in the table appearing under the
heading "Prepayment and Yield Considerations" in this Pro-
spectus Supplement. INVESTORS IN THE CLASS A-8 CERTIFICATES
SHOULD CONSIDER THE RISK THAT A RAPID RATE OF PRINCIPAL
PAYMENTS ON THE MORTGAGE LOANS OR A HIGH RATE OF LIBOR COULD
RESULT IN THE FAILURE OF SUCH INVESTORS TO FULLY RECOVER
THEIR INITIAL INVESTMENTS.
REINVESTMENT RISK. As stated above, if an Offered
Certificate is purchased at par, fluctuations in the rate of
distributions of principal will generally not affect the
yield to maturity of that Certificate. However, the total
return on any investor's investment, including an investor
who purchases at par, will be reduced to the extent that
principal distributions received on its Certificate cannot
be reinvested at a rate as high as the stated interest rate
of the Certificate. Investors in the Offered Certificates
should consider the risk that rapid rates of prepayments on
the Mortgage Loans may coincide with periods of low
prevailing market interest rates. During periods of low
prevailing market interest rates, mortgagors may be expected
to prepay or refinance Mortgage Loans that carry interest
rates significantly higher than then-current interest rates
for mortgage loans. Consequently, the amount of principal
distributions available to an investor for reinvestment at
such low prevailing interest rates may be relatively large.
Conversely, slow rates of prepayments on the Mortgage Loans
may coincide with periods of high prevailing market interest
rates. During such periods, it is less likely that
mortgagors will elect to prepay or refinance Mortgage Loans
and, therefore, the amount of principal distributions
available to an investor for reinvestment at such high
prevailing interest rates may be relatively small.
WEIGHTED AVERAGE LIFE VOLATILITY. One indication of the
impact of varying prepayment speeds on a security is the
change in its weighted average life. The "weighted average
life" of an Offered Certificate (other than the Class A-8
Certificates) is the average amount of time that will elapse
between the date of issuance of the Certificate and the date
on which each dollar in reduction of the principal balance
of the Certificate is distributed to the investor. The
weighted average life of a Class A-8 Certificate is the
average amount of time that will elapse between the date of
</TABLE>
S-30
<PAGE>
<TABLE>
<S> <C>
issuance of the Series 1996-5 Certificates and the date on
which each dollar in reduction of the principal balance of
the Class A-7 Certificates (which balance corresponds to the
notional amount of the Class A-8 Certificates) is
distributed to the investors in the Class A-7 Certificates.
Low rates of prepayment may result in the extension of the
weighted average life of a Certificate; high rates, in the
shortening of such weighted average life.
In general, if the weighted average life of a Certificate
purchased at par is extended beyond that initially
anticipated, such Certificate's market value may be
adversely affected even though the yield to maturity on the
Certificate is unaffected.
THE WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFICATES WILL
BE HIGHLY SENSITIVE TO THE RATE OF PREPAYMENTS ON THE
MORTGAGE LOANS. AT RATES ABOVE CERTAIN PREPAYMENT LEVELS,
PAYMENTS OF PRINCIPAL ALLOCATED TO THE CLASS A CERTIFICATES
(OTHER THAN THE CLASS A-16 PO COMPONENT) IN EXCESS OF SUCH
PREPAYMENT LEVELS WILL BE PAID TO HOLDERS OF SUCH COMPANION
CERTIFICATES WHILE SUCH CERTIFICATES REMAIN OUTSTANDING
PRIOR TO BEING PAID TO THE HOLDERS OF THE PAC CERTIFICATES
AND THE CLASS A-16 CERTIFICATES WITH RESPECT TO THE CLASS
A-16 PAC COMPONENT AND THE CLASS A-16 TAC COMPONENT.
See "Prepayment and Yield Considerations" and "Description
of the Certificates -- Principal (Including Prepayments) --
Principal Payment Characteristics of the PAC Certificates,
the Class A-16 PAC Component, the Class A-16 TAC Component
and the Companion Certificates" in this Prospectus Supple-
ment.
The weighted average lives of the Offered Certificates,
under various prepayment scenarios, are displayed in the
tables appearing under the heading "Prepayment and Yield
Considerations" in this Prospectus Supplement.
Federal Income Tax Status............... For federal income tax purposes, the Trust Estate will
consist of two real estate mortgage investment conduits (the
"Upper-Tier REMIC" and the "Lower-Tier REMIC,"
respectively). The Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class A-9,
Class A-10, Class A-11, Class A-12, Class A-13, Class A-14,
Class A-15 and Class A-17 Certificates, the Class A-16
Accrual Component, the Class A-16 PAC Component, the Class
A-16 TAC Component, the Class A-16 Accretion Directed
Component, the Class A-16 IO Component, the Class A-16 PO
Component, the Class M Certificates and the Class B-1, Class
B-2, Class B-3, Class B-4 and Class B-5 Certificates will
constitute "regular interests" in the Upper-Tier REMIC and
the Class A-R and Class A-LR Certificates will constitute
the "residual interest" in the Upper-Tier REMIC and
Lower-Tier REMIC, respectively.
The Regular Certificates (as defined herein) generally will
be treated as newly originated debt instruments for federal
income tax purposes. Beneficial owners of the Regular
Certificates will be required to report income thereon in
accordance with the accrual method of accounting. Although
not free from doubt, it is anticipated that the Class A-8
Certificates will be treated as issued with
</TABLE>
S-31
<PAGE>
<TABLE>
<S> <C>
original issue discount in an amount equal to the excess of
all distributions of interest expected to be received
thereon over their issue price (including accrued interest).
It is anticipated that the Class A-4 Certificates will be
issued with original issue discount in an amount equal to
the excess of their initial principal balances (plus five
days of interest at the pass-through rate thereon) over
their issue price (including accrued interest). It is also
anticipated that the Class A-1, Class A-3, Class A-5, Class
A-6, Class A-9, Class A-10, Class A-11, Class A-13 and Class
A-17 Certificates will be issued at a premium and that the
Class A-2, Class A-7, Class A-12, Class A-14, Class A-15,
Class M, Class B-1, and Class B-2 Certificates will be
issued with DE MINIMIS original issue discount for federal
income tax purposes. It is further anticipated that the
Class A-16, Class B-3, Class B-4 and Class B-5 Certificates,
which are not offered hereby, will be issued with original
issue discount for federal income tax purposes.
Holders of the Class A-R and Class A-LR Certificates will be
required to include the taxable income or loss of the
Upper-Tier REMIC and Lower-Tier REMIC, respectively, in
determining their federal taxable income. It is anticipated
that all or a substantial portion of the taxable income of
the Upper-Tier REMIC and Lower-Tier REMIC includible by the
Class A-R and Class A-LR Certificateholders will be treated
as "excess inclusion" income subject to special limitations
for federal income tax purposes. AS A RESULT, THE EFFECTIVE
AFTER-TAX RETURN OF THE CLASS A-R AND CLASS A-LR
CERTIFICATES MAY BE SIGNIFICANTLY LOWER THAN WOULD BE THE
CASE IF THE CLASS A-R AND CLASS A-LR CERTIFICATES WERE TAXED
AS DEBT INSTRUMENTS, OR MAY BE NEGATIVE. FURTHER,
SIGNIFICANT RESTRICTIONS APPLY TO THE TRANSFER OF THE CLASS
A-R AND CLASS A-LR CERTIFICATES. THE CLASS A-R AND CLASS
A-LR CERTIFICATES WILL BE CONSIDERED "NONECONOMIC RESIDUAL
INTERESTS," CERTAIN TRANSFERS OF WHICH MAY BE DISREGARDED
FOR FEDERAL INCOME TAX PURPOSES.
See "Description of the Certificates -- Restrictions on
Transfer of the Class A-R, Class A-LR, Class M and Offered
Class B Certificates" and "Federal Income Tax
Considerations" in this Prospectus Supplement and "Certain
Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates" in the Prospectus.
ERISA Considerations.................... A fiduciary of any employee benefit plan subject to the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal Revenue Code of
1986, as amended (the "Code"), or a governmental plan
subject to any federal, state or local law ("Similar Law")
which is, to a material extent, similar to the foregoing
provisions of ERISA or the Code (collectively, a "Plan"),
should carefully review with its legal advisors whether the
purchase or holding of Offered Certificates could give rise
to a transaction prohibited or not otherwise permissible
under ERISA, the Code or Similar Law. BECAUSE THE CLASS M
AND OFFERED CLASS B CERTIFICATES ARE SUBORDINATED TO THE
CLASS A CERTIFICATES, THE CLASS M AND OFFERED CLASS B
CERTIFICATES MAY NOT BE TRANSFERRED UNLESS THE TRANSFEREE
HAS DELIVERED (I) A REPRESENTATION LETTER TO THE TRUSTEE AND
SELLER STATING EITHER (A) THAT
</TABLE>
S-32
<PAGE>
<TABLE>
<S> <C>
THE TRANSFEREE IS NOT A PLAN AND IS NOT ACTING ON BEHALF OF
A PLAN OR USING THE ASSETS OF A PLAN TO EFFECT SUCH PURCHASE
OR (B) SUBJECT TO CERTAIN CONDITIONS DESCRIBED HEREIN, THAT
THE SOURCE OF FUNDS USED TO PURCHASE THE CLASS M OR OFFERED
CLASS B CERTIFICATES IS AN "INSURANCE COMPANY GENERAL
ACCOUNT" OR (II) AN OPINION OF COUNSEL AS DESCRIBED UNDER
"ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
RELATING TO THE OFFERING OF SUCH CERTIFICATES. THE CLASS A-R
AND CLASS A-LR CERTIFICATE MAY NOT BE PURCHASED BY OR
TRANSFERRED TO A PLAN. See "ERISA Considerations" in this
Prospectus Supplement and in the Prospectus.
Legal Investment........................ The Class A and Class M Certificates will constitute
"mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 (the "Enhancement
Act") so long as they are rated in one of the two highest
rating categories by at least one nationally recognized
statistical rating organization. As such, the Class A and
Class M Certificates are legal investments for certain
entities to the extent provided in the Enhancement Act.
However, there are regulatory requirements and con-
siderations applicable to regulated financial institutions
and restrictions on the ability of such institutions to
invest in certain types of mortgage rated securities. The
Class B-1 and Class B-2 Certificates will not constitute
"mortgage related securities" under the Enhancement Act. The
appropriate characterization of the Class B-1 and Class B-2
Certificates under various legal investment restrictions,
and thus the ability of investors subject to these
restrictions to purchase the Class B-1 and Class B-2
Certificates, may be subject to significant interpretive
uncertainties. Prospective purchasers of the Offered
Certificates should consult their own legal, tax and
accounting advisors in determining the suitability of and
consequences to them of the purchase, ownership and
disposition of the Offered Certificates. See "Legal
Investment" in this Prospectus Supplement.
</TABLE>
S-33
<PAGE>
RISK FACTORS
GENERAL
The rate of distributions in reduction of the principal balance of any
Subclass or Class of Offered Certificates, the aggregate amount of distributions
of principal and interest on any Subclass or Class of Offered Certificates and
the yield to maturity of any Subclass or Class of Offered Certificates will be
directly related to the rate of payments of principal on the Mortgage Loans in
the Trust Estate, and the amount and timing of mortgagor defaults resulting in
Realized Losses. The rate of principal payments on the Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
of principal prepayments (including partial prepayments and those resulting from
refinancing) thereon by mortgagors, liquidations of defaulted Mortgage Loans,
repurchases of Mortgage Loans by the Seller as a result of defective
documentation or breaches of representations and warranties, optional purchase
by the Seller of defaulted Mortgage Loans and optional purchase by the Seller of
all of the Mortgage Loans in connection with the termination of the Trust
Estate. See "Pooling and Servicing Agreement -- Optional Termination" herein and
"The Pooling and Servicing Agreement -- Assignment of Mortgage Loans to the
Trustee," "-- Optional Purchases" and "-- Termination; Purchase of Mortgage
Loans" in the Prospectus. Mortgagors are permitted to prepay the Mortgage Loans,
in whole or in part, at any time without penalty.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing rates for similar mortgage loans fall below the Mortgage Interest
Rates on the Mortgage Loans, the rate of prepayment would generally be expected
to increase. Conversely, if interest rates on similar mortgage loans rise above
the Mortgage Interest Rates on the Mortgage Loans, the rate of prepayment would
generally be expected to decrease.
An investor that purchases any Offered Certificates at a discount should
consider the risk that a slower than anticipated rate of principal payments on
the Mortgage Loans will result in an actual yield that is lower than such
investor's expected yield. An investor that purchases any Offered Certificates
at a premium, or that purchases any Class A-8 Certificates, which have no
principal balance, should consider the risk that a faster than anticipated rate
of principal payments on the Mortgage Loans will result in an actual yield that
is lower than such investor's expected yield.
The yield to investors in the Class A-8 Certificates will also be highly
sensitive to LIBOR and relatively small increases in LIBOR will have a material
negative effect on the yield to investors in the Class A-8 Certificates. The
particular sensitivity of the Class A-8 Certificates is separately displayed in
the table appearing under the heading "Prepayment and Yield Considerations" in
this Prospectus Supplement. INVESTORS IN THE CLASS A-8 CERTIFICATES SHOULD
CONSIDER THE RISK THAT A RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS
OR A HIGH RATE OF LIBOR COULD RESULT IN THE FAILURE OF SUCH INVESTORS TO FULLY
RECOVER THEIR INITIAL INVESTMENTS. See "Prepayment and Yield Considerations"
herein.
SUBORDINATION
The rights of the holders of the Class M Certificates to receive
distributions with respect to the Mortgage Loans in the Trust Estate will be
subordinated to such rights of the holders of the Class A Certificates and the
rights of the holders of a Subclass of Class B Certificates to receive
distributions with respect to the Mortgage Loans in the Trust Estate will be
subordinated to such rights of the holders of the Class A Certificates, the
Class M Certificates and the Subclasses of Class B Certificates with lower
numerical designations, all to the extent described herein under "Description of
the Certificates -- Subordination of Class M and Class B Certificates."
BOOK-ENTRY SYSTEM FOR CERTAIN SUBCLASSES OF CLASS A CERTIFICATES
Transactions in the Subclasses of Book-Entry Certificates generally can be
effected only through DTC, DTC Participants and Indirect DTC Participants. The
ability of a Beneficial Owner to pledge Book-Entry Certificates and the
liquidity of the Book-Entry Certificates in general may be limited due to the
lack of a physical certificate for such Book-Entry Certificates. In addition,
Beneficial Owners
S-34
<PAGE>
may experience delays in their receipt of payments. See "Risk Factors --
Book-Entry System for Certain Classes and Subclasses of Certificates" and
"Description of the Certificates -- Book-Entry Form" in the Prospectus.
See "Risk Factors" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
DENOMINATIONS
The Offered Certificates, other than the Class A-8, Class A-12, Class A-17,
Class A-R, Class A-LR, Class M, Class B-1 and Class B-2 Certificates, will be
issued in minimum denominations of $25,000 initial principal balance and
integral multiples of $1,000 initial principal balance in excess thereof. The
Class A-8 Certificates will be issued in minimum denominations of $14,000,000
initial notional amount and integral multiples of $1,000 initial notional amount
in excess thereof. The Class A-12, Class A-17, Class M, Class B-1 and Class B-2
Certificates will be issued in minimum denominations of $100,000 initial
principal balance and integral multiples of $1,000 initial principal balance in
excess thereof. The Class A-R Certificate and Class A-LR Certificate will each
be issued as a single Certificate with a denomination of $100 initial principal
balance.
DEFINITIVE FORM
Offered Certificates issued in fully registered, certificated form are
referred to herein as "Definitive Certificates." The Class A-8, Class A-R, Class
A-LR, Class M and Offered Class B Certificates will be issued as Definitive
Certificates. Distributions of principal of, and interest on, the Definitive
Certificates will be made by the Trust Administrator or other paying agent
directly to holders of Definitive Certificates in accordance with the procedures
set forth in the Pooling and Servicing Agreement. The Definitive Certificates
will be transferable and exchangeable at the offices of the Trust Administrator
or other certificate registrar. No service charge will be imposed for any
registration of transfer or exchange, but the Trust Administrator may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
BOOK-ENTRY FORM
Each Subclass of the Book-Entry Certificates initially will be represented
by one physical certificate registered in the name of Cede & Co. ("Cede"), as
nominee of DTC, which will be the "holder" or "Certificateholder" of such
Certificates, as such terms are used herein. No person acquiring an interest in
the Book-Entry Certificates (a "Beneficial Owner") will be entitled to receive a
Definitive Certificate representing such person's interest in the Book-Entry
Certificates, except as set forth under "Description of the Certificates --
Book-Entry Form" in the Prospectus. Unless and until Definitive Certificates are
issued under the limited circumstances described therein, all references to
actions taken by Certificateholders or holders shall, in the case of the
Book-Entry Certificates, refer to actions taken by DTC upon instructions from
its DTC Participants (as defined under "Description of the Certificates --
Book-Entry Form" in the Prospectus), and all references herein to distributions,
notices, reports and statements to Certificateholders or holders shall, in the
case of the Book-Entry Certificates, refer to distributions, notices, reports
and statements to DTC or Cede, as the registered holder of the Book-Entry
Certificates, as the case may be, for distribution to Beneficial Owners in
accordance with DTC procedures. See "Description of the Certificates --
Book-Entry Form" in the Prospectus.
DISTRIBUTIONS
Distributions of interest and in reduction of principal balance to holders
of each Subclass of Class A and Class B Certificates and the Class M
Certificates will be made monthly, to the extent of each Subclass's or Class's
entitlement thereto, on the 25th day of each month or, if such day is not a
business day, on the succeeding business day (each, a "Distribution Date"),
beginning in November 1996. The "Determination Date" with respect to each
Distribution Date will be the 17th day of each month, or if such day is not a
business day, the preceding business day. Distributions will be made
S-35
<PAGE>
on each Distribution Date to holders of record (which, in the case of the
Book-Entry Certificates, will be Cede, as nominee for DTC) at the close of
business on the last business day of the preceding month (each, a "Record
Date"), except that the final distribution in respect of any Certificate will
only be made upon presentation and surrender of such Certificate at the office
or agency appointed by the Trust Administrator and specified in the notice of
final distribution in respect of such Certificate.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date will be the Pool Distribution Amount. The "Pool
Distribution Amount" for a Distribution Date will be the sum of all previously
undistributed payments or other receipts on account of principal (including
principal prepayments and Liquidation Proceeds in respect of principal, if any),
and interest on or in respect of the Mortgage Loans received by the Master
Servicer, including without limitation any related insurance proceeds and the
proceeds of any purchase of a related Mortgage Loan for breach of a
representation or warranty or the sale of a Mortgaged Property by a Servicer in
connection with the liquidation of the related Mortgage Loan on or prior to the
Remittance Date in the month in which such Distribution Date occurs, plus (i)
all Periodic Advances made and (ii) all other amounts (including any insurance
proceeds and Compensating Interest) placed in the Certificate Account by any
Servicer on or before the Remittance Date or by the Master Servicer on or before
the Distribution Date pursuant to the Pooling and Servicing Agreement, but
excluding the following:
(a) amounts received as late payments of principal or interest
respecting which one or more unreimbursed Periodic Advances has been made;
(b) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds with respect to a Mortgage Loan that
represents any unreimbursed Periodic Advances of such Servicer;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent (i) the applicable Servicing Fee, (ii) the Master
Servicing Fee and (iii) the Fixed Retained Yield, if any;
(d) all amounts representing scheduled payments of principal and
interest due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e) all principal prepayments in full, all partial principal
prepayments, all proceeds of any Mortgage Loans or property acquired in
respect thereof, or liquidated pursuant to the Pooling and Servicing
Agreement, including net Partial Liquidation Proceeds but excluding any Net
Foreclosure Profits (as defined under "-- Additional Rights of the Class A-R
and Class A-LR Certificateholders" below), and other unscheduled receipts in
respect of principal of the Mortgage Loans other than proceeds of a
repurchase of a Mortgage Loan by the Seller or amounts deposited by the
Seller in the Certificate Account in connection with the substitution of a
Mortgage Loan (collectively, "Unscheduled Principal Receipts") that were
received by the Servicers after the Unscheduled Principal Receipt Period (as
described under "Servicing of the Mortgage Loans -- Unscheduled Principal
Receipts" below) relating to the Distribution Date for the applicable type
of Unscheduled Principal Receipt, and all related payments of interest on
such amounts;
(f) all repurchase proceeds with respect to Mortgage Loans repurchased
by the Seller on or following the Due Date in the month in which such
Distribution Date occurs and the excess of the unpaid principal balance of
any defective Mortgage Loan for which a Mortgage Loan was substituted over
the unpaid principal balance of such substituted Mortgage Loan on or
following the Due Date in the month in which such Distribution Date occurs;
(g) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds or insurance proceeds with respect to a
Mortgage Loan or proceeds of any Mortgaged Property that becomes owned by
the Trustee which represents any unpaid Servicing Fee or Master Servicing
Fee to which such Servicer or the Master Servicer, respectively, is
entitled, or which represents unpaid Fixed Retained Yield, and the portion
of net Liquidation Proceeds used to reimburse any unreimbursed Periodic
Advances;
S-36
<PAGE>
(h) all amounts representing certain expenses reimbursable to the Master
Servicer and other amounts permitted to be retained by the Master Servicer
or withdrawn by the Master Servicer from the Certificate Account pursuant to
the Pooling and Servicing Agreement;
(i) reinvestment earnings on payments received in respect of the
Mortgage Loans or on other amounts on deposit in the Certificate Account;
(j) Net Foreclosure Profits;
(k) Month End Interest; and
(l) the amount of any recoveries in respect of principal which had
previously been allocated as a loss to one or more Subclasses of the Class A
or Class B Certificates or the Class M Certificates.
The "Remittance Date" with respect to any Distribution Date and any Mortgage
Loan serviced by an Other Servicer will be the 18th day of each month, or if any
such day is not a business day, the preceding business day. The "Remittance
Date" with respect to any Distribution Date and any Mortgage Loan serviced by
Norwest Mortgage will, except as described below under "Servicing of the
Mortgage Loans -- Anticipated Changes in Servicing," be the 24th day of each
month, or if any such day is not a business day, the preceding business day.
"Partial Liquidation Proceeds" are Liquidation Proceeds received by a
Servicer on a Mortgage Loan prior to such Mortgage Loan becoming a Liquidated
Loan and "net Partial Liquidation Proceeds" are Partial Liquidation Proceeds
less expenses incurred with respect to such liquidation.
Each Servicer is required to deposit in the Certificate Account on the
Remittance Date certain amounts in respect of the Mortgage Loans as set forth
herein under "Servicing of the Mortgage Loans -- Custodial Accounts." The Master
Servicer is required to remit to the Trust Administrator on or before the
Distribution Date any payments constituting part of the Pool Distribution Amount
that are received by the Master Servicer or are required to be made with the
Master Servicer's own funds. Except as described below under "Description of the
Certificates -- Periodic Advances," neither the Master Servicer nor the Trust
Administrator is obligated to remit any amounts which a Servicer was required
but failed to deposit in the Certificate Account.
On each Distribution Date, the Pool Distribution Amount will be allocated
among the Classes or Subclasses of Certificates and distributed to the holders
thereof of record as of the related Record Date as follows (the "Pool
Distribution Amount Allocation"):
FIRST, to the Subclasses of Class A Certificates, pro rata based on their
respective Class A Subclass Interest Accrual Amounts in an aggregate amount up
to the sum of the Class A Subclass Interest Accrual Amounts with respect to such
Distribution Date; provided, that prior to the Accretion Termination Date, an
amount equal to the amount that would otherwise be distributable in respect of
interest to the Class A-16 Certificates by virtue of the Class A-16 Accrual
Component pursuant to this provision will be distributed in reduction of the
Class A Subclass Principal Balance of the Accretion Directed Certificates and
the Component Principal Balances of the Class A-16 Accretion Directed Component
and the Class A-16 Accrual Component, as set forth below under "-- Principal
(Including Prepayments) -- Allocation of Amount to be Distributed;"
SECOND, to the Subclasses of Class A Certificates, pro rata based on their
respective unpaid Class A Subclass Interest Shortfall Amounts in an aggregate
amount up to the sum of the previously unpaid Class A Subclass Interest
Shortfall Amounts; provided, that prior to the Accretion Termination Date, an
amount equal to the amount that would otherwise be distributable in respect of
interest shortfalls to the Class A-16 Certificates by virtue of the Class A-16
Accrual Component pursuant to this provision will be distributed in reduction of
the Class A Subclass Principal Balance of the Accretion Directed Certificates
and the Component Principal Balances of the Class A-16 Accretion Directed
Component and the Class A-16 Accrual Component, as set forth below under "--
Principal (Including Prepayments) -- Allocation of Amount to be Distributed;"
S-37
<PAGE>
THIRD, concurrently, to the Class A Certificates (other than the Class
A-16 Certificates with respect to the Class A-16 PO Component), based on the
Class A-Non PO Optimal Principal Amount, and the Class A-16 Certificates with
respect to the Class A-16 PO Component, based on the Class A-16 PO Component
Optimal Principal Amount, (A) to the Subclasses of Class A Certificates, (other
than the Class A-16 Certificates with respect to the Class A-16 PO Component) in
an aggregate amount up to the Class A Non-PO Optimal Principal Amount, such
distribution to be allocated among such Subclasses in accordance with the
priorities set forth below under "-- Principal (Including Prepayments) --
Allocation of Amount to be Distributed" and (B) to the Class A-16 Certificates
with respect to the Class A-16 PO Component in an amount up to the Class A-16 PO
Component Optimal Principal Amount;
FOURTH, to the Class A-16 Certificates with respect to the Class A-16 PO
Component in an amount up to the Class A-16 PO Component Deferred Amount, but
only, first from amounts otherwise distributable (without regard to this
priority) to the Subclasses of Class B Certificates pursuant to priorities
FOURTEENTH clause (C), THIRTEENTH and TENTH of this Pool Distribution Amount
Allocation and then from amounts otherwise distributable (without regard to this
priority) to the Class M Certificates pursuant to priority SEVENTH of this Pool
Distribution Amount Allocation;
FIFTH, to the Class M Certificates in an amount up to the Class M Interest
Accrual Amount with respect to such Distribution Date;
SIXTH, to the Class M Certificates in an amount up to the sum of the
previously unpaid Class M Interest Shortfall Amounts;
SEVENTH, to the Class M Certificates in an amount up to the Class M
Optimal Principal Amount; provided, however, that the amount distributable
pursuant to this priority SEVENTH to the Class M Certificates will be reduced by
the amount, if any, otherwise distributable as principal hereunder used to pay
the Class A-16 PO Component Deferred Amount in accordance with priority FOURTH;
EIGHTH, to the Class B-1 Certificates in an amount up to the Class B
Subclass Interest Accrual Amount for such Subclass with respect to such
Distribution Date;
NINTH, to the Class B-1 Certificates in an amount up to the sum of the
previously unpaid Class B Subclass Interest Shortfall Amounts for such Subclass;
TENTH, to the Class B-1 Certificates in an amount up to the Subclass B
Optimal Principal Amount for such Subclass; provided, however, that the amount
distributable pursuant to this priority TENTH will be reduced by the amount, if
any, otherwise distributable as principal hereunder used to pay the Class A-16
PO Component Deferred Amount in accordance with priority FOURTH;
ELEVENTH, to the Class B-2 Certificates in an amount up to the Class B
Subclass Interest Accrual Amount for such Subclass with respect to such
Distribution Date;
TWELFTH, to the Class B-2 Certificates in an amount up to the sum of the
previously unpaid Class B Subclass Interest Shortfall Amounts for such Subclass;
THIRTEENTH, to the Class B-2 Certificates in an amount up to the Subclass
B Optimal Principal Amount for such Subclass; provided, however, that the amount
distributable pursuant to this priority THIRTEENTH will be reduced by the
amount, if any, otherwise distributable as principal hereunder used to pay the
Class A-16 PO Component Deferred Amount in accordance with priority FOURTH; and
FOURTEENTH, sequentially, to the Class B-3, Class B-4 and Class B-5
Certificates so that each such Subclass shall receive (A) an amount up to its
Class B Subclass Interest Accrual Amount with respect to such Distribution Date,
(B) then, an amount up to its previously unpaid Class B Subclass Interest
Shortfall Amounts and (C) finally, an amount up to its Subclass B Optimal
Principal Amount before any Subclasses of Class B Certificates with higher
numerical designations receive any payments in respect of interest or principal;
provided, however, that the amount distributable pursuant to this
S-38
<PAGE>
priority FOURTEENTH clause (C) to any Subclasses of Class B Certificates will be
reduced by the amount, if any, otherwise distributable as principal hereunder
used to pay the Class A-16 PO Component Deferred Amount in accordance with
priority FOURTH.
The "Class A Non-PO Distribution Amount" for any Distribution Date will be
equal to the sum of the amounts distributed in accordance with priorities FIRST,
SECOND and THIRD clause (A) of the Pool Distribution Amount Allocation set forth
above.
The "Class M Distribution Amount" for any Distribution Date will be equal to
the sum of the amounts distributed in accordance with priorities FIFTH through
SEVENTH of the Pool Distribution Amount Allocation set forth above.
The "Class B Subclass Distribution Amount" for any Distribution Date and the
Class B-1 or Class B-2 Certificates will be equal to the sum of the amounts
distributed in accordance with priorities EIGHTH through TENTH of the Pool
Distribution Amount Allocation set forth above with respect to the Class B-1
Certificates and priorities ELEVENTH through THIRTEENTH of the Pool Distribution
Amount Allocation set forth above with respect to the Class B-2 Certificates.
The undivided percentage interest (the "Percentage Interest") represented by
any Certificate of a Subclass or Class in distributions to such Subclass or
Class will be equal to the percentage obtained by dividing the initial principal
balance (or initial notional amount in the case of the Class A-8 Certificates)
of such Certificate by the aggregate initial principal balance (or notional
amount) of all Certificates of such Subclass or Class.
INTEREST
Interest will accrue on each Subclass of Class A Certificates (other than
the Class A-7 and Class A-8 Certificates), the Class M Certificates and each
Subclass of Class B Certificates during each one-month period ending on the last
day of the month preceding the month in which each Distribution Date occurs
(each, a "Regular Interest Accrual Period"). The initial Regular Interest
Accrual Period will be deemed to have commenced on October 1, 1996. Interest
which accrues on such Subclasses of Class A Certificates and Class B
Certificates and on the Class M Certificates will be calculated on the
assumption that distributions in reduction of the principal balances thereof on
a Distribution Date are made on the first day of the month of such Distribution
Date. Interest will accrue on the Class A-7 and Class A-8 Certificates during
each one-month period commencing on the 25th day of each month and ending on the
24th day of the following month (each, a "LIBOR Based Interest Accrual Period").
The initial LIBOR Based Interest Accrual Period will commence on October 25,
1996. Interest on each Subclass of Class A Certificates, the Class M
Certificates and each Subclass of Class B Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
The amount of interest that will accrue on each Subclass of Class A
Certificates during each Regular Interest Accrual Period or each LIBOR Based
Interest Accrual Period, after taking into account any Non-Supported Interest
Shortfalls and the interest portion of certain losses allocated to such
Subclass, is referred to herein as the "Class A Subclass Interest Accrual
Amount" for such Subclass. The Class A Subclass Interest Accrual Amount for each
Subclass of Class A Certificates, other than the Class A-16 Certificates, will
equal the difference between (a) the product of (i) 1/12th of the Pass-Through
Rate for such Subclass and (ii) the outstanding Class A Subclass Principal
Balance of such Subclass or, in the case of the Class A-8 Certificates, the
outstanding Class A-8 Notional Amount, and (b) the sum of (i) any Non-Supported
Interest Shortfall allocable to such Subclass, (ii) the interest portion of any
Excess Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses
allocable to such Subclass and (iii) the interest portion of any Realized
Losses, other than the interest portion of any Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses, allocable to such Subclass on
or after the Cross-Over Date. The pass-through rate for each Subclass of Class A
Certificates (other than the Class A-16 Certificates) (the "Pass-Through Rate")
is the percentage set forth on the cover of this Prospectus Supplement or, in
the case of the Class A-7 and Class A-8 Certificates, is the percentage
determined as described below.
S-39
<PAGE>
During the initial LIBOR Based Interest Accrual Period, the Pass-Through
Rate for the Class A-7 Certificates will be 6.1375% per annum. During each
subsequent LIBOR Based Interest Accrual Period, the Pass-Through Rate for the
Class A-7 Certificates will be a per annum rate, determined on the second
business day preceding the commencement of such LIBOR Based Interest Accrual
Period, (each, a "Rate Determination Date"), equal to the lesser of (i) 0.70%
plus the arithmetic mean of the London interbank offered rate quotations for
one-month Eurodollar deposits ("LIBOR") prevailing on such Rate Determination
Date, determined as described below under "--Determination of LIBOR" and (ii)
9.00%.
During the initial LIBOR Based Interest Accrual Period, the Pass-Through
Rate for the Class A-8 Certificates will be 2.8625% per annum. During each
subsequent LIBOR Based Interest Accrual Period, interest will accrue on the
Class A-8 Notional Amount of the Class A-8 Certificates at a per annum rate,
subject to a minimum rate of 0.00% and a maximum of 8.30%, equal to 8.30% minus
LIBOR, as determined on the applicable Rate Determination Date. As a result of
this calculation, an increase in LIBOR will produce reduced interest rates
(subject to the minimum rate) for the Class A-8 Certificates, while a decrease
in LIBOR will produce increased interest rates (subject to the maximum rate) for
the Class A-8 Certificates.
The yields to investors in the Class A-7 and Class A-8 Certificates will be
affected by changes in LIBOR. An increase in LIBOR may have little or no
correlation to prevailing mortgage loan interest rates. It is possible that
lower prevailing mortgage loan interest rates (which might be expected to result
in faster prepayments) could occur concurrently with an increase in LIBOR.
Conversely, it is possible that higher prevailing mortgage loan interest rates
(which might be expected to result in slower prepayments) could occur
concurrently with a decrease in LIBOR. See "Prepayment and Yield Considerations"
herein and in the Prospectus.
The Class A-8 Certificates are interest-only certificates and have no
principal balance. The "Class A-8 Notional Amount" with respect to each
Distribution Date will be equal to the Class A Subclass Principal Balance of the
Class A-7 Certificates. Accordingly, any distributions in respect of principal
made to, or losses in respect of principal allocated in reduction of, the Class
A Subclass Principal Balance of the Class A-7 Certificates will result in a
corresponding reduction in the Class A-8 Notional Amount. See "--Principal
(Including Prepayments)" and "--Subordination of Class M and Class B
Certificates--Allocation of Losses" herein. The Class A-8 Notional Amount with
respect to the first Distribution Date will be approximately $40,568,000.
The Class A Subclass Interest Accrual Amount for the Class A-16 Certificates
will equal the sum of the Component Interest Accrual Amounts for the Class A-16
Accrual Component, Class A-16 PAC Component, Class A-16 TAC Component, Class
A-16 Accretion Directed Component and Class A-16 IO Component. The amount of
interest that will accrue on each such Component during each month, after taking
into account any Non-Supported Interest Shortfalls and the interest portion of
certain losses allocated to such Component, is referred to herein as the
"Component Interest Accrual Amount" for such Component. The component rate for
each Component (other than the Class A-16 PO Component) (the "Component Rate")
is the percentage set forth on page S-11 hereof.
The Component Interest Accrual Amount for each Component (other than the
Class A-16 PO Component) during each Regular Interest Accrual Period will equal
the difference between (a) the product of (i) 1/12th of the Component Rate for
such Component and (ii) the outstanding Component Principal Balance of such
Component or, in the case of the Class A-16 IO Component, the outstanding Class
A-16 IO Notional Amount and (b) the sum of such Component's pro rata share based
on interest accrued of (i) any Non-Supported Interest Shortfall allocable to the
Class A-16 Certificates, (ii) the interest portion of any Excess Special Hazard
Losses, Excess Fraud Losses and Excess Bankruptcy Losses allocable to the Class
A-16 Certificates and (iii) the interest portion of any Realized Losses, other
than the interest portion of any Excess Special Hazard Losses, Excess Fraud
Losses and Excess Bankruptcy Losses, allocable to the Class A-16 Certificates on
or after the Cross-Over Date.
S-40
<PAGE>
The Class A-16 IO Component is an interest-only Component and has no
principal balance. The "Class A-16 IO Notional Amount" with respect to each
Distribution Date will be equal to the product of (i) approximately 28.77% and
(ii) the sum of the Class A Subclass Principal Balances of the Class A-1, Class
A-2, Class A-3, Class A-4 and Class A-6 Certificates. Accordingly, any
distributions in respect of principal made to, or losses in respect of principal
allocated in reduction of, the Class A Subclass Principal Balances of the Class
A-1, Class A-2, Class A-3, Class A-4 or Class A-6 Certificates will result in a
reduction in the Class A-16 IO Notional Amount. See "-- Principal (Including
Prepayments)" and "-- Subordination of Class M and Class B Certificates --
Allocation of Losses" herein. The Class A-16 IO Notional Amount with respect to
the first Distribution Date will be approximately $39,573,000.
No interest will accrue on the Class A-16 PO Component of the Class A-16
Certificates.
The amount of interest that will accrue on the Class M Certificates during
each Regular Interest Accrual Period, after taking into account any
Non-Supported Interest Shortfalls and the interest portion of certain losses
allocated to such Class, is referred to herein as the "Class M Interest Accrual
Amount." The Class M Interest Accrual Amount will equal the difference between
(a) the product of (i) 1/12th of 8.00% and (ii) the outstanding Class M
Principal Balance and (b) the sum of (i) any Non-Supported Interest Shortfall
allocable to such Class and (ii) the interest portion of any Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses allocable to
such Class.
The amount of interest that will accrue on each Subclass of Class B
Certificates during each Regular Interest Accrual Period, after taking into
account any Non-Supported Interest Shortfalls and the interest portion of
certain losses allocated to such Subclass, is referred to herein as the "Class B
Subclass Interest Accrual Amount." The Class B Subclass Interest Accrual Amount
will equal the difference between (a) the product of (i) 1/12th of 8.00% and
(ii) the outstanding Class B Subclass Principal Balance and (b) the sum of (i)
any Non-Supported Interest Shortfall allocable to such Subclass and (ii) the
interest portion of any Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses allocable to such Subclass.
The "Class A Subclass Principal Balance" of a Subclass of Class A
Certificates (other than the Class A-8 and Class A-16 Certificates) as of any
Determination Date will be the principal balance of such Subclass on the date of
initial issuance of the Class A Certificates, less (i) all amounts previously
distributed to holders of Certificates of such Subclass in reduction of the
principal balance of such Subclass and (ii) such Subclass's pro rata share of
the principal portion of Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses allocated through such Determination Date to the
holders of Class A Certificates (other than the Class A-16 Certificates with
respect to the Class A-16 PO Component) in the manner described herein under "--
Subordination of Class M and Class B Certificates -- Allocation of Losses."
After the Cross-Over Date, the Class A Subclass Principal Balance of a Subclass
may be subject to further reduction in an amount equal to such Subclass's pro
rata share of the difference, if any, between (a) the Class A Non-PO Principal
Balance as of such Determination Date without regard to this provision and (b)
the difference between (i) the Adjusted Pool Amount for the preceding
Distribution Date and (ii) the Adjusted Pool Amount (PO Portion) for the
preceding Distribution Date. Any pro rata allocation among the Subclasses of
Class A Certificates described in this paragraph will be made among the
Subclasses of Class A Certificates (other than the Class A-16 Certificates) and
the Class A-16 Components (other than the Class A-16 PO Component) on the basis
of their then-outstanding Class A Subclass Principal Balances or Component
Principal Balances or, in the case of the Class A-16 Accrual Component, its
initial Component Principal Balance, if lower, immediately prior to the
preceding Distribution Date.
The Class A Subclass Principal Balance of the Class A-16 Certificates as of
any Determination Date will be equal to the sum of the Component Principal
Balances of the Class 16 Accrual Component, the Class A-16 PAC Component, the
Class A-16 TAC Component, the Class A-16 Accretion Directed Component and the
Class A-16 PO Component.
S-41
<PAGE>
The "Component Principal Balance" of each Component (other than the Class
A-16 PO Component) as of any Determination Date will be the principal balance of
such Component on the date of initial issuance of the Class A Certificates plus,
in the case of the Class A-16 Accrual Component, the Class A-16 Accrual
Component Distribution Amounts, as described under "-- Principal (Including
Prepayments)" below, previously added to the Component Principal Balance of the
Class A-16 Accrual Component, less (i) all amounts previously distributed to
holders of the Class A-16 Certificates in reduction of the principal balance of
such Component and (ii) such Component's pro rata share of the principal portion
of Excess Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy
Losses allocated through such Determination Date to the Class A Certificates
(other than the Class A-16 Certificates with respect to the Class A-16 PO
Component) in the manner described herein under "-- Subordination of Class M and
Class B Certificates -- Allocation of Losses." After the Cross-Over Date, the
Component Principal Balance of each Component may be subject to further
reduction in an amount equal to such Component's pro rata share of the
difference, if any, between (a) the Class A Non-PO Principal Balance as of such
Determination Date without regard to this provision and (b) the difference
between (i) the Adjusted Pool Amount for the preceding Distribution Date and
(ii) the Adjusted Pool Amount (PO Portion) for the preceding Distribution Date.
Any pro rata allocation described in this paragraph will be made among the
Subclasses of Class A Certificates (other than the Class A-16 Certificates) and
the Class A-16 Components (other than the Class A-16 PO Component) on the basis
of their then-outstanding Class A Subclass Principal Balances or Component
Principal Balances or, in the case of the Class A-16 Accrual Component, its
initial Component Principal Balance, if lower, immediately prior to the
preceding Distribution Date.
The "Component Principal Balance" of the Class A-16 PO Component as of any
Determination Date will be the principal balance of such Component on the date
of initial issuance of the Class A Certificates less (i) all amounts previously
distributed to the holders of the Class A-16 Certificates in respect of the
Class A-16 PO Component pursuant to priorities THIRD clause (B) and FOURTH of
the Pool Distribution Amount Allocation and (ii) the principal portion of Excess
Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses
allocated through such Determination Date to the Class A-16 PO Component in the
manner described herein under "-- Subordination of Class M and Class B
Certificates -- Allocation of Losses." After the Cross-Over Date, the Component
Principal Balance of the Class A-16 PO Component will be subject to further
reduction in an amount equal to the excess, if any, of (a) the Component
Principal Balance of the Class A-16 PO Component as of such Determination Date
without regard to this provision over (b) the Adjusted Pool Amount (PO Portion)
for the preceding Distribution Date.
The "Class A Non-PO Principal Balance" as of any Determination Date will be
equal to the sum of the Class A Subclass Principal Balances of the Subclasses of
Class A Certificates (other than the Class A-16 Certificates) and the Component
Principal Balances of the Class A-16 Components (other than the Class A-16 PO
Component) as of such date.
The "Class M Principal Balance" as of any Determination Date will be the
lesser of (a) the principal balance of the Class M Certificates on the date of
initial issuance of the Class M Certificates less (i) all amounts previously
distributed to holders of the Class M Certificates in reduction of the principal
balance thereof and (ii) the principal portion of Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses allocated through such
Determination Date to the holders of the Class M Certificates in the manner
described herein under "-- Subordination of Class M and Class B
Certificates -- Allocation of Losses" and (b) the Adjusted Pool Amount as of the
preceding Distribution Date less the sum of (i) the Class A Non-PO Principal
Balance and (ii) the Component Principal Balance of the Class A-16 PO Component,
each as of such Determination Date.
The "Class B Subclass Principal Balance" of a Subclass of Class B
Certificates as of any Determination Date will be the lesser of (a) the
principal balance of such Subclass on the date of initial issuance of the Class
B Certificates less (i) all amounts previously distributed to holders of such
Subclass in reduction of the principal balance thereof and (ii) the principal
portion of Excess Special
S-42
<PAGE>
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses allocated
through such Determination Date to the holders of such Subclass in the manner
described under "-- Subordination of Class M and Class B
Certificates -- Allocation of Losses" and (b) the Adjusted Pool Amount as of the
preceding Distribution Date less the sum of (i) the Class A Non-PO Principal
Balance, (ii) the Component Principal Balance of the Class A-16 PO Component,
(iii) the Class M Principal Balance and (iv) the Class B Subclass Principal
Balances of the Subclasses of Class B Certificates with lower numerical
designations, each as of such Determination Date.
The "Class B Principal Balance" as of any date will be equal to the sum of
the Class B Subclass Principal Balances of the Subclasses of Class B
Certificates as of such date.
With respect to any Distribution Date, the "Adjusted Pool Amount" will equal
the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans minus the sum
of (i) all amounts in respect of principal received in respect of the Mortgage
Loans (including amounts received as Periodic Advances, principal prepayments
and Liquidation Proceeds in respect of principal) and distributed to holders of
the Series 1996-5 Certificates on such Distribution Date and all prior
Distribution Dates and (ii) the principal portion of all Realized Losses (other
than Debt Service Reductions) incurred on the Mortgage Loans from the Cut-Off
Date through the end of the month preceding such Distribution Date.
With respect to any Distribution Date, the "Adjusted Pool Amount (PO
Portion)" will equal the sum as to each Mortgage Loan outstanding at the Cut-Off
Date of the product of (A) the PO Fraction for such Mortgage Loan and (B) the
principal balance of such Mortgage Loan as of the Cut-Off Date less the sum of
(i) all amounts in respect of principal received in respect of such Mortgage
Loan (including amounts received as Periodic Advances, principal prepayments and
Liquidation Proceeds in respect of principal) and distributed to holders of the
Series 1996-5 Certificates on such Distribution Date and all prior Distribution
Dates and (ii) the principal portion of any Realized Loss (other than a Debt
Service Reduction) incurred on such Mortgage Loan from the Cut-Off Date through
the end of the month preceding the month in which such Distribution Date occurs.
The "Net Mortgage Interest Rate" on each Mortgage Loan will be equal to the
Mortgage Interest Rate on such Mortgage Loan as stated in the related mortgage
note minus the sum of (i) the Servicing Fee Rate of 0.25% per annum, (ii) the
Master Servicing Fee Rate and (iii) the Fixed Retained Yield rate, if any, for
such Mortgage Loan. See "Servicing of the Mortgage Loans -- Fixed Retained
Yield; Servicing Compensation and Payment of Expenses" herein.
When mortgagors prepay principal, or when principal is recovered through
foreclosure sales or other liquidations of defaulted Mortgage Loans, or when
other Unscheduled Principal Receipts occur, a full month's interest for the
month of payment or recovery may not be paid or recovered, resulting in interest
shortfalls to the extent that such payment or recovery is not included in the
distribution to Certificateholders made in the month in which it is received.
Interest shortfalls resulting from principal prepayments in full made by
mortgagors ("Prepayments in Full") are referred to herein as "Prepayment
Interest Shortfalls." The Master Servicer will be obligated, on or before each
Distribution Date, to pay to the Trust Administrator for the benefit of
Certificateholders, from the Master Servicer's own funds (including amounts
otherwise payable to the Master Servicer in respect of such Distribution Date as
Master Servicing Fees) an amount (such amount, "Compensating Interest") equal to
the lesser of (i) the aggregate Prepayment Interest Shortfall with respect to
such Distribution Date and (ii) the lesser of (X) the product of (A) 1/12th of
0.20% and (B) the Pool Scheduled Principal Balance for such Distribution Date
and (Y) the Available Master Servicing Compensation for such Distribution Date.
The "Available Master Servicing Compensation" for any Distribution Date will
be equal to the sum of (a) the Master Servicing Fee for such Distribution Date,
(b) interest earned through the business day preceding the applicable
Distribution Date on any Prepayments in Full remitted to the Master Servicer and
deposited in the Certificate Account (which amount of interest with respect to
Prepayments in Full on the Mortgage Loans serviced by Norwest Mortgage is
expected to be zero unless the Remittance Date for such Mortgage Loans changes
as described below under "Servicing of
S-43
<PAGE>
the Mortgage Loans -- Anticipated Changes in Servicing") and (c) the aggregate
amount of Month End Interest remitted by the Servicers to the Master Servicer
pursuant to the related Underlying Servicing Agreements. With respect to the
Mortgage Loans serviced by Norwest Mortgage, "Month End Interest" for each
Distribution Date will be equal to the lesser of (i) the aggregate Prepayment
Interest Shortfalls with respect to the Mortgage Loans serviced by Norwest
Mortgage and (ii) the product of 1/12th of 0.20% and the aggregate scheduled
principal balance (as determined in the applicable Underlying Servicing
Agreement) of the Mortgage Loans serviced by Norwest Mortgage. With respect to
the Mortgage Loans serviced by each Other Servicer, "Month End Interest" for
each Distribution Date will be equal to the lesser of (i) the sum of the
aggregate Prepayment Interest Shortfalls and aggregate Curtailment Interest
Shortfalls with respect to the Mortgage Loans serviced by such Other Servicer
and (ii) the sum of (X) the product of 1/12th of 0.25% and the aggregate
scheduled principal balance (as determined in the applicable Underlying
Servicing Agreement) of the Mortgage Loans serviced by such Other Servicer and
(Y) reinvestment earnings on payments received in respect of the Mortgage Loans
or on other amounts on deposit in the related Servicer Custodial Account
pursuant to the related Underlying Servicing Agreement on such Distribution Date
(other than with respect to the Mortgage Loans serviced by Countrywide Home
Loans, Inc.). As described below under "Servicing of the Mortgage Loans --
Anticipated Changes in Servicing," any or all of the Servicers may be required
to begin to remit to the Master Servicer Unscheduled Principal Receipts in full
for deposit into the Certificate Account daily on a specified business day
following receipt thereof which will generally result in a deposit earlier than
on the following Remittance Date and, in conjunction therewith, may be relieved
of its obligation to remit Month End Interest. Any such change may have an
impact on the amount of Compensating Interest by increasing the amount described
in clause (b) of the definition of Available Master Servicing Compensation and
decreasing the amount described in clause (c) of the definition thereof. No
assurance can be given as to the timing of any such changes or that any such
changes will occur.
As to any Distribution Date, Prepayment Interest Shortfalls to the extent
that they exceed Compensating Interest are referred to herein as "Non-Supported
Interest Shortfalls" and will be allocated to (i) the Class A Certificates
according to the percentage obtained by dividing the then-outstanding Class A
Non-PO Principal Balance by the sum of the then-outstanding Class A Non-PO
Principal Balance, Class M Principal Balance and Class B Principal Balance, (ii)
the Class M Certificates according to the percentage obtained by dividing the
then-outstanding Class M Principal Balance by the sum of the then-outstanding
Class A Non-PO Principal Balance, Class M Principal Balance and Class B
Principal Balance and (iii) the Class B Certificates according to the percentage
obtained by dividing the then-outstanding Class B Principal Balance by the sum
of the then-outstanding Class A Non-PO Principal Balance, Class M Principal
Balance and Class B Principal Balance. Such allocation of the Non-Supported
Interest Shortfall will reduce the amount of interest due to be distributed to
holders of the Class A Certificates then entitled to distributions in respect of
interest or, in the case of the Class A-16 Certificates with respect to the
Class A-16 Accrual Component prior to the Accretion Termination Date, will
reduce the amount of interest accrued on and then added to the Component
Principal Balance thereof. Such allocation of the Non-Supported Interest
Shortfall will also reduce the amount of interest due to be distributed to the
holders of the Class M Certificates and the Class B Certificates. Any such
reduction in respect of interest allocated to the Class A Certificates or Class
B Certificates will be allocated among such Subclasses of Class A or Class B
Certificates, as the case may be, pro rata on the basis of their respective
Class A Subclass Interest Accrual Amount or Class B Subclass Interest Accrual
Amount, without regard to any reduction pursuant to this paragraph, for such
Distribution Date. Any Non-Supported Interest Shortfall allocated to the Class
A-16 Certificates will be allocated among the Class A-16 Components (other than
the Class A-16 PO Component) pro rata on the basis of their respective Component
Interest Accrual Amounts, without regard to any reduction pursuant to this
paragraph, for such Distribution Date.
Any interest shortfalls arising from Unscheduled Principal Receipts in full
that are not Prepayments in Full and any interest shortfalls resulting from the
timing of the receipt of partial principal prepayments by mortgagors
("Curtailment Interest Shortfalls") or of other partial Unscheduled
S-44
<PAGE>
Principal Receipts with respect to the Mortgage Loans will not be offset by
Compensating Interest, but instead will be borne first by the Subclasses of
Class B Certificates in reverse numerical order, second by the Class M
Certificates and then pro rata by the Class A Certificates based on interest
accrued. See "Description of the Certificates -- Subordination of Class M and
Class B Certificates" herein. After the Cross-Over Date all interest shortfalls
arising from Unscheduled Principal Receipts, other than Prepayment Interest
Shortfalls covered by Compensating Interest, will be treated as Non-Supported
Interest Shortfalls and allocated in reduction of interest accrued on the Class
A Certificates.
The interest portion of any Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses will be allocated among the Class A, Class M
and Class B Certificates pro rata based on the interest accrued on each such
Class and among the Subclasses of Class A Certificates or Class B Certificates,
as the case may be, pro rata on the basis of their respective Class A Subclass
Interest Accrual Amounts or Class B Subclass Interest Accrual Amounts, without
regard to any reduction pursuant to this paragraph, for such Distribution Date.
Any amount allocated to the Class A-16 Certificates will be allocated among the
Class A-16 Components (other than the Class A-16 PO Component) pro rata on the
basis of their respective Component Interest Accrual Amounts, without regard to
any reduction pursuant to this paragraph, for such Distribution Date.
Allocations of the interest portion of Realized Losses (other than Excess
Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses) first to
the Subclasses of Class B Certificates in reverse numerical order and then to
the Class M Certificates will result from the priority of distributions first to
the holders of the Class A Certificates, second to the holders of the Class M
Certificates and finally to holders of the Subclasses of Class B Certificates in
numerical order of the Pool Distribution Amount as described above under
"Description of the Certificates -- Distributions."
On each Distribution Date on which the Pool Distribution Amount equals or
exceeds the sum of the Class A Subclass Interest Accrual Amounts, distributions
in respect of interest to each Subclass of Class A Certificates will equal such
Subclass's Class A Subclass Interest Accrual Amount. On each Distribution Date,
interest in an amount equal to the Component Interest Accrual Amount of the
Class A-16 Accrual Component will accrue thereon, but such amount will not be
distributed as interest to the Class A-16 Certificates with respect to the Class
A-16 Accrual Component until the Accretion Termination Date. Prior to such time,
an amount equal to the Component Interest Accrual Amount for the Class A-16
Accrual Component will instead be distributed in reduction of the Class A
Subclass Principal Balance of the Accretion Directed Certificates and the
Component Principal Balances of the Class A-16 Accretion Directed Component and
the Class A-16 Accrual Component, as described under "-- Principal (Including
Prepayments) -- Allocation of Amount to be Distributed" below, and the Component
Principal Balance of the Class A-16 Accrual Component will be increased by a
corresponding amount. The "Accretion Termination Date" will be the earlier to
occur of (i) the Distribution Date following the Distribution Date on which the
Class A Subclass Principal Balance of the Class A-13 Certificates and the
Component Principal Balance of the Class A-16 Accretion Directed Component has
been reduced to zero or (ii) the Cross-Over Date.
If, on any Distribution Date, the Pool Distribution Amount is less than the
sum of the Class A Subclass Interest Accrual Amounts, the amount of interest
currently distributed on the Class A Certificates will equal the Pool
Distribution Amount and will be allocated among the Subclasses of Class A
Certificates pro rata in accordance with each such Subclass's Class A Subclass
Interest Accrual Amount. Amounts so allocated will be distributed in respect of
interest to each Subclass of Class A Certificates with the exception of the
Class A-16 Certificates with respect to the Class A-16 Accrual Component prior
to the Accretion Termination Date. In the case of the Class A-16 Accrual
Component prior to the Accretion Termination Date, amounts so allocated will be
added to the Component Principal Balance of the Class A-16 Accrual Component and
distributed to the Accretion Directed Certificates, the Class A-16 Accretion
Directed Component and the Class A-16 Accrual Component as described under "--
Principal (Including Prepayments) -- Allocation of Amount to be Distributed"
below. Any difference between the portion of the Pool Distribution Amount
distributed
S-45
<PAGE>
in respect of current interest to each Subclass of Class A Certificates or, in
the case of the Class A-16 Certificates with respect to the Class A-16 Accrual
Component prior to the Accretion Termination Date, accrued on and added to the
Component Principal Balance thereof, and the Class A Subclass Interest Accrual
Amount for such Subclass with respect to the related Distribution Date (as to
each Subclass, the "Class A Subclass Interest Shortfall Amount") will be added
to the amount to be distributed on subsequent Distribution Dates to such
Subclass, but only so long as it is outstanding, to the extent that the Pool
Distribution Amount is sufficient therefor. The Class A Subclass Interest
Shortfall Amount of the Class A-16 Certificates with respect to any Distribution
Date will be allocated among the Components of the Class A-16 Certificates
(other than the Class A-16 PO Component) based on their Component Interest
Accrual Amounts (such shortfall allocated to any Class A-16 Component, the
"Component Interest Shortfall Amount"). No interest will accrue on the unpaid
Class A Subclass Interest Shortfall Amounts. In the event that on any
Distribution Date prior to the Accretion Termination Date, the Pool Distribution
Amount is less than the sum of the Class A Subclass Interest Accrual Amounts,
resulting in Class A Subclass Interest Shortfall Amounts, as described above, an
amount equal to the Class A-16 Accrual Component Distribution Amount would be
distributed to the Accretion Directed Certificates, the Class A-16 Accretion
Directed Component and the Class A-16 Accrual Component in reduction of their
Class A Subclass Principal Balance and Component Principal Balances,
notwithstanding that the holders of the Class A Certificates of the Subclasses
then entitled to receive distributions of interest have received less than their
respective Class A Subclass Interest Accrual Amounts with respect to such
Distribution Date.
On each Distribution Date on which the Pool Distribution Amount exceeds the
sum of the Class A Subclass Interest Accrual Amounts, any excess will then be
allocated first to pay previously unpaid Class A Subclass Interest Shortfall
Amounts. Such amounts will be allocated among the Subclasses of Class A
Certificates pro rata in accordance with their respective unpaid Class A
Subclass Interest Shortfall Amounts immediately prior to such Distribution Date.
Any amount allocated to the Class A-16 Certificates will be allocated among the
Components of the Class A-16 Certificates (other than the Class A-16 PO
Component) based on their unpaid Component Interest Shortfall Amounts. Prior to
the Accretion Termination Date, the amount so allocated to the Class A-16
Accrual Component will not be distributed as interest to the holders of the
Class A-16 Certificates, but instead will be distributed in reduction of the
Class A Subclass Principal Balance of the Accretion Directed Certificates and
the Component Principal Balances of the Class A-16 Accretion Directed Component
and the Class A-16 Accrual Component, and the Component Principal Balance of the
Class A-16 Accrual Component will be increased by a corresponding amount.
On each Distribution Date on which the Pool Distribution Amount equals or
exceeds the sum for such Distribution Date of (A) the sum of (i) the sum of the
Class A Subclass Interest Accrual Amounts with respect to the Subclasses of
Class A Certificates, (ii) the sum of the unpaid Class A Subclass Interest
Shortfall Amounts with respect to the Subclasses of Class A Certificates and
(iii) the Class A Non-PO Optimal Principal Amount (collectively with the amounts
described in clauses (i) and (ii), the "Class A Non-PO Optimal Amount"), (B) the
Class A-16 PO Optimal Principal Amount (collectively with the amount described
in clause (A), the "Class A Optimal Amount") and (C) the Class M Interest
Accrual Amount, distributions in respect of current interest to the Class M
Certificates will equal the Class M Interest Accrual Amount.
If, on any Distribution Date, the Pool Distribution Amount is less than the
sum of (i) the Class A Optimal Amount and (ii) the Class M Interest Accrual
Amount, the amount of current interest distributed on the Class M Certificates
will equal the Pool Distribution Amount minus the amounts distributed to the
Class A Certificates with respect to such Distribution Date. Any difference
between the portion of the Pool Distribution Amount distributed in respect of
current interest to the Class M Certificates and the Class M Interest Accrual
Amount with respect to such Distribution Date (the "Class M Interest Shortfall
Amount") will be added to the amount to be distributed on subsequent
Distribution Dates to the Class M Certificates, but only so long as they are
outstanding, to the extent that the Pool Distribution Amount is sufficient
therefor. No interest will accrue on the unpaid Class M Interest Shortfall
Amount.
S-46
<PAGE>
Subject to the payment of any Class A-16 PO Component Deferred Amount, on
each Distribution Date on which the Pool Distribution Amount exceeds the sum of
the Class A Optimal Amount and the Class M Interest Accrual Amount, any excess
will be allocated first to pay previously unpaid Class M Interest Shortfall
Amounts and then to make distributions in respect of principal on the Class M
Certificates. With respect to each Distribution Date, the "Class M Optimal
Amount" will equal the sum of (i) the Class M Interest Accrual Amount, (ii) the
unpaid Class M Interest Shortfall Amount and (iii) the Class M Optimal Principal
Amount.
Each Distribution Date on which the Pool Distribution Amount equals or
exceeds the sum of (i) the Class B Subclass Interest Accrual Amount for a
particular Subclass of Class B Certificates and (ii) all amounts senior in
priority to such Class B Subclass Interest Accrual Amount as set forth in the
Pool Distribution Amount Allocation, the distribution in respect of current
interest to such Subclass of Class B Certificates will equal such Subclass's
Class B Subclass Interest Accrual Amount.
If on any Distribution Date, the Pool Distribution Amount is less than the
sum of (i) the Class B Subclass Interest Accrual Amount for a particular
Subclass of Class B Certificates and (ii) all amounts senior in priority to such
Class B Subclass Interest Accrual Amount based on the priorities in the Pool
Distribution Amount Allocation, the amount of current interest distributed on
such Subclass of Class B Certificates will equal the Pool Distribution Amount
less all amounts senior in priority to such Class B Subclass Interest Accrual
Amount as set forth in the Pool Distribution Amount Allocation. Any difference
between the amount distributed in respect of current interest to such Subclass
of Class B Certificates and the Class B Subclass Interest Accrual Amount for
such Subclass with respect to the related Distribution Date (as to such
Subclass, the "Class B Subclass Interest Shortfall Amount") will be added to the
amount to be distributed on subsequent Distribution Dates to the extent the Pool
Distribution Amount is sufficient therefor. No interest will accrue on such
Class B Subclass Interest Shortfall Amount.
For a particular Subclass of Class B Certificates, subject to the payment of
any Class A-16 PO Component Deferred Amount, on each Distribution Date on which
the Pool Distribution Amount exceeds the sum of the Class A Optimal Amount, the
Class M Optimal Amount, the Subclass B Optimal Amount for each Subclass of Class
B Certificates with a lower numerical designation and the Class B Subclass
Interest Accrual Amount for such Subclass, any excess will be allocated first to
pay previously unpaid Class B Subclass Interest Shortfall Amounts of such
Subclass and then to make distributions in respect of principal on such
Subclass. With respect to each Distribution Date, the "Subclass B Optimal
Amount" for any Subclass of Class B Certificates will equal the sum of (i) the
Class B Subclass Interest Accrual Amount, (ii) the unpaid Class B Subclass
Interest Shortfall Amounts and (iii) the Subclass B Optimal Principal Amount.
On any Distribution Date on which the Pool Distribution Amount is less than
the Class A Optimal Amount, the Class M Certificates and the Subclasses of Class
B Certificates will not be entitled to any distributions of interest or
principal.
DETERMINATION OF LIBOR
On each Rate Determination Date, the Trust Administrator will determine
LIBOR for the succeeding LIBOR Based Interest Accrual Period on the basis of the
offered LIBOR quotations of the Reference Banks, as such quotations are provided
to the Trust Administrator as of 11:00 a.m. (London time) on such Rate
Determination Date. As used herein with respect to a Rate Determination Date,
"business day" means a day on which banks are open for dealing in foreign
currency and exchange in London and New York City; "Reference Banks" means four
leading banks engaged in transactions in Eurodollar deposits in the
International Eurocurrency market (i) with an established place of business in
London, (ii) whose quotations appear on the Reuters Screen LIBO Page on the Rate
Determination Date in question and (iii) which have been designated as such by
the Trust Administrator and are able and willing to provide such quotations to
the Trust Administrator on each Rate Determination Date; and "Reuters Screen
LIBO Page" means the display designated as page "LIBO" on the Reuters Monitor
Money Rates Service (or such other page as may replace the LIBO page on that
S-47
<PAGE>
service for the purpose of displaying London interbank offered rate quotations
of major banks). If any Reference Bank should be removed from the Reuters Screen
LIBO Page or in any other way fails to meet the qualifications of a Reference
Bank, the Trust Administrator may, in its sole discretion, designate an
alternative Reference Bank.
On each Rate Determination Date, LIBOR for the next succeeding LIBOR Based
Interest Accrual Period will be established by the Trust Administrator as
follows:
(i) If on any Rate Determination Date two or more of the Reference Banks
provide such offered quotations, LIBOR for the next LIBOR Based Interest
Accrual Period will be the arithmetic mean of such offered quotations
(rounding such arithmetic mean upwards if necessary to the nearest whole
multiple of 1/16%).
(ii) If on any Rate Determination Date only one or none of the Reference
Banks provides such offered quotations, LIBOR for the next LIBOR Based
Interest Accrual Period will be the higher of (x) LIBOR as determined on
the previous Rate Determination Date or (y) the Reserve Interest Rate.
The "Reserve Interest Rate" will be the rate per annum which the Trust
Administrator determines to be either (A) the arithmetic mean (rounding
such arithmetic mean upwards if necessary to the nearest whole multiple
of 1/16%) of the one-month Eurodollar lending rate that New York City
banks selected by the Trust Administrator are quoting, on the relevant
Rate Determination Date, to the principal London offices of at least two
leading banks in the London interbank market or (B) in the event that the
Trust Administrator can determine no such arithmetic mean, the lowest
one-month Eurodollar lending rate that the New York City banks selected
by the Trust Administrator are quoting on such Rate Determination Date to
leading European banks.
(iii) If on any Rate Determination Date the Trust Administrator is required
but is unable to determine the Reserve Interest Rate in the manner
provided in paragraph (ii) above, LIBOR for the next LIBOR Based Interest
Accrual Period will be LIBOR as determined on the previous Rate
Determination Date, or, in the case of the first Rate Determination Date,
5.4375%.
The establishment of LIBOR by the Trust Administrator and the Trust
Administrator's subsequent calculation of the rates of interest applicable to
the Class A-7 and Class A-8 Certificates for the relevant LIBOR Based Interest
Accrual Period, in the absence of manifest error, will be final and binding.
Such Pass-Through Rates may be obtained by telephoning the Trust Administrator
at 704-386-3705.
PRINCIPAL (INCLUDING PREPAYMENTS)
The principal balance of a Class A or Class B Certificate of any Subclass
(other than the Class A-8 Certificates) or of any Class M Certificate at any
time is equal to the product of the Class A Subclass Principal Balance or Class
B Subclass Principal Balance of such Subclass or the Class M Principal Balance,
as the case may be, and such Certificate's Percentage Interest, and represents
the maximum specified dollar amount (exclusive of (i) any interest that may
accrue on such Class A Certificate (other than interest added to the Component
Principal Balance of the Class A-16 Accrual Component), such Class M Certificate
or such Class B Certificate and (ii) in the case of the Class A-R and Class A-LR
Certificate, any additional amounts to which the holder of such Certificate may
be entitled as described below under "-- Additional Rights of the Class A-R and
Class A-LR Certificateholder") to which the holder thereof is entitled from the
cash flow on the Mortgage Loans at such time, and will decline to the extent of
distributions in reduction of the principal balance of, and allocations of
losses to, such Certificate. The approximate initial Class A Subclass Principal
Balance or Class B Subclass Principal Balance of each Subclass of Class A
Certificates (other than the Class A-8 and Class A-16 Certificates) and Offered
Class B Certificates and the approximate initial Class M Principal Balance
S-48
<PAGE>
are set forth on the cover of this Prospectus Supplement. The Class A-8
Certificates will have no Class A Subclass Principal Balance. The approximate
inital Class A Subclass Principal Balance of the Class A-16 Certificates is
expected to be approximately $67,912,430.
CALCULATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A CERTIFICATES
Distributions in reduction of the principal balance of the Class A
Certificates (other than the Class A-16 Certificates with respect to the Class
A-16 PO Component) will be made on each Distribution Date pursuant to priority
THIRD clause (A) of the Pool Distribution Amount Allocation, in an aggregate
amount equal to the Class A Non-PO Principal Distribution Amount. The "Class A
Non-PO Principal Distribution Amount" with respect to any Distribution Date will
be equal to the sum of (i) the Class A-16 Accrual Component Distribution Amount,
if any, with respect to such Distribution Date and (ii) the Class A Non-PO
Principal Amount with respect to such Distribution Date.
The "Class A-16 Accrual Component Distribution Amount" with respect to any
Distribution Date will be equal to the sum of (i) the portion, if any, of
current interest allocated but not distributed with respect to the Class A-16
Accrual Component on such Distribution Date in accordance with priority FIRST of
the Pool Distribution Amount Allocation and (ii) the portion, if any, of the
unpaid Class A Interest Shortfall Amount allocated but not distributed with
respect to the Class A-16 Accrual Component on such Distribution Date in
accordance with priority SECOND of the Pool Distribution Amount Allocation.
The "Class A Non-PO Principal Amount" with respect to any Distribution Date
will be equal to the amount distributed pursuant to priority THIRD clause (A) of
the Pool Distribution Amount Allocation, in an aggregate amount up to the Class
A Non-PO Optimal Principal Amount.
The "Class A Non-PO Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum for each outstanding
Mortgage Loan (including each defaulted Mortgage Loan, other than a Liquidated
Loan, with respect to which the related Mortgaged Property has been acquired by
the Trust Estate) of the product of (A) the Non-PO Fraction for such Mortgage
Loan and (B) the sum of:
(i) the Class A Percentage of (A) the scheduled payment of principal due on
such Mortgage Loan on the first day of the month in which the
Distribution Date occurs, less (B) if the Bankruptcy Loss Amount is
zero, the principal portion of Debt Service Reductions with respect to
such Mortgage Loan,
(ii) the Class A Prepayment Percentage of all Unscheduled Principal Receipts
that were received by a Servicer with respect to such Mortgage Loan
during the Unscheduled Principal Receipt Period relating to such
Distribution Date for each applicable type of Unscheduled Principal
Receipt,
(iii) the Class A Prepayment Percentage of the Scheduled Principal Balance of
such Mortgage Loan which, during the month preceding the month of such
Distribution Date was repurchased by the Seller, as described under the
heading "Description of the Mortgage Loans -- Mandatory Repurchase or
Substitution of Mortgage Loans" herein, and
(iv) the Class A Percentage of the excess of the unpaid principal balance of
any defective Mortgage Loan for which a Mortgage Loan was substituted
during the month preceding the month in which such Distribution Date
occurs over the unpaid principal balance of such substituted Mortgage
Loan, less the amount allocable to the principal portion of any
unreimbursed advances in respect of such defective Mortgage Loan. See
"The Pooling and Servicing Agreement -- Assignment of the Mortgage Loans
to the Trustee" in the Prospectus.
In addition, in the event that there is any recovery of an amount in respect
of principal which had previously been allocated as a Realized Loss to the Class
A Certificates, each Subclass of Class A
S-49
<PAGE>
Certificates, for so long as its principal balance has not been reduced to zero,
will be entitled to its pro rata share of such recovery in an amount up to the
amount by which the Class A Subclass Principal Balance of such Subclass was
reduced as a result of such Realized Loss.
The "Non-PO Fraction" with respect to any Mortgage Loan will equal the Net
Mortgage Interest Rate for such Mortgage Loan divided by 8.00%.
The "Scheduled Principal Balance" of a Mortgage Loan as of any Distribution
Date is the unpaid principal balance of such Mortgage Loan as specified in the
amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy (other than Deficient Valuations),
moratorium or similar waiver or grace period) as of the Due Date occurring in
the month preceding the month in which such Distribution Date occurs, after
giving effect to any principal prepayments or other unscheduled recoveries of
principal previously received, to any partial principal prepayments and
Deficient Valuations occurring prior to such Due Date, to the payment of
principal due on such Due Date irrespective of any delinquency in payment by the
mortgagor and to any Unscheduled Principal Receipts received or applied during
the applicable Unscheduled Principal Receipt Period for the Distribution Date in
the month preceding such Distribution Date.
A "Realized Loss" is any Liquidated Loan Loss (including any Special Hazard
Loss and any Fraud Loss) or any Bankruptcy Loss. A "Liquidated Loan" is a
defaulted Mortgage Loan as to which the Servicer has determined that all
recoverable liquidation and insurance proceeds have been received. A "Liquidated
Loan Loss" on a Liquidated Loan is equal to the excess, if any, of (i) the
unpaid principal balance of such Liquidated Loan, plus accrued interest thereon
in accordance with the amortization schedule at the Net Mortgage Interest Rate
through the last day of the month in which such Mortgage Loan was liquidated,
over (ii) net Liquidation Proceeds. For purposes of calculating the amount of
any Liquidated Loan Loss, all net Liquidation Proceeds (after reimbursement of
any previously unreimbursed Periodic Advance) will be applied first to accrued
interest and then to the unpaid principal balance of the Liquidated Loan. A
"Special Hazard Loss" is (A) a Liquidated Loan Loss suffered by a Mortgaged
Property on account of direct physical loss exclusive of (i) any loss covered by
a standard hazard insurance policy or, if the Mortgaged Property is located in
an area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards, a flood insurance policy, of the types
described in the Prospectus under "The Trust Estates -- Mortgage Loans --
Insurance Policies" and (ii) any loss caused by or resulting from (a) normal
wear and tear, (b) dishonest acts of the Trustee, the Trust Administrator, the
Master Servicer or the Servicer or (c) errors in design, faulty workmanship or
faulty materials, unless the collapse of the property or a part thereof ensues
or (B) a Liquidated Loan Loss arising from or relating to the presence or
suspected presence of hazardous wastes or substances on a Mortgaged Property. A
"Fraud Loss" is a Liquidated Loan Loss incurred on a Liquidated Loan as to which
there was fraud in the origination of such Mortgage Loan. A "Bankruptcy Loss" is
a Debt Service Reduction or Deficient Valuation. A "Debt Service Reduction"
means a reduction in the amount of monthly payments due to certain bankruptcy
proceedings, but does not include any permanent forgiveness of principal. A
"Deficient Valuation" with respect to a Mortgage Loan means a valuation by a
court of the Mortgaged Property in an amount less than the outstanding
indebtedness under the Mortgage Loan or any reduction in the amount of monthly
payments that results in a permanent forgiveness of principal, which valuation
or reduction results from a bankruptcy proceeding.
The "Class A Percentage" for any Distribution Date occurring on or prior to
the Cross-Over Date is the percentage (subject to rounding), which in no event
will exceed 100%, obtained by dividing the Class A Non-PO Principal Balance as
of such date (before taking into account distributions in reduction of principal
balance on such date) by the Pool Balance (Non-PO Portion). The "Pool Balance
(Non-PO Portion)" is the sum for each outstanding Mortgage Loan of the product
of (i) the Non-PO Fraction for such Mortgage Loan and (ii) the Scheduled
Principal Balance of such Mortgage Loan as of such Distribution Date. The Class
A Percentage for the first Distribution Date will be approximately 93.95%. The
Class A Percentage will decrease as a result of the allocation of certain
unscheduled payments in respect of principal according to the Class A Prepayment
Percentage for a specified period
S-50
<PAGE>
to the Class A Certificates (other than the Class A-16 Certificates with respect
to the Class A-16 PO Component) and will increase as a result of the allocation
of Realized Losses to the Class M and Class B Certificates. The Class A
Percentage for each Distribution Date occurring after the Cross-Over Date will
be 100%.
The "Class A Prepayment Percentage" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN CLASS A PREPAYMENT PERCENTAGE
- ------------------------------------------------- ---------------------------------------------------------------
<S> <C>
November 1996 through October 2001............... 100%;
November 2001 through October 2002............... the Class A Percentage, plus 70% of the Subordinated
Percentage;
November 2002 through October 2003............... the Class A Percentage, plus 60% of the Subordinated
Percentage;
November 2003 through October 2004............... the Class A Percentage, plus 40% of the Subordinated
Percentage;
November 2004 through October 2005............... the Class A Percentage, plus 20% of the Subordinated
Percentage; and
November 2005 and thereafter..................... the Class A Percentage;
</TABLE>
PROVIDED, HOWEVER, that if on any of the foregoing Distribution Dates the
Class A Percentage exceeds the initial Class A Percentage, the Class A
Prepayment Percentage for such Distribution Date will once again equal 100%. See
"Prepayment and Yield Considerations" herein and in the Prospectus.
Notwithstanding the foregoing, no reduction of the Class A Prepayment Percentage
will occur on any Distribution Date if (i) as of such Distribution Date as to
which any such reduction applies, the average outstanding principal balance on
such Distribution Date and for the preceding five Distribution Dates on the
Mortgage Loans that were delinquent 60 days or more (including for this purpose
any Mortgage Loans in foreclosure and Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the Trust Estate) is greater
than or equal to 50% of the sum of the then-outstanding Class M Principal
Balance and the then-outstanding Class B Principal Balance, or (ii) for any
Distribution Date, cumulative Realized Losses with respect to the Mortgage Loans
exceed the percentages of the principal balance of the Subordinated Certificates
as of the Cut-Off Date (the "Original Subordinated Principal Balance") indicated
below:
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL
DISTRIBUTION DATE OCCURRING IN SUBORDINATED PRINCIPAL BALANCE
- ----------------------------------------------------------------------------------- ---------------------------------
<S> <C>
November 2001 through October 2002................................................. 30%
November 2002 through October 2003................................................. 35%
November 2003 through October 2004................................................. 40%
November 2004 through October 2005................................................. 45%
November 2005 and thereafter....................................................... 50%
</TABLE>
This disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the Class
A Certificates (other than the Class A-16 Certificates with respect to the Class
A-16 PO Component) while, in the absence of Realized Losses, increasing the
interest in the principal balance of the Mortgage Loans evidenced by the Class M
and Class B Certificates. Increasing the respective interest of the Class M and
Class B Certificates relative to that of the Class A Certificates (other than
the Class A-16 Certificates with respect to the Class A-16 PO Component) is
intended to preserve the availability of the subordination provided by the Class
M and Class B Certificates. See "-- Subordination of Class M and Class B
Certificates" below. The "Subordinated Percentage" for any Distribution Date
will be calculated as the difference between 100% and the Class A Percentage for
such date. The "Subordinated Prepayment Percentage" for any Distribution Date
will be calculated as the difference between 100% and the Class A Prepayment
Percentage for such date. If on any Distribution Date the allocation to the
Class A Certificates of full and partial principal prepayments and other amounts
in the percentage required above would reduce
S-51
<PAGE>
the outstanding Class A Non-PO Principal Balance below zero, the Class A
Prepayment Percentage for such Distribution Date will be limited to the
percentage necessary to reduce the Class A Non-PO Principal Balance to zero.
CALCULATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A-16 PO COMPONENT
Distributions in reduction of the Component Principal Balance of the Class
A-16 PO Component will be made on each Distribution Date in an aggregate amount
equal to the Class A-16 PO Component Distribution Amount. The "Class A-16 PO
Component Distribution Amount" with respect to any Distribution Date will be
equal to the sum of (i) the amount distributed pursuant to priority THIRD clause
(B) of the Pool Distribution Amount Allocation, in an aggregate amount up to the
Class A-16 PO Component Optimal Principal Amount and (ii) the amount distributed
pursuant to priority FOURTH of the Pool Distribution Amount Allocation, in an
aggregate amount up to the Class A-16 PO Component Deferred Amount.
The "Class A-16 PO Component Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum for each outstanding
Mortgage Loan (including each defaulted Mortgage Loan, other than a Liquidated
Loan, with respect to which the related Mortgaged Property has been acquired by
the Trust Estate) of the product of (A) the PO Fraction for such Mortgage Loan
and (B) the sum of:
(i) the scheduled payment of principal due on such Mortgage Loan on the
first day of the month in which the Distribution Date occurs, less, if
the Bankruptcy Loss Amount is zero, the principal portion of Debt
Service Reductions with respect to such Mortgage Loan,
(ii) all Unscheduled Principal Receipts that were received by a Servicer
with respect to such Mortgage Loan during the Unscheduled Principal
Receipt Period relating to such Distribution Date for each applicable
type of Unscheduled Principal Receipt,
(iii) the Scheduled Principal Balance of such Mortgage Loan which, during the
month preceding the month of such Distribution Date was repurchased by
the Seller, as described under the heading "Description of the Mortgage
Loans -- Mandatory Repurchase or Substitution of Mortgage Loans"
herein, and
(iv) the excess of the unpaid principal balance of any defective Mortgage
Loan for which a Mortgage Loan was substituted during the month
preceding the month in which such Distribution Date occurs over the
unpaid principal balance of such substituted Mortgage Loan, less the
amount allocable to the principal portion of any unreimbursed advances
in respect of such defective Mortgage Loan. See "The Pooling and
Servicing Agreement -- Assignment of Mortgage Loans to the Trustee" in
the Prospectus.
The "Class A-16 PO Component Deferred Amount" for any Distribution Date
prior to the Cross-Over Date will equal the difference between (A) the sum of
(i) the amount by which the Class A-16 PO Component Optimal Principal Amount for
all prior Distribution Dates exceeds the amounts distributed to the Class A-16
Certificates in respect of the Class A-16 PO Component on such prior
Distribution Dates pursuant to priority THIRD, clause (B) of the Pool
Distribution Amount Allocation, but only to the extent such shortfall is not
attributable to Realized Losses allocated to the Class A-16 PO Component as
described in "-- Subordination of Class M and Class B Certificates -- Allocation
of Losses" below and (ii) the sum of the product for each Discount Mortgage Loan
which became a Liquidated Loan at any time on or prior to the last day of the
applicable Unscheduled Receipt Period for the current Distribution Date of (a)
the PO Fraction for such Discount Mortgage Loan and (b) an amount equal to the
principal portion of Realized Losses (other than Bankruptcy Losses due to Debt
Service Reductions) incurred with respect to such Discount Mortgage Loan other
than Excess Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy
Losses and (B) amounts distributed on the Class A-16 PO Component on prior
Distribution Dates pursuant to priority FOURTH of the Pool
S-52
<PAGE>
Distribution Amount Allocation. On or after the Cross-Over Date, the Class A-16
PO Component Deferred Amount will be zero. No interest will accrue on any Class
A-16 PO Component Deferred Amount.
The "PO Fraction" with respect to any Discount Mortgage Loan will equal the
difference between 1.0 and the Non-PO Fraction for such Mortgage Loan. The PO
Fraction with respect to each Mortgage Loan that is not a Discount Mortgage Loan
will be zero.
The "Pool Balance (PO Portion)" is the sum for each Discount Mortgage Loan
of the product of the Scheduled Principal Balance of such Discount Mortgage Loan
and the PO Fraction for such Discount Mortgage Loan.
CALCULATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS M AND CLASS B
CERTIFICATES
Distributions in reduction of the principal balance of the Class M
Certificates will be made on each Distribution Date, pursuant to priority
SEVENTH of the Pool Distribution Amount Allocation, in an aggregate amount (the
"Class M Principal Distribution Amount") up to the Class M Optimal Principal
Amount.
The "Class M Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum for each outstanding Mortgage Loan
(including each defaulted Mortgage Loan, other than a Liquidated Loan, with
respect to which the related Mortgaged Property has been acquired by the Trust
Estate) of the product of (A) the Non-PO Fraction for such Mortgage Loan and (B)
the sum of:
(i) the Class M Percentage of (A) the scheduled payment of principal due on
such Mortgage Loan on the first day of the month in which the
Distribution Date occurs, less (B) if the Bankruptcy Loss Amount is
zero, the principal portion of Debt Service Reductions with respect to
such Mortgage Loan,
(ii) the Class M Prepayment Percentage of all Unscheduled Principal Receipts
that were received by a Servicer with respect to such Mortgage Loan
during the Unscheduled Principal Receipt Period relating to such
Distribution Date for each applicable type of Unscheduled Principal
Receipt,
(iii) the Class M Prepayment Percentage of the Scheduled Principal Balance of
such Mortgage Loan which, during the month preceding the month of such
Distribution Date was repurchased by the Seller, as described under the
heading "Description of the Mortgage Loans -- Mandatory Repurchase or
Substitution of Mortgage Loans" herein, and
(iv) the Class M Percentage of the excess of the unpaid principal balance of
any defective Mortgage Loan for which a Mortgage Loan was substituted
during the month preceding the month in which such Distribution Date
occurs over the unpaid principal balance of such substituted Mortgage
Loan, less the amount allocable to the principal portion of any
unreimbursed advances in respect of such defective Mortgage Loan. See
"The Pooling and Servicing Agreement -- Assignment of the Mortgage Loans
to the Trustee" in the Prospectus.
Distributions in reduction of the principal balances of the Class B-1 and
Class B-2 Certificates will be made on each Distribution Date, pursuant to
priorities TENTH and THIRTEENTH, respectively, of the Pool Distribution Amount
Allocation, in an aggregate amount with respect to each such Subclass (the
"Class B-1 Principal Distribution Amount" and "Class B-2 Principal Distribution
Amount," respectively) up to the Subclass B Optimal Principal Amount for such
Subclass.
The "Subclass B Optimal Principal Amount" for a particular Subclass of Class
B Certificates with respect to each Distribution Date will be an amount equal to
the sum for each outstanding Mortgage
S-53
<PAGE>
Loan (including each defaulted Mortgage Loan, other than a Liquidated Loan, with
respect to which the related Mortgaged Property has been acquired by the Trust
Estate) of the product of (A) the Non-PO Fraction for such Mortgage Loan and (B)
the sum of:
(i) the Subclass B Percentage for such Subclass of (A) the scheduled payment
of principal due on such Mortgage Loan on the first day of the month in
which the Distribution Date occurs, less (B) if the Bankruptcy Loss
Amount is zero, the principal portion of Debt Service Reductions with
respect to such Mortgage Loan,
(ii) the Subclass B Prepayment Percentage for such Subclass of all
Unscheduled Principal Receipts that were received by a Servicer with
respect to such Mortgage Loan during the Unscheduled Principal Receipt
Period relating to such Distribution Date for each applicable type of
Unscheduled Principal Receipt,
(iii) the Subclass B Prepayment Percentage for such Subclass of the Scheduled
Principal Balance of such Mortgage Loan which, during the month
preceding the month of such Distribution Date was repurchased by the
Seller, as described under the heading "Description of the Mortgage
Loans -- Mandatory Repurchase or Substitution of Mortgage Loans"
herein, and
(iv) the Subclass B Percentage for such Subclass of the excess of the unpaid
principal balance of any defective Mortgage Loan for which a Mortgage
Loan was substituted during the month preceding the month in which such
Distribution Date occurs over the unpaid principal balance of such
substituted Mortgage Loan, less the amount allocable to the principal
portion of any unreimbursed advances in respect of such defective
Mortgage Loan. See "The Pooling and Servicing Agreement -- Assignment of
the Mortgage Loans to the Trustee" in the Prospectus.
The principal distribution to the holders of Class M Certificates or a
Subclass of Class B Certificates will be reduced on any Distribution Date on
which (i) the principal balance of the Class M Certificates or such Subclass of
Class B Certificates on the following Determination Date would be reduced to
zero as a result of principal distributions or allocation of losses and (ii) the
principal balance of any Class A Certificates, and in the case of a Subclass of
Class B Certificates, the principal balances of the Class M Certificates or any
Subclass of Class B Certificates with a lower numerical designation, would be
subject to reduction on such Determination Date as a result of allocation of
Realized Losses (other than Excess Bankruptcy Losses, Excess Fraud Losses and
Excess Special Hazard Losses). The amount of any such reduction in the principal
distributed to the holders of Class M Certificates or such Subclass of Class B
Certificates will instead be distributed pro rata to the holders of any Subclass
(other than the Class A-16 Certificates with respect to the Class A-16 PO
Component) and Class senior in priority to receive distributions in accordance
with the Pool Distribution Amount Allocation.
In addition, in the event that there is any recovery of an amount in respect
of principal which had previously been allocated as a Realized Loss to the Class
M Certificates or any Subclass of Class B Certificates, the Class M Certificates
or such Subclass, for so long as the principal balance of such Class or Subclass
has not been reduced to zero, will be entitled to their pro rata share of such
recovery up to the amount by which the Class M Principal Balance or Class B
Subclass Principal Balance was reduced as a result of such Realized Loss.
The "Class M Percentage" and "Class M Prepayment Percentage" for any
Distribution Date will equal that portion of the Subordinated Percentage and
Subordinated Prepayment Percentage, as the case may be, represented by the
fraction the numerator of which is the then-outstanding Class M Principal
Balance and the denominator of which is the sum of the Class M Principal Balance
and, if any of the Subclasses of the Class B Certificates are entitled to
principal distributions for such Distribution Date as described below, the Class
B Subclass Principal Balances of the Subclasses entitled to principal
distributions.
The "Subclass B Percentage" and "Subclass B Prepayment Percentage" for a
Subclass of Class B Certificates will equal the portion of the Subordinated
Percentage and Subordinated Prepayment
S-54
<PAGE>
Percentage, as the case may be, represented by the fraction, the numerator of
which is the then-outstanding Class B Subclass Principal Balance for such
Subclass of Class B Certificates and the denominator of which is the sum of the
Class M Principal Balance and the Class B Subclass Principal Balances of the
Subclasses entitled to principal distributions for such Distribution Date as
described below. In the event that a Subclass of Class B Certificates is not
entitled to principal distributions for such Distribution Date, the Subclass B
Percentage and Subclass B Prepayment Percentage for such Subclass will both be
0% with respect to such Distribution Date.
In the event that on any Distribution Date, the Current Class M Fractional
Interest is less than the Original Class M Fractional Interest, then the Class
B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates will not be
entitled to distributions in respect of principal and the Class B Subclass
Principal Balances thereof will not be used to determine the Class M Percentage
and Class M Prepayment Percentage for such Distribution Date. For such
Distribution Date, the Class M Percentage and Class M Prepayment Percentage will
equal the Subordinated Percentage and the Subordinated Prepayment Percentage,
respectively. In the event that the Current Class M Fractional Interest equals
or exceeds the Original Class M Fractional Interest but the Current Class B-1
Fractional Interest is less than the Original Class B-1 Fractional Interest, the
Class B-2, Class B-3, Class B-4 and Class B-5 Certificates will not be entitled
to distributions in respect of principal and the Class B Subclass Principal
Balances of such Subclasses will not be used to determine the Class M
Percentage, the Class M Prepayment Percentage, the Subclass B Percentage for the
Class B-1 Certificates and the Subclass B Prepayment Percentage for the Class
B-1 Certificates for such Distribution Date. In the event that each of the
Current Class M Fractional Interest and the Current Class B-1 Fractional
Interest equals or exceeds the Original Class M Fractional Interest and the
Original Class B-1 Fractional Interest, respectively, but the Current Class B-2
Fractional Interest is less than the Original Class B-2 Fractional Interest, the
Class B-3, Class B-4 and Class B-5 Certificates will not be entitled to
distributions in respect of principal and the Class B Subclass Principal
Balances of such Subclasses will not be used to determine the Class M
Percentage, the Class M Prepayment Percentage, the Subclass B Percentages for
the Subclasses of Class B Certificates with lower numerical designations and the
Subclass B Prepayment Percentages for the Subclasses of Class B Certificates
with lower numerical designations for such Distribution Date. In the event that
each of the Current Class M Fractional Interest, the Current Class B-1
Fractional Interest and the Current Class B-2 Fractional Interest equals or
exceeds the Original Class M Fractional Interest, the Original Class B-1
Fractional Interest and the Original Class B-2 Fractional Interest,
respectively, but the Current Class B-3 Fractional Interest is less than the
Original Class B-3 Fractional Interest, the Class B-4 and Class B-5 Certificates
will not be entitled to distributions in respect of principal and the Class B
Subclass Principal Balances of such Subclasses will not be used to determine the
Class M Percentage, the Class M Prepayment Percentage, the Subclass B
Percentages for the Subclasses of Class B Certificates with lower numerical
designations and the Subclass B Prepayment Percentages for the Subclasses of
Class B Certificates with lower numerical designations for such Distribution
Date. In the event that each of the Current Class M Fractional Interest, the
Current Class B-1 Fractional Interest, the Current Class B-2 Fractional Interest
and the Current Class B-3 Fractional Interest equals or exceeds the Original
Class M Fractional Interest, the Original Class B-1 Fractional Interest, the
Original Class B-2 Fractional Interest and the Original Class B-3 Fractional
Interest, respectively, but the Current Class B-4 Fractional Interest is less
than the Original Class B-4 Fractional Interest, the Class B-5 Certificates will
not be entitled to distributions in respect of principal and the Class B
Subclass Principal Balance of such Subclass will not be used to determine the
Class M Percentage, the Class M Prepayment Percentage, the Subclass B
Percentages for the Subclasses of Class B Certificates with lower numerical
designations and the Subclass B Prepayment Percentages for the Subclasses of
Class B Certificates with lower numerical designations for such Distribution
Date. The Class B-5 Certificates will not have original or current fractional
interests which are required to be maintained as described above.
The "Original Class M Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the Class
B-1, Class B-2, Class B-3, Class B-4 and
S-55
<PAGE>
Class B-5 Certificates by the sum of the initial Class A Non-PO Principal
Balance, initial Class M Principal Balance and initial Class B Principal
Balance. The Original Class M Fractional Interest is expected to be
approximately 3.78%. The "Current Class M Fractional Interest" for any
Distribution Date is the percentage obtained by dividing the sum of the
then-outstanding Class B Subclass Principal Balances of the Class B-1, Class
B-2, Class B-3, Class B-4 and Class B-5 Certificates by the sum of the
then-outstanding Class A Non-PO Principal Balance, the Class M Principal Balance
and the Class B Principal Balance.
The "Original Class B-1 Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the Class
B-2, Class B-3, Class B-4 and Class B-5 Certificates by the sum of the initial
Class A Non-PO Principal Balance, initial Class M Principal Balance and initial
Class B Principal Balance. The Original Class B-1 Fractional Interest is
expected to be approximately 2.27%. The "Current Class B-1 Fractional Interest"
for any Distribution Date is the percentage obtained by dividing the sum of the
then-outstanding Class B Subclass Principal Balances of the Class B-2, Class
B-3, Class B-4 and Class B-5 Certificates by the sum of the then-outstanding
Class A Non-PO Principal Balance, the Class M Principal Balance and the Class B
Principal Balance.
The "Original Class B-2 Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the Class
B-3, Class B-4 and Class B-5 Certificates by the sum of the initial Class A
Non-PO Principal Balance, initial Class M Principal Balance and initial Class B
Principal Balance. The Original Class B-2 Fractional Interest is expected to be
approximately 1.26%. The "Current Class B-2 Fractional Interest" for any
Distribution Date is the percentage obtained by dividing the sum of the
then-outstanding Class B Subclass Principal Balances of the Class B-3, Class B-4
and Class B-5 Certificates by the sum of the then-outstanding Class A Non-PO
Principal Balance, the Class M Principal Balance and the Class B Principal
Balance.
The "Original Class B-3 Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the Class
B-4 and Class B-5 Certificates by the sum of the initial Class A Non-PO
Principal Balance, initial Class M Principal Balance and initial Class B
Principal Balance. The Original Class B-3 Fractional Interest is expected to be
approximately 0.76%. The "Current Class B-3 Fractional Interest" for any
Distribution Date is the percentage obtained by dividing the sum of the
then-outstanding Class B Subclass Principal Balances of the Class B-4 and Class
B-5 Certificates by the sum of the then-outstanding Class A Non-PO Principal
Balance, the Class M Principal Balance and the Class B Principal Balance.
The "Original Class B-4 Fractional Interest" is the percentage obtained by
dividing the initial Class B Subclass Principal Balance of the Class B-5
Certificates by the sum of the initial Class A Non-PO Principal Balance, initial
Class M Principal Balance and initial Class B Principal Balance. The Original
Class B-4 Fractional Interest is expected to be approximately 0.50%. The
"Current Class B-4 Fractional Interest" for any Distribution Date is the
percentage obtained by dividing the then-outstanding Class B Subclass Principal
Balance of the Class B-5 Certificates by the sum of the then-outstanding Class A
Non-PO Principal Balance, the Class M Principal Balance and the Class B
Principal Balance.
ALLOCATION OF AMOUNT TO BE DISTRIBUTED
The Class A-8 Certificates are interest-only Certificates and are not
entitled to distributions of principal.
On each Distribution Date occurring prior to the Accretion Termination Date,
an amount equal to the Class A-16 Accrual Component Distribution Amount, if any,
for such Distribution Date will be allocated first, concurrently, to the Class
A-13 Certificates and the Class A-16 Accretion Directed Component, pro rata,
until the Class A Subclass Principal Balance of the Class A-13 Certificates and
the Component Principal Balance of the Class A-16 Accretion Directed Component
have been reduced to zero and then to the Class A-16 Accrual Component until the
Component Principal Balance thereof has been reduced to zero.
S-56
<PAGE>
On each Distribution Date occurring prior to the Cross-Over Date, the Class
A Non-PO Principal Amount will be allocated among and distributed in reduction
of the Class A Subclass Principal Balances of the Class A Certificates (other
than the Class A-16 Certificates with respect to the Class A-16 IO Component and
the Class A-16 PO Component) as follows:
FIRST, to the Class A-17 Certificates, up to the Class A-17 Priority Amount;
SECOND, concurrently to the Class A-R and Class A-LR Certificates, pro rata,
until the Class A Subclass Principal Balance of each such Subclass has been
reduced to zero;
THIRD, concurrently as follows, until the Class A Subclass Principal Balance
of the Class A-1 Certificates has been reduced to zero:
(i) approximately 43.92315530501% to the Class A-1 Certificates;
(ii) approximately 3.17960886362% to the Class A-3 Certificates;
(iii) approximately 5.27278775782% to the Class A-5 Certificates;
(iv) approximately 4.89740216537% to the Class A-6 Certificates;
(v) approximately 15.33599467731% to the Class A-7 Certificates;
(vi) approximately 27.39105123087%, sequentially, as follows:
(a) concurrently, approximately 84.2105263158% to the Class A-9
Certificates and approximately 15.7894736842% to the Class A-16 PAC
Component, up to their respective PAC Principal Amounts for such
Distribution Date, until the Class A Subclass Principal Balance of
the Class A-9 Certificates has been reduced to approximately
$5,553,000 and the Component Principal Balance of the Class A-16 PAC
Component has been reduced to approximately $3,823,000;
(b) concurrently, approximately 51.7279925478% to the Class A-9
Certificates, approximately 32.4825337680% to the Class A-10
Certificates and approximately 15.7894736842% to the Class A-16 PAC
Component, until the Class A-9 and Class A-10 Certificates have
received their PAC Principal Amounts for such Distribution Date;
(c) concurrently, to the Class A-11 Certificates and the Class A-16 PAC
Component, pro rata, up to their respective PAC Principal Amounts
for such Distribution Date;
(d) to the Class A-16 TAC Component, up to its TAC Principal Amount with
respect to such Distribution Date;
(e) to the Class A-12 Certificates, until the Class A Subclass Principal
Balance thereof has been reduced to zero;
(f) to the Class A-16 TAC Component, without regard to its TAC Principal
Amount and until the Component Principal Balance thereof has been
reduced to zero;
(g) concurrently, approximately 84.2105263158% to the Class A-9
Certificates and approximately 15.7894736842% to the Class A-16 PAC
Component, without regard to their respective PAC Principal Amounts
for such Distribution Date, until the Class A Subclass Principal
Balance of the Class A-9 Certificates has been reduced to
approximately $5,553,000 and the Component Principal Balance of the
Class A-16 PAC Component has been reduced to approximately
$3,823,000;
(h) concurrently, approximately 51.7279925478% to the Class A-9
Certificates, approximately 32.4825337680% to the Class A-10
Certificates and approximately 15.7894736842% to the Class A-16 PAC
Component without regard to their respective PAC Principal Amounts
for such Distribution Date, until the Class A Subclass Principal
Balance of the Class A-9 and Class A-10 Certificates have been
reduced to zero;
S-57
<PAGE>
(i) concurrently, to the Class A-11 Certificates and the Class A-16 PAC
Component, pro rata, without regard to their respective PAC
Principal Amounts for such Distribution Date, until the Class A
Subclass Principal Balance of such Subclass and the Component
Principal Balance of such Component have been reduced to zero;
FOURTH, concurrently as follows, until the Class A Subclass Principal
Balances of the Class A-2 Certificates and the Class A-3 Certificates have been
reduced to zero:
(i) approximately 43.92315530501% to the Class A-2 Certificates;
(ii) approximately 3.17960886362% to the Class A-3 Certificates;
(iii) approximately 5.27278775782% to the Class A-5 Certificates;
(iv) approximately 4.89740216537% to the Class A-6 Certificates;
(v) approximately 15.33599467731% to the Class A-7 Certificates;
(vi) approximately 27.39105123087%, sequentially, in accordance with the
priorities and proportions set forth in clause THIRD (vi)(a) through (i)
above.
FIFTH, concurrently as follows, until the Class A Subclass Principal
Balances of the Class A-4 Certificates, the Class A-5 Certificates, the Class
A-6 Certificates and the Class A-7 Certificates have been reduced to zero:
(i) approximately 47.10276416863% to the Class A-4 Certificates;
(ii) approximately 5.27278775782% to the Class A-5 Certificates;
(iii) approximately 4.89740216537% to the Class A-6 Certificates;
(iv) approximately 15.33599467731% to the Class A-7 Certificates;
(v) approximately 27.39105123087%, sequentially, in accordance with the
priorities and proportions set forth in clause THIRD (vi)(a) through (i)
above.
SIXTH, concurrently as follows, until the Class A Subclass Principal Balance
of the Class A-13 Certificates and the Component Principal Balance of the Class
A-16 Accretion Directed Component have been reduced to zero:
(i) approximately 42.5223305231% to the Class A-13 Certificates;
(ii) approximately 19.4565455856% to the Class A-14 Certificates;
(iii) approximately 10.6305826308% to the Class A-16 Accretion Directed
Component;
(iv) approximately 27.3905412605%, sequentially, in accordance with the
priorities and proportions set forth in clause THIRD (vi)(a) through (i)
above.
SEVENTH, concurrently as follows:
(i) approximately 19.4565455856% to the Class A-14 Certificates, until the
Class A Subclass Principal Balance hereof has been reduced to zero;
(ii) approximately 53.1529131539% to the Class A-16 Accrual Component, until
the Component Principal Balance thereof has been reduced to zero;
(iii) approximately 27.3905412605%, sequentially, in accordance with the
priorities and proportions set forth in clause THIRD (vi)(a) through
(i) above.
EIGHTH, to the Class A-15 Certificates, until the Class A Subclass Principal
Balance thereof has been reduced to zero; and
S-58
<PAGE>
NINTH, to the Class A-17 Certificates, without regard to the Class A-17
Priority Amount, until the Class A Subclass Principal Balance thereof has been
reduced to zero.
The "Class A-17 Priority Amount" for any Distribution Date means the lesser
of (i) the Class A Subclass Principal Balance of the Class A-17 Certificates and
(ii) the sum of (A) the product of (1) the Class A-17 Percentage, (2) the Class
A-17 Scheduled Percentage and (3) the Scheduled Principal Amount and (B) the
product of (1) the Class A-17 Percentage, (2) the Class A-17 Prepayment Shift
Percentage and (3) the Unscheduled Principal Amount.
The "Class A-17 Percentage" means the Class A Subclass Principal Balance of
the Class A-17 Certificates divided by the Pool Balance (Non-PO Portion).
The "Class A-17 Scheduled Percentage" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN: CLASS A-17 SCHEDULED PERCENTAGE
- ---------------------------------------------------------------------------------- ---------------------------------
<S> <C>
November 1996 through October 2001................................................ 0%
November 2001 and thereafter...................................................... 100%
</TABLE>
The "Scheduled Principal Amount" means the sum for each outstanding Mortgage
Loan (including each defaulted Mortgage Loan, other than a Liquidated Loan, with
respect to which the related Mortgaged Property has been acquired by the Trust
Estate) of the product of (A) the Non-PO Fraction for such Mortgage Loan and (B)
the sum of the amounts described in clauses B(i) and B(iv) of the definition of
"Class A Non-PO Optimal Principal Amount" on page S-49, but without that amount
being multiplied by the Class A Percentage.
The "Unscheduled Principal Amount" means the sum for each outstanding
Mortgage Loan (including each defaulted Mortgage Loan, other than a Liquidated
Loan, with respect to which the related Mortgage Property has been acquired by
the Trust Estate) of the product of (A) the Non-PO Fraction for such Mortgage
Loan and (B) the sum of the amounts described in clauses B(ii) and B(iii) of the
definition of "Class A Non-PO Optimal Principal Amount" on page S-49, but
without that amount being multiplied by the Class A Prepayment Percentage.
The "Class A-17 Prepayment Shift Percentage" for any Distribution Date will
be the percentage indicated below:
<TABLE>
<CAPTION>
CLASS A-17 PREPAYMENT SHIFT
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
- ---------------------------------------------------------------------------- -------------------------------------
<S> <C>
November 1996 through October 2001.......................................... 0%
November 2001 through October 2002.......................................... 30%
November 2002 through October 2003.......................................... 40%
November 2003 through October 2004.......................................... 60%
November 2004 through October 2005.......................................... 80%
November 2005 and thereafter................................................ 100%
</TABLE>
As used above, the "PAC Principal Amount" for any Distribution Date and for
any Subclass of PAC Certificates and the Class A-16 PAC Component means the
amount, if any, that would reduce the Class A Subclass Principal Balance of such
Subclass or the Component Principal Balance of such Component to the percentage
of its initial Class A Subclass Principal Balance or Component Principal Balance
shown in the following tables with respect to such Distribution Date.
As used above, the "TAC Principal Amount" for any Distribution Date and for
the Class A-16 TAC Component means the amount, if any, that would reduce the
Component Principal Balance of such Component to the percentage of its initial
Component Principal Balance shown in the table set forth below with respect to
such Distribution Date.
Notwithstanding the foregoing, on each Distribution Date occurring on or
after the Cross-Over Date, the Class A Non-PO Principal Distribution Amount will
be distributed among the Subclasses of Class A Certificates (other than the
Class A-16 Certificates with respect to the Class A-16 PO
S-59
<PAGE>
Component) pro rata in accordance with their respective outstanding Class A
Subclass Principal Balances (less in the case of the Class A-16 Certificates the
Component Principal Balance of the Class A-16 PO Component) without regard to
either the proportions or the priorities set forth above.
Any amounts distributed on a Distribution Date to the holders of Class A
Certificates of any Subclass in reduction of principal balance will be allocated
among the holders of Class A Certificates of such Subclass pro rata in
accordance with their respective Percentage Interests.
Amounts distributed on any Distribution Date to the holders of the Class M
and Offered Class B Certificates in reduction of principal balance will be
allocated among the holders of each such Class or Subclass pro rata in
accordance with their respective Percentage Interests.
The following tables set forth for each Distribution Date the planned Class
A Subclass Principal Balance and planned Component Principal Balance for each
Subclass of PAC Certificates and the Class A-16 PAC Component and the targeted
Component Principal Balance for the Class A-16 TAC Component, expressed as a
percentage of the initial Class A Subclass Principal Balance or initial
Component Principal Balance of such Subclass or Component, as the case may be.
PLANNED CLASS A SUBCLASS PRINCIPAL BALANCES
AS PERCENTAGES OF INITIAL CLASS A SUBCLASS PRINCIPAL BALANCE
CLASS A-9 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
BALANCE
----------------%
99.31530329
DISTRIBUTION DATE 98.53179067
- --------------------- 97.64994182
96.67000645
November 1996........ 95.59228510
December 1996........ 94.41712907
January 1997......... 93.14494006
February 1997........ 91.77617045
March 1997........... 90.31132270
April 1997........... 88.75094925
May 1997............. 87.09565229
June 1997............ 85.34608343
July 1997............ 83.50294316
August 1997.......... 81.56698059
September 1997....... 79.53899294
October 1997......... 77.41982505
November 1997........ 75.21036877
December 1997........ 72.91156259
January 1998......... PERCENTAGE OF
February 1998........ INITIAL CLASS A
March 1998........... SUBCLASS
April 1998........... PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
May 1998............. 70.52439056
June 1998............ 68.04988219
July 1998............ 65.48911130
August 1998.......... 62.84319552
September 1998....... 60.11329538
October 1998......... 57.30061346
November 1998........ 54.40639372
December 1998........ 51.43192040
January 1999......... 48.40537832
February 1999........ 45.32769093
March 1999........... 42.26540084
April 1999........... 39.21842981
May 1999............. 36.18669993
June 1999............ 33.40991377
July 1999............ 31.56619503
August 1999.......... 29.73169634
September 1999....... 27.90637078
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
October 1999......... 26.09017185
November 1999........ 24.28305319
December 1999........ 22.48496860
January 2000......... 20.69587221
February 2000........ 18.91571843
March 2000........... 17.14446188
April 2000........... 15.38205745
May 2000............. 13.62846017
June 2000............ 11.88362545
July 2000............ 10.14750879
August 2000.......... 8.42006609
September 2000....... 6.70125333
October 2000......... 4.99102690
November 2000........ 3.28934321
December 2000........ 1.59615907
January 2001
and thereafter....... 0.00000000
</TABLE>
CLASS A-10 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
BALANCE
----------------%
DISTRIBUTION DATE 100.00000000
- --------------------- 98.87000057
93.41388127
Up to and including 87.98504703
May 1999............. 82.58335876
June 1999............ 77.20867909
July 1999............ 71.86087038
August 1999.......... PERCENTAGE OF
September 1999....... INITIAL CLASS A
October 1999......... SUBCLASS
November 1999........ PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
December 1999........ 66.53979610
January 2000......... 61.24532119
February 2000........ 55.97730972
March 2000........... 50.73562805
April 2000........... 45.52014224
May 2000............. 40.33071953
June 2000............ 35.16722799
July 2000............ 30.02953570
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
August 2000.......... 24.91751219
September 2000....... 19.83102753
October 2000......... 14.76995211
November 2000........ 9.73415744
December 2000........ 4.72351563
January 2001
and thereafter....... 0.00000000
</TABLE>
S-60
<PAGE>
PLANNED CLASS A SUBCLASS OR COMPONENT PRINCIPAL BALANCES
AS PERCENTAGES OF INITIAL CLASS A SUBCLASS PRINCIPAL BALANCE OR INITIAL
COMPONENT PRINCIPAL BALANCE
CLASS A-11 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
BALANCE
----------------%
DISTRIBUTION DATE 100.00000000
- --------------------- 99.85308823
97.07252720
Up to and including 94.30585186
December 2000........ 91.55299184
January 2001......... 88.81387747
February 2001........ 86.08843920
March 2001........... 83.37660802
April 2001........... 80.67831520
May 2001............. 77.99349242
June 2001............ 75.32207172
July 2001............ 72.88223855
August 2001.......... 70.45558882
September 2001....... 68.04205674
October 2001......... 65.64157689
November 2001........ 63.25408412
December 2001........ 60.87951380
January 2002......... 58.51780157
February 2002........ PERCENTAGE OF
March 2002........... INITIAL CLASS A
April 2002........... SUBCLASS
May 2002............. PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
June 2002............ 56.16888334
July 2002............ 53.83269549
August 2002.......... 51.50917475
September 2002....... 49.19825816
October 2002......... 46.89988316
November 2002........ 44.66342005
December 2002........ 42.43908688
January 2003......... 40.22682184
February 2003........ 38.02656373
March 2003........... 35.83825159
April 2003........... 33.66182466
May 2003............. 31.49722274
June 2003............ 29.34438581
July 2003............ 27.23475141
August 2003.......... 25.18160849
September 2003....... 23.18365278
October 2003......... 21.23960849
November 2003........ 19.68818950
December 2003........ 18.18024518
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
January 2004......... 16.71471340
February 2004........ 15.29055621
March 2004........... 13.90675946
April 2004........... 12.56233224
May 2004............. 11.25630621
June 2004............ 9.98773549
July 2004............ 8.75569572
August 2004.......... 7.55928389
September 2004....... 6.39761766
October 2004......... 5.26983506
November 2004........ 4.46257542
December 2004........ 3.67830962
January 2005......... 2.91644772
February 2005........ 2.17641406
March 2005........... 1.45764673
April 2005........... 0.75959757
May 2005............. 0.08173150
June 2005
and thereafter....... 0.00000000
</TABLE>
CLASS A-16 PAC COMPONENT
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
PRINCIPAL
BALANCE
----------------%
99.64017073
DISTRIBUTION DATE 99.22841071
- --------------------- 98.76497186
98.24998550
November 1996........ 97.68360976
December 1996........ 97.06602900
January 1997......... 96.39745437
February 1997........ 95.67812366
March 1997........... 94.90830104
April 1997........... 94.08827648
May 1997............. 93.21836688
June 1997............ 92.29891438
July 1997............ 91.33028740
August 1997.......... 90.31287924
September 1997....... 89.24710916
October 1997......... 88.13342094
November 1997........ 86.97228347
December 1997........ 85.76418983
January 1998......... 84.50965734
February 1998........ 83.20922668
March 1998........... 81.86346256
April 1998........... 80.47295224
May 1998............. 79.03830530
June 1998............ 77.56015419
July 1998............ 76.03915231
August 1998.......... 74.47597476
September 1998....... 72.88543357
October 1998......... 71.26801382
November 1998........ 69.65868583
December 1998........ 68.05740849
January 1999......... 66.46414071
February 1999........ 64.87884206
March 1999........... 63.30147177
April 1999........... 61.73198960
May 1999............. 60.17035528
June 1999............ PERCENTAGE OF
July 1999............ INITIAL
August 1999.......... COMPONENT
September 1999....... PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
October 1999......... 58.61652925
November 1999........ 57.07047160
December 1999........ 55.53214310
January 2000......... 54.00150418
February 2000........ 52.47851612
March 2000........... 50.96313986
April 2000........... 49.45533703
May 2000............. 47.95506908
June 2000............ 46.46229763
July 2000............ 44.97698499
August 2000.......... 43.49909313
September 2000....... 42.02858468
October 2000......... 40.56542197
November 2000........ 39.10956797
December 2000........ 37.66098567
January 2001......... 36.24208972
February 2001........ 35.23287361
March 2001........... 34.22869742
April 2001........... 33.22953556
May 2001............. 32.23536261
June 2001............ 31.24615368
July 2001............ 30.26188334
August 2001.......... 29.28252686
September 2001....... 28.30805936
October 2001......... 27.33845625
November 2001........ 26.45290875
December 2001........ 25.57214617
January 2002......... 24.69614481
February 2002........ 23.82488078
March 2002........... 22.95833038
April 2002........... 22.09647024
May 2002............. 21.23927716
June 2002............ 20.38672761
July 2002............ 19.53879857
August 2002.......... 18.69546717
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
September 2002....... 17.85671039
October 2002......... 17.02250571
November 2002........ 16.21077230
December 2002........ 15.40344141
January 2003......... 14.60049070
February 2003........ 13.80189800
March 2003........... 13.00764097
April 2003........... 12.21769794
May 2003............. 11.43204673
June 2003............ 10.65066570
July 2003............ 9.88496521
August 2003.......... 9.13976855
September 2003....... 8.41460225
October 2003......... 7.70900341
November 2003........ 7.14590943
December 2003........ 6.59859492
January 2004......... 6.06667406
February 2004........ 5.54977042
March 2004........... 5.04751561
April 2004........... 4.55955023
May 2004............. 4.08552277
June 2004............ 3.62508972
July 2004............ 3.17791591
August 2004.......... 2.74367320
September 2004....... 2.32204162
October 2004......... 1.91270834
November 2004........ 1.61971022
December 2004........ 1.33505765
January 2005......... 1.05853676
February 2005........ 0.78993843
March 2005........... 0.52905884
April 2005........... 0.27569913
May 2005............. 0.02966485
June 2005
and thereafter....... 0.00000000
</TABLE>
S-61
<PAGE>
TARGETED COMPONENT PRINCIPAL BALANCES
AS PERCENTAGES OF INITIAL COMPONENT PRINCIPAL BALANCE
CLASS A-16 TAC COMPONENT
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
PRINCIPAL
BALANCE
----------------%
99.73224944
DISTRIBUTION DATE 99.38981913
- --------------------- 98.97292410
98.48191113
November 1996........ 97.91725891
December 1996........ 97.27957818
January 1997......... 96.56961140
February 1997........ 95.78823221
March 1997........... 94.93644464
April 1997........... 94.01538179
May 1997............. 93.02630440
June 1997............ 91.97059902
July 1997............ 90.84977598
August 1997.......... 89.66546689
September 1997....... 88.41942185
October 1997......... 87.11350665
November 1997........ 85.74969927
December 1997........ 84.33008638
January 1998......... 82.85685940
February 1998........ 81.33231050
March 1998........... 79.75882801
April 1998........... 78.13889197
May 1998............. 76.47506909
June 1998............ 74.77000776
July 1998............ 73.02643259
August 1998.......... 71.24713905
September 1998....... 69.45465585
October 1998......... 67.65085805
November 1998........ 65.88554980
December 1998........ 64.15815335
January 1999......... 62.46809905
February 1999........ 60.81482505
March 1999........... 59.19777731
April 1999........... 57.61640944
May 1999............. 56.07018266
June 1999............ 54.55856562
July 1999............ 53.08103433
August 1999.......... 51.63707210
September 1999....... 50.22616942
October 1999......... 48.84782380
November 1999........ PERCENTAGE OF
December 1999........ INITIAL
January 2000......... COMPONENT
February 2000........ PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
March 2000........... 47.50153973
April 2000........... 46.18682868
May 2000............. 44.90320879
June 2000............ 43.65020497
July 2000............ 42.42734874
August 2000.......... 41.23417810
September 2000....... 40.07023756
October 2000......... 38.93507788
November 2000........ 37.82825617
December 2000........ 36.74933569
January 2001......... 35.69788578
February 2001........ 34.67348176
March 2001........... 33.67570499
April 2001........... 32.70414258
May 2001............. 31.75838744
June 2001............ 30.83803821
July 2001............ 29.94269910
August 2001.......... 29.07197995
September 2001....... 28.22549590
October 2001......... 27.40286771
November 2001........ 26.72769593
December 2001........ 26.07470725
January 2002......... 25.44354043
February 2002........ 24.83383938
March 2002........... 24.24525303
April 2002........... 23.67743520
May 2002............. 23.13004469
June 2002............ 22.60274505
July 2002............ 22.09520459
August 2002.......... 21.60709634
September 2002....... 21.13809794
October 2002......... 20.68789159
November 2002........ 20.29434803
December 2002........ 19.91839414
January 2003......... 19.55973007
February 2003........ 19.21806024
March 2003........... 18.89309330
April 2003........... 18.58454209
May 2003............. 18.29212358
June 2003............ 18.01555875
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
July 2003............ 17.73820263
August 2003.......... 17.45284673
September 2003....... 17.15987113
October 2003......... 16.85964510
November 2003........ 16.49408896
December 2003........ 16.12428684
January 2004......... 15.75052700
February 2004........ 15.37308868
March 2004........... 14.99224242
April 2004........... 14.60825009
May 2004............. 14.22136545
June 2004............ 13.83184364
July 2004............ 13.43992233
August 2004.......... 13.04582160
September 2004....... 12.64976399
October 2004......... 12.25196469
November 2004........ 11.80909235
December 2004........ 11.36744738
January 2005......... 10.92714518
February 2005........ 10.48829647
March 2005........... 10.05100730
April 2005........... 9.61537940
May 2005............. 9.18151012
June 2005............ 8.44988285
July 2005............ 7.68767202
August 2005.......... 6.93718261
September 2005....... 6.19824396
October 2005......... 5.47068773
November 2005........ 4.84601726
December 2005........ 4.22995664
January 2006......... 3.62239007
February 2006........ 3.02320342
March 2006........... 2.43228399
April 2006........... 1.84952060
May 2006............. 1.27480355
June 2006............ 0.70802461
July 2006............ 0.14907696
August 2006
and thereafter....... 0.00000000
</TABLE>
S-62
<PAGE>
PRINCIPAL PAYMENT CHARACTERISTICS OF THE PAC CERTIFICATES, THE CLASS A-16 PAC
COMPONENT, THE CLASS A-16 TAC COMPONENT AND THE COMPANION CERTIFICATES
The percentages of the initial Class A Subclass Principal Balances of the
PAC Certificates and the Component Principal Balances of the Class A-16 PAC
Component and the Class A-16 TAC Component set forth in the preceding tables
were calculated using the Structuring Assumptions. Based on such assumptions,
the Class A Subclass Principal Balance of each Subclass of PAC Certificates and
the Component Principal Balance of the Class A-16 PAC Component would be reduced
to the percentage of its initial Class A Subclass Principal Balance or Component
Principal Balance, as applicable, indicated in the preceding tables for each
Distribution Date if prepayments on the Mortgage Loans occur at any CONSTANT
rate between approximately 100% SPA (as defined herein under "Prepayment and
Yield Considerations") and approximately 375% SPA. Based on such assumptions,
the Component Principal Balance of the Class A-16 TAC Component would be reduced
to the percentage of its Component Principal Balance indicated in the preceding
tables for each Distribution Date if prepayments on the Mortgage Loans occur at
a CONSTANT rate of approximately 245% SPA. However, IT IS HIGHLY UNLIKELY THAT
PRINCIPAL PREPAYMENTS ON THE MORTGAGE LOANS WILL OCCUR AT ANY CONSTANT RATE OR
THAT THE MORTGAGE LOANS WILL PREPAY AT THE SAME RATE. In addition, even if
principal prepayments were to occur at a constant rate, there will be
differences between the characteristics of the actual Mortgage Loans ultimately
included in the Trust Estate and the characteristics which are assumed in
preparing the tables. Therefore, there can be no assurance that the Class A
Subclass Principal Balance of any Subclass of PAC Certificates or the Component
Principal Balance of the Class A-16 PAC Component or the Class A-16 TAC
Component, after the application of the distributions to be made on any
Distribution Date, will be equal to the applicable percentage of the initial
Class A Subclass Principal Balance or Component Principal Balance, as
applicable, for such Distribution Date specified in the tables above.
The weighted average lives of the Subclasses of PAC Certificates and the
Class A-16 Certificates with respect to the Class A-16 PAC Component and the
Class A-16 TAC Component will vary under different prepayment scenarios. To the
extent that principal prepayments occur at a CONSTANT rate that is slower than
approximately 100% SPA, the Class A Non-PO Principal Amount on each Distribution
Date may be insufficient to make distributions in reduction of the principal
balances of one or more of the Subclasses of the PAC Certificates or to the
Class A-16 PAC Component in amounts that would reduce their principal balances
to their respective planned principal balance for such Distribution Date. The
weighted average lives of the Subclasses of the PAC Certificates or the Class
A-16 Certificates with respect to the Class A-16 PAC Component may therefore be
extended, as illustrated for the PAC Certificates by the tables beginning on
page S-90. To the extent that such principal prepayments occur at a CONSTANT
rate that is higher than approximately 375% SPA, the weighted average lives may
be shortened as illustrated for the PAC Certificates by the tables beginning on
page S-90.
To the extent that principal prepayments are made at a CONSTANT rate that is
slower than approximately 245% SPA, the Class A Non-PO Principal Amount on each
Distribution Date may be insufficient to make distributions in reduction of the
principal balance to the Class A-16 TAC Component in an amount that would reduce
its principal balance to its targeted principal balance for such Distribution
Date. The weighted average life of the Class A-16 Certificates with respect to
the Class A-16 TAC Component may therefore be extended. To the extent that such
principal prepayments occur at a CONSTANT rate that is higher than approximately
245% SPA, the weighted average life of the Class A-16 Certificates with respect
to the Class A-16 TAC Component may be shortened.
Because any Excess Principal Payments for any Distribution Date will be
distributed to Certificateholders on such Distribution Date, the ability to
distribute the PAC Principal Amounts and the TAC Principal Amount on any
Distribution Date will not be enhanced by the averaging of high and low
principal prepayment rates on the Mortgage Loans over several Distribution
Dates, as might be the case if any such Excess Principal Payments were held for
future applications and not distributed monthly. There is no assurance that,
with respect to the Class A Non-PO Principal Amount (i) distributions in
reduction of the Class A Subclass Principal Balance of any Subclass of PAC
S-63
<PAGE>
Certificates (other than the Class A-9 Certificates) will not commence
significantly earlier than the first Distribution Date shown in the preceding
tables relating to such Subclass, (ii) distributions in reduction of the Class A
Subclass Principal Balance of any Subclass of PAC Certificates (other than the
Class A-9 Certificates) or the Component Principal Balance of the Class A-16 TAC
Component will not commence significantly later than the first Distribution Date
shown in the preceding tables relating to such Subclass or Component or (iii)
the Class A Subclass Principal Balance of any Subclass of PAC Certificates or
the Component Principal Balance of the Class A-16 PAC Component or the Class
A-16 TAC Component will not be reduced to zero significantly earlier or
significantly later than the last Distribution Date shown in the preceding
tables.
The extent to which the planned principal balances will be achieved and the
sensitivity of the PAC Certificates or the Class A-16 PAC Component to principal
prepayments on the Mortgage Loans will depend, in part, upon the period of time
during which the Class A-16 TAC Component and the Companion Certificates remain
outstanding. On each Distribution Date, the excess of the portion of the Class A
Non-PO Principal Amount available to make distributions of principal to the PAC
Certificates and the Class A-16 PAC Component over the PAC Principal Amounts
("Excess Principal Payments") for such Distribution Date will be distributed
first to the Class A-16 TAC Component and the Companion Certificates before
being distributed to the PAC Certificates and the Class A-16 PAC Component in
accordance with the priorities set forth above under "-- Allocation of Amount to
be Distributed." This is intended to decrease the likelihood that the PAC
Certificates and the Class A-16 PAC Component will be reduced below their
planned principal balances on a given Distribution Date. As such, and in
accordance with the priorities described above, the Class A-16 TAC Component and
the Companion Certificates support the PAC Certificates and the Class A-16 PAC
Component. However, under certain relatively fast prepayment scenarios, one or
more Subclasses of PAC Certificates or the Class A-16 PAC Component may continue
to be outstanding when the Companion Certificates and the Class A-16 TAC
Component are no longer outstanding. Under such circumstances, all Excess
Principal Payments will be applied to the remaining PAC Certificates and the
Class A-16 PAC Component in accordance with the priorities described herein.
Thus, when the principal balances of the Class A-16 TAC Component and the
Companion Certificates have been reduced to zero, any Subclasses of PAC
Certificates or the Class A-16 PAC Component then outstanding will, in
accordance with the priorities set forth above, become more sensitive to the
rate of prepayment on the Mortgage Loans as such Subclasses or Component will
receive all Excess Principal Payments until the principal balances of the PAC
Certificates and the Class A-16 PAC Component have been reduced to zero.
Conversely, under certain relatively slow prepayment scenarios, the portion of
the Class A Non-PO Principal Amount available to make distributions of principal
to the PAC Certificates and the Class A-16 PAC Component may not be sufficient
to pay the PAC Principal Amounts for all Subclasses of PAC Certificates and the
Class A-16 PAC Component on a given Distribution Date. In such cases, the
portion of the Class A Non-PO Principal Amount available to make distributions
of principal to the PAC Certificates and the Class A-16 PAC Component for each
subsequent Distribution Date will be applied in accordance with the priorities
described herein such that the Class A-16 TAC Component and the Companion
Certificates will not receive any distributions in reduction of their principal
balances until the outstanding principal balance of each such Subclass of PAC
Certificates and the Class A-16 PAC Component has reached its planned principal
balance for such Distribution Date. As a result, the weighted average life of
any Subclass of PAC Certificates (or of the Class A-16 Certificates to the
extent of the Class A-16 PAC Component) that did not receive its PAC Principal
Amount on a Distribution Date may be extended.
The extent to which the targeted principal balance will be achieved and the
sensitivity of the Class A-16 TAC Component to principal prepayments on the
Mortgage Loans will depend, in part, upon the period of time during which the
Companion Certificates remain outstanding. On each Distribution Date, the excess
of the portion of the Class A Non-PO Principal Amount available to make
distributions of principal to the Class A-16 TAC Component over the PAC
Principal Amounts and the TAC Principal Amount for such Distribution Date will
be distributed first to the Companion Certificates before being distributed to
the Class A-16 TAC Component in accordance with the
S-64
<PAGE>
priorities set forth above under "-- Allocation of Amount to be Distributed." As
such, and in accordance with such priorities described above, the Companion
Certificates support the Class A-16 TAC Component. This is intended to decrease
the likelihood that the principal balance of the Class A-16 TAC Component will
be reduced below its targeted principal balance on a given Distribution Date.
However, under certain relatively fast prepayment scenarios, the Class A-16 TAC
Component may continue to be outstanding when the Companion Certificates are no
longer outstanding. Under such circumstances, all Excess Principal Payments will
be applied first to the Class A-16 TAC Component. Thus, when the principal
balance of the Companion Certificates has been reduced to zero, the Class A-16
TAC Component, if outstanding, will become more sensitive to the rate of
prepayment on the Mortgage Loans as the Class A-16 TAC Component will receive
all Excess Principal Prepayments until the principal balance of such Class A-16
TAC Component has been reduced to zero. Conversely, under certain relatively
slow prepayment scenarios, the Excess Principal Payments, if any, may not be
sufficient to pay the TAC Principal Amount of the Class A-16 TAC Component on a
given Distribution Date. In such cases, the Excess Principal Payments for each
subsequent Distribution Date will be applied in accordance with the priorities
described herein such that the Companion Certificates will not receive any
distributions in reduction of their principal balance until the outstanding
principal balance of the Class A-16 TAC Component has reached its targeted
principal balance for such Distribution Date. As a result, the weighted average
life of the Class A-16 Certificates to the extent of the Class A-16 TAC
Component may be extended.
THE WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFICATES WILL BE HIGHLY
SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE
MORTGAGE LOANS. See "Prepayment and Yield Considerations" herein.
ADDITIONAL RIGHTS OF THE CLASS A-R AND CLASS A-LR CERTIFICATEHOLDERS
The Class A-R and Class A-LR Certificates will remain outstanding for as
long as the Trust Estate shall exist, whether or not either such Subclass is
receiving current distributions of principal or interest. The holders of the
Class A-R and Class A-LR Certificates will be entitled to receive the proceeds
of the remaining assets of the Trust Estate, if any, on the final Distribution
Date for the Series 1996-5 Certificates, after distributions in respect of any
accrued but unpaid interest on the Series 1996-5 Certificates and after
distributions in reduction of principal balance have reduced the principal
balances of the Series 1996-5 Certificates to zero. It is not anticipated that
there will be any assets remaining in the Trust Estate on the final Distribution
Date following the distributions of interest and in reduction of principal
balance made on the Series 1996-5 Certificates on such date.
In addition, the Class A-LR Certificateholder will be entitled on each
Distribution Date to receive any Pool Distribution Amount remaining after all
distributions pursuant to the Pool Distribution Amount Allocation have been made
and any Net Foreclosure Profits. "Net Foreclosure Profits" means, with respect
to any Distribution Date, the excess, if any, of (i) the aggregate profits on
Liquidated Loans in the related period with respect to which net Liquidation
Proceeds exceed the unpaid principal balance thereof plus accrued interest
thereon at the Mortgage Interest Rate over (ii) the aggregate Realized Losses on
Liquidated Loans in the related period with respect to which net Liquidation
Proceeds are less than the unpaid principal balance thereof plus accrued
interest thereon at the Mortgage Interest Rate. It is not anticipated that there
will be any such Net Foreclosure Profits or undistributed portion of the Pool
Distribution Amounts.
PERIODIC ADVANCES
If, on any Determination Date, payments of principal and interest due on any
Mortgage Loan in the Trust Estate on the related Due Date have not been
received, the Servicer of the Mortgage Loan will, in certain circumstances, be
required to advance on or before the related Distribution Date for the benefit
of holders of the Series 1996-5 Certificates an amount in cash equal to all
delinquent payments of principal and interest due on each Mortgage Loan in the
Trust Estate (with interest adjusted to the applicable Net Mortgage Interest
Rate) not previously advanced, but only to the extent that such Servicer
believes that such amounts will be recoverable by it from liquidation proceeds
or
S-65
<PAGE>
other recoveries in respect of the related Mortgage Loan (each, a "Periodic
Advance"). Upon a Servicer's failure to make a required Periodic Advance, the
Trust Administrator, if such Servicer is Norwest Mortgage, or the Master
Servicer, if such Servicer is not Norwest Mortgage, will be required to make
such Periodic Advance.
The Underlying Servicing Agreements and the Pooling and Servicing Agreement
provide that any advance of the kind described in the preceding paragraph may be
reimbursed to the related Servicer or the Master Servicer or the Trust
Administrator, as applicable, at any time from funds available in the Servicer
Custodial Account or the Certificate Account, as the case may be, to the extent
that (i) such funds represent receipts on, or liquidation, insurance, purchase
or repurchase proceeds in respect of, the Mortgage Loans to which the advance
relates or (ii) the Servicer, the Master Servicer or Trust Administrator, as
applicable, has determined in good faith that the advancing party will be unable
to recover such advance from funds of the type referred to in clause (i) above.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R, CLASS A-LR, CLASS M AND OFFERED CLASS
B CERTIFICATES
The Class A-R and Class A-LR Certificates will be subject to the following
restrictions on transfer, and each of the Class A-R and Class A-LR Certificate
will contain a legend describing such restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations and (ii) certain Pass-Through Entities (as defined in
the Prospectus) that have Disqualified Organizations as beneficial owners. No
tax will be imposed on a Pass-Through Entity with respect to the Class A-R or
Class A-LR Certificate to the extent it has received an affidavit from the owner
thereof that such owner is not a Disqualified Organization or a nominee for a
Disqualified Organization. The Pooling and Servicing Agreement will provide that
no legal or beneficial interest in the Class A-R or Class A-LR Certificate may
be transferred to or registered in the name of any person unless (i) the
proposed purchaser provides to the Trust Administrator an affidavit (or, to the
extent acceptable to the Trust Administrator, a representation letter signed
under penalty of perjury) to the effect that, among other items, such transferee
is not a Disqualified Organization (as defined in the Prospectus) and is not
purchasing the Class A-R or Class A-LR Certificate as an agent for a
Disqualified Organization (I.E., as a broker, nominee, or other middleman
thereof) and (ii) the transferor states in writing to the Trust Administrator
that it has no actual knowledge that such affidavit is false. Further, such
affidavit or letter requires the transferee to affirm that it (i) historically
has paid its debts as they have come due and intends to do so in the future,
(ii) understands that it may incur tax liabilities with respect to the Class A-R
or Class A-LR Certificate in excess of cash flows generated thereby, (iii)
intends to pay taxes associated with holding the Class A-R or Class A-LR
Certificate as such taxes become due and (iv) will not transfer the Class A-R or
Class A-LR Certificate to any person or entity that does not provide a similar
affidavit (or letter). The transferor must certify in writing to the Trust
Administrator that, as of the date of the transfer, it had no knowledge or
reason to know that the affirmations made by the transferee pursuant to the
preceding sentence were false.
In addition, the Class A-R and Class A-LR Certificates may not be purchased
by or transferred to any person that is not a "U.S. Person," unless (i) such
person holds such Class A-R or Class A-LR Certificate in connection with the
conduct of a trade or business within the United States and furnishes the
transferor and the Trust Administrator with an effective Internal Revenue
Service Form 4224 or (ii) the transferee delivers to both the transferor and the
Trust Administrator an opinion of a nationally recognized tax counsel to the
effect that such transfer is in accordance with the requirements of the Code and
the regulations promulgated thereunder and that such transfer of the Class A-R
or Class A-LR Certificate will not be disregarded for federal income tax
purposes. The term "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, an
estate that is subject to United States federal income tax regardless of the
source of its income, or a trust if (A) for taxable years beginning after
December 31, 1996 (or after August 20, 1996, if the trustee has made an
applicable election), a court within the United States is able to exercise
S-66
<PAGE>
primary supervision over the administration of such trust, and one or more
United States fiduciaries have the authority to control all substantial
decisions of such trust or (B) for all other taxable years, such trust is
subject to United States federal income tax regardless of the source of its
income.
The Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Any transferor or
agent to whom the Trust Administrator provides information as to any applicable
tax imposed on such transferor or agent may be required to bear the cost of
computing or providing such information. See "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates --
Taxation of Residual Certificates -- Tax-Related Restrictions on Transfer of
Residual Certificates" in the Prospectus.
NEITHER THE CLASS A-R CERTIFICATE NOR THE CLASS A-LR CERTIFICATE MAY BE
PURCHASED BY OR TRANSFERRED TO A PLAN. See "ERISA Considerations" herein and in
the Prospectus.
Because the Class M and Offered Class B Certificates are subordinated to the
Class A Certificates, the Class M and Offered Class B Certificates may not be
transferred unless the transferee has delivered (i) a representation letter to
the Trustee and the Seller stating either (a) that the transferee is not a Plan
and is not acting on behalf of a Plan or using the assets of a Plan to effect
such purchase or (b) subject to the conditions described herein, that the source
of funds used to purchase the Class M or Offered Class B Certificates is an
"insurance company general account" or (ii) an opinion of counsel as described
herein under "ERISA Considerations." See "ERISA Considerations" herein and in
the Prospectus.
REPORTS
In addition to the applicable information specified in the Prospectus, the
Master Servicer will cause to be included in the statement delivered to holders
of Class A, Class M and Class B Certificates with respect to each Distribution
Date the following information: (i) the amount of such distribution allocable to
interest, the amount of interest currently distributable to each Subclass of
Class A and Class B Certificates and to the Class M Certificates, any Class A
Subclass Interest Shortfall Amount or Class B Subclass Interest Shortfall Amount
arising with respect to each Subclass or any Class M Interest Shortfall Amount
on such Distribution Date, any remaining unpaid Class A Subclass Interest
Shortfall Amount or Class B Subclass Interest Shortfall Amount with respect to
each Subclass or any remaining unpaid Class M Interest Shortfall Amount, after
giving effect to such distribution and any Non-Supported Interest Shortfall or
the interest portion of Realized Losses allocable to such Subclass or Class with
respect to such Distribution Date, (ii) the amount of such distribution
allocable to principal, (iii) the Class A Non-PO Principal Balance, the
Component Principal Balance of each Class A-16 Component, the Class M Principal
Balance, the Class B Principal Balance, the Class A Subclass Principal Balance
of each Subclass of Class A Certificates and the Class B Subclass Principal
Balance of each Subclass of Class B Certificates in each case after giving
effect to the distribution of principal and the allocation of the principal
portion of Realized Losses to such Subclass, Class or Component with respect to
such Distribution Date, (iv) the Adjusted Pool Amount, the Adjusted Pool Amount
(PO Portion) and the Pool Scheduled Principal Balance of the Mortgage Loans and
the aggregate Scheduled Principal Balance of the Discount Mortgage Loans for
such Distribution Date, (v) the Class A Percentage, the Class M Percentage and
Subclass B Percentage of each Subclass of Class B Certificates for the following
Distribution Date (without giving effect to Unscheduled Principal Receipts
received after the applicable Unscheduled Principal Receipt Period for the
current Distribution Date that are applied during such Unscheduled Principal
Receipt Period), and (vi) the amount of the remaining Special Hazard Loss
Amount, the Fraud Loss Amount and the Bankruptcy Loss Amount as of the close of
business on such Distribution Date. The statement delivered to the holders of
the Class A-7 and Class A-8 Certificates will also include the applicable
Pass-Through Rates
S-67
<PAGE>
with respect to such Distribution Date. The statement delivered to holders of
the Class A-8 Certificates and the Class A-16 Certificates will also include the
applicable notional amount for the Class A-8 Certificates and Class A-16 IO
Component. See "Servicing of the Mortgage Loans -- Reports to
Certificateholders" in the Prospectus.
Copies of the foregoing reports are available upon written request to the
Trust Administrator at its corporate trust office. See "Pooling and Servicing
Agreement -- Trust Administrator" herein.
SUBORDINATION OF CLASS M AND CLASS B CERTIFICATES
The rights of the holders of the Class M Certificates to receive
distributions with respect to the Mortgage Loans in the Trust Estate will be
subordinated to such rights of the holders of the Class A Certificates, the
rights of the holders of the Class B Certificates to receive distributions with
respect to the Mortgage Loans in the Trust Estate will be subordinated to such
rights of the holders of the Class A Certificates and the Class M Certificates
and the rights of the holders of the Subclasses of Class B Certificates with
higher numerical designations to receive distributions with respect to the
Mortgage Loans in the Trust Estate will be subordinated to such rights of the
holders of Subclasses of Class B Certificates with lower numerical designations,
all to the extent described below. This subordination is intended to enhance the
likelihood of timely receipt by the holders of the Class A Certificates (to the
extent of the subordination of the Class M and Class B Certificates), the
holders of the Class M Certificates (to the extent of the subordination of the
Class B Certificates) and the holders of a Subclass of Class B Certificates (to
the extent of the subordination of Subclasses of Class B Certificates with
higher numerical designations) of the full amount of their scheduled monthly
payments of interest and principal and to afford the holders of the Class A
Certificates (to the extent of the subordination of the Class M and Class B
Certificates), the holders of the Class M Certificates (to the extent of the
subordination of the Class B Certificates) and the holders of the Subclasses of
Class B Certificates (to the extent of the subordination of Subclasses of Class
B Certificates with higher numerical designations) protection against Realized
Losses, as more fully described below. If Realized Losses exceed the credit
support provided through subordination to the Class A Certificates, the Class M
Certificates or a Subclass of Class B Certificates or if Excess Special Hazard
Losses, Excess Fraud Losses or Excess Bankruptcy Losses occur, all or a portion
of such losses will be borne by the Class A Certificates, the Class M
Certificates or such Subclass of Class B Certificates.
The protection afforded to the holders of Class A Certificates by means of
the subordination feature will be accomplished by the preferential right of such
holders to receive, prior to any distribution being made on a Distribution Date
in respect of the Class M and Class B Certificates, the amounts of principal and
interest due the Class A Certificateholders (other than the Class A-16 PO
Deferred Amount) on each Distribution Date out of the Pool Distribution Amount
with respect to such date and, if necessary, by the right of such holders to
receive future distributions on the Mortgage Loans that would otherwise have
been payable to the holders of Class M and Class B Certificates. The application
of this subordination to cover Realized Losses experienced in periods prior to
the periods in which a Subclass of Class A Certificates is entitled to
distributions in reduction of principal balance will decrease the protection
provided by the subordination to any such Subclass.
The protection afforded to the holders of Class M Certificates by means of
the subordination feature will be accomplished by the preferential right of such
holders to receive, prior to any distribution being made on a Distribution Date
in respect of the Class B Certificates, the amounts of principal (other than any
amount used to pay the Class A-16 PO Component Deferred Amount) and interest due
the Class M Certificateholders on each Distribution Date from the Pool
Distribution Amount with respect to such date (after all required payments on
the Class A Certificates have been made) and, if necessary, by the right of such
holders to receive future distributions on the Mortgage Loans that would
otherwise have been payable to the holders of the Class B Certificates.
A Subclass of Class B Certificates will be entitled, on each Distribution
Date, to the remaining portion, if any, of the applicable Pool Distribution
Amount, after payment of the Class A Optimal Amount, the Class A-16 PO Component
Deferred Amount, the Class M Optimal Amount and the
S-68
<PAGE>
Subclass B Optimal Amount of each Subclass of Class B Certificates with a lower
numerical designation for such date. Amounts so distributed to Class B
Certificateholders will not be available to cover delinquencies or Realized
Losses in respect of subsequent Distribution Dates.
ALLOCATION OF LOSSES
Realized Losses (other than Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses) will not be allocated to the holders of the
Class A Certificates until the date on which the amount of principal payments on
the Mortgage Loans to which the holders of the Subordinated Certificates are
entitled has been reduced to zero as a result of the allocation of losses to the
Subordinated Certificates, I.E., the Distribution Date preceding the
Distribution Date for which the Subordinated Percentage is equal to zero (the
"Cross-Over Date"). Prior to such time, such Realized Losses will be allocated
to the Subclasses of Class B Certificates sequentially in reverse numerical
order, until the Class B Subclass Principal Balance of each such Subclass has
been reduced to zero, and then to the Class M Certificates until the Class M
Principal Balance has been reduced to zero.
The allocation of the principal portion of a Realized Loss (other than a
Debt Service Reduction, Excess Special Hazard Loss, Excess Fraud Loss or Excess
Bankruptcy Loss) will be effected through the adjustment of the principal
balance of the most subordinate Class (or in the case of the Subclasses of Class
B Certificates, the most subordinate Subclass) then outstanding in such amount
as is necessary to cause the sum of the Class A Subclass Principal Balances, the
Class M Principal Balance and the Class B Subclass Principal Balances to equal
the Adjusted Pool Amount.
Allocations to the Class M Certificates or the Subclasses of Class B
Certificates of (i) the principal portion of Debt Service Reductions, (ii) the
interest portion of Realized Losses (other than Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses), (iii) any interest shortfalls
resulting from delinquencies for which the Servicer, the Master Servicer or the
Trust Administrator does not advance, (iv) any interest shortfalls or losses
resulting from the application of the Soldiers' and Sailors' Civil Relief Act of
1940, as more fully described under "Certain Legal Aspects of the Mortgage Loans
- -- Soldiers' and Sailors' Civil Relief Act" in the Prospectus and (v) any
interest shortfalls resulting from the timing of the receipt of Unscheduled
Principal Receipts (other than Prepayments in Full) with respect to Mortgage
Loans will result from the priority of distributions of the Pool Distribution
Amount first to the holders of the Class A Certificates, second to the Class M
Certificates and finally to the Subclasses of Class B Certificates in numerical
order as described above under "-- Distributions."
The allocation of the principal portion of Realized Losses in respect of the
Mortgage Loans allocated on or after the Cross-Over Date will be effected
through the adjustment on any Determination Date of the Class A Non-PO Principal
Balance and the Component Principal Balance of the Class A-16 PO Component such
that (i) the Class A Non-PO Principal Balance equals the Adjusted Pool Amount
less the Adjusted Pool Amount (PO Portion) as of the preceding Distribution Date
and (ii) the Component Principal Balance of the Class A-16 PO Component equals
the Adjusted Pool Amount (PO Portion) as of the preceding Distribution Date. The
principal portion of such Realized Losses allocated to the Class A Certificates
(other than the Class A-8 and Class A-16 Certificates) and the Class A-16
Components (other than the Class A-16 IO Component and the Class A-16 PO
Component) will be allocated to such outstanding Subclasses of Class A
Certificates and such Components pro rata in accordance with their Class A
Subclass Principal Balances or Component Principal Balances or, in the case of
the Class A-16 Accrual Component, the initial Component Principal Balance, if
lower. The interest portion of any Realized Loss allocated on or after the
Cross-Over Date will be allocated among the outstanding Subclasses of Class A
Certificates pro rata in accordance with their respective Class A Subclass
Interest Accrual Amounts, without regard to any reduction pursuant to this
sentence. Any amount allocated to the Class A-16 Certificates will be allocated
among the Class A-16 Components (other than the Class A-16 PO Component) pro
rata in accordance with their
S-69
<PAGE>
respective Component Interest Accrual Amounts, without regard to any reduction
pursuant to this sentence. Any such losses will be allocated among the
outstanding Class A Certificates within each Subclass pro rata in accordance
with their respective Percentage Interests.
Any Excess Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy
Losses will be allocated (i) with respect to the principal portion of such
losses (a) to the outstanding Subclasses of the Class A Certificates (other than
the Class A-16 Certificates with respect to the Class A-16 PO Component), the
Class M Certificates and the Class B Certificates pro rata based on their
outstanding principal balances in proportion to the Non-PO Fraction of such
losses and (b) in respect of Discount Mortgage Loans, to the Class A-16 PO
Component in proportion to the PO Fraction of such losses and (ii) with respect
to the interest portion of such losses, to the Class A, Class M and Class B
Certificates pro rata based on the interest accrued. The principal portion of
any such losses so allocated to the Class A Certificates (other than the Class
A-16 Certificates with respect to the Class A-16 PO Component) will be allocated
among the outstanding Subclasses of Class A Certificates (other than the Class
A-8 and Class A-16 Certificates) and the Class A-16 Components (other than the
Class A-16 IO Component and the Class A-16 PO Component) pro rata in accordance
with their then-outstanding Class A Subclass Principal Balances or Component
Principal Balances, or, in the case of the Class A-16 Accrual Component, the
initial Component Principal Balance, if lower, and the interest portion of any
such losses will be allocated among the outstanding Subclasses of Class A
Certificates (other than Class A-16 Certificates) and the Class A-16 Components
(other than the Class A-16 PO Component) in accordance with their Class A
Subclass Interest Accrual Amounts and Component Interest Accrual Amounts,
without regard to any reduction pursuant to this sentence, and among the
outstanding Class A Certificates within each Subclass pro rata in accordance
with their respective Percentage Interests.
The interest portion of Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses will be allocated by reducing the Class A Subclass
Interest Accrual Amounts, Class M Interest Accrual Amount and Class B Subclass
Interest Accrual Amounts.
As described above, the Pool Distribution Amount for any Distribution Date
will include current receipts (other than certain unscheduled payments in
respect of principal) from the Mortgage Loans otherwise payable to holders of
the Class M and Class B Certificates. If the Pool Distribution Amount is not
sufficient to cover the amount of principal payable to the holders of the Class
A Certificates on a particular Distribution Date, then the percentage of
principal payments on the Mortgage Loans to which the holders of the Class A
Certificates (other than the Class A-16 Certificates) and the Class A-16
Certificates to the extent of the Class A-16 Components (other than the Class
A-16 PO Component) will be entitled (I.E., the Class A Percentage) on and after
the next Distribution Date will be proportionately increased, thereby reducing,
as a relative matter, the respective interest of the Class M and Class B
Certificates in future payments of principal on the Mortgage Loans in the Trust
Estate. Such a shortfall could occur, for example, if a considerable number of
Mortgage Loans were to become Liquidated Loans in a particular month.
Special Hazard Losses, other than Excess Special Hazard Losses, will be
allocated solely to the Subclasses of Class B Certificates in reverse numerical
order or, following the reduction of the Class B Principal Balance to zero,
solely to the Class M Certificates. Special Hazard Losses in excess of the
Special Hazard Loss Amount are "Excess Special Hazard Losses." Excess Special
Hazard Losses will be allocated among (i) the Class A Certificates (other than
the Class A-16 PO Component), the Class M Certificates and the Class B
Certificates and (ii) to the extent such Excess Special Hazard Losses arise with
respect to Discount Mortgage Loans, the Class A-16 PO Component. If the
aggregate of all Special Hazard Losses incurred in the month preceding the month
of the related Distribution Date (the "Aggregate Current Special Hazard Losses")
is less than or equal to the then-applicable Special Hazard Loss Amount, no
Special Hazard Losses will be regarded as Excess Special Hazard Losses. If
Aggregate Current Special Hazard Losses exceed the then-applicable Special
Hazard Loss Amount, a portion of each Special Hazard Loss will be regarded as an
"Excess Special Hazard Loss" in proportion to the ratio of (a) the excess of (i)
Aggregate Current Special Hazard Losses over (ii) the then-
S-70
<PAGE>
applicable Special Hazard Loss Amount, to (b) the Aggregate Current Special
Hazard Losses. Thereafter, when the Special Hazard Loss Amount is zero, all
Special Hazard Losses will be regarded as Excess Special Hazard Losses. Upon
initial issuance of the Series 1996-5 Certificates, the "Special Hazard Loss
Amount" with respect thereto will be equal to approximately 1.00% (approximately
$4,150,622) of the Cut-Off Date Aggregate Principal Balance of the Mortgage
Loans. As of any Distribution Date, the Special Hazard Loss Amount will equal
the initial Special Hazard Loss Amount less the sum of (A) any Special Hazard
Losses allocated solely to the Class B or Class M Certificates and (B) the
Adjustment Amount. The "Adjustment Amount" on each anniversary of the Cut-Off
Date 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) 1.00% (or, if greater than 1.00%, the
highest percentage of Mortgage Loans by principal balance in any California zip
code) times the aggregate principal balance of all the Mortgage Loans on such
anniversary (ii) twice the principal balance of the single Mortgage Loan having
the largest principal balance, and (iii) that which is necessary to maintain the
original ratings on the Class A, Class M and Offered Class B Certificates, as
evidenced by letters to that effect delivered by Fitch and S&P to the Master
Servicer and the Trust Administrator. On and after the Cross-Over Date, the
Special Hazard Loss Amount will be zero.
Fraud Losses, other than Excess Fraud Losses, will be allocated solely to
the Subclasses of Class B Certificates in reverse numerical order or, following
the reduction of the Class B Principal Balance to zero, solely to the Class M
Certificates. Fraud Losses in excess of the Fraud Loss Amount are "Excess Fraud
Losses." Excess Fraud Losses will be allocated among (i) the Class A
Certificates (other than the Class A-16 PO Component), the Class M Certificates
and the Class B Certificates and (ii) to the extent such Excess Fraud Losses
arise with respect to Discount Mortgage Loans, the Class A-16 PO Component. If
the aggregate of all Fraud Losses incurred in the month preceding the month of
the related Distribution Date (the "Aggregate Current Fraud Losses") is less
than or equal to the then-applicable Fraud Loss Amount, no Fraud Losses will be
regarded as Excess Fraud Losses. If Aggregate Current Fraud Losses exceed the
then-applicable Fraud Loss Amount, a portion of each Fraud Loss will be regarded
as an "Excess Fraud Loss" in proportion to the ratio of (a) the excess of (i)
Aggregate Current Fraud Losses over (ii) the then-applicable Fraud Loss Amount,
to (b) the Aggregate Current Fraud Losses. Thereafter, when the Fraud Loss
Amount is zero, all Fraud Losses will be regarded as Excess Fraud Losses. Upon
initial issuance of the Series 1996-5 Certificates, the "Fraud Loss Amount" with
respect thereto will be equal to approximately 2.00% (approximately $8,301,245)
of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans. As of any
Distribution Date prior to the first anniversary of the Cut-Off Date, the Fraud
Loss Amount will equal the initial Fraud Loss Amount minus the aggregate amount
of Fraud Losses allocated solely to the Class B or Class M Certificates through
the related Determination Date. As of any Distribution Date from the first
through fifth anniversary of the Cut-Off Date, the Fraud Loss Amount will be an
amount equal to (1) the lesser of (a) the Fraud Loss Amount as of the most
recent anniversary of the Cut-Off Date and (b) 1.00% of the aggregate principal
balance of all of the Mortgage Loans as of the most recent anniversary of the
Cut-Off Date minus (2) the aggregate amounts allocated solely to the Class B or
Class M Certificates with respect to Fraud Losses since the most recent
anniversary of the Cut-Off Date through the related Determination Date. On and
after the Cross-Over Date or after the fifth anniversary of the Cut-Off Date,
the Fraud Loss Amount will be zero.
Bankruptcy Losses, other than Excess Bankruptcy Losses, will be allocated
solely to the Subclasses of Class B Certificates in reverse numerical order or,
following the reduction of the Class B Principal Balance to zero, solely to the
Class M Certificates. Bankruptcy losses in excess of the Bankruptcy Loss Amount
are "Excess Bankruptcy Losses." Excess Bankruptcy Losses will be allocated among
(i) the Class A Certificates (other than the Class A-16 PO Component), the Class
M Certificates and the Class B Certificates and (ii) to the extent such Excess
Bankruptcy Losses arise with respect to Discount Mortgage Loans, the Class A-16
PO Component. If the aggregate of all Bankruptcy Losses incurred in the month
preceding the month of the related Distribution Date (the "Aggregate Current
Bankruptcy Losses") is less than or equal to the then applicable Bankruptcy Loss
S-71
<PAGE>
Amount, no Bankruptcy Losses will be regarded as Excess Bankruptcy Losses. If
Aggregate Current Bankruptcy Losses exceed the then-applicable Bankruptcy Loss
Amount, a portion of each Bankruptcy Loss will be regarded as an "Excess
Bankruptcy Loss" in proportion to the ratio of (a) the excess of (i) Aggregate
Current Bankruptcy Losses over (ii) the then-applicable Bankruptcy Loss Amount,
to (b) the Aggregate Current Bankruptcy Losses. Thereafter, when the Bankruptcy
Loss Amount is zero, all Bankruptcy Losses will be regarded as Excess Bankruptcy
Losses. Upon initial issuance of the Series 1996-5 Certificates, the "Bankruptcy
Loss Amount" with respect thereto will be equal to approximately 0.04%
(approximately $169,705) of the Cut-Off Date Aggregate Principal Balance of the
Mortgage Loans. As of any Distribution Date prior to the first anniversary of
the Cut-Off Date, the Bankruptcy Loss Amount will equal the initial Bankruptcy
Loss Amount minus the aggregate amount of Bankruptcy Losses allocated solely to
the Class B or Class M Certificates through the related Determination Date. As
of any Distribution Date on or after the first anniversary of the Cut-Off Date,
the Bankruptcy Loss Amount will equal the excess, if any, of (1) the lesser of
(a) the Bankruptcy Loss Amount as of the business day next preceding the most
recent anniversary of the Cut-Off Date and (b) an amount, if any, calculated
pursuant to the terms of the Pooling and Servicing Agreement, which amount as
calculated will provide for a reduction in the Bankruptcy Loss Amount, over (2)
the aggregate amount of Bankruptcy Losses allocated solely to the Class B or
Class M Certificates since such anniversary. The Bankruptcy Loss Amount and the
related coverage levels described above may be reduced or modified upon written
confirmation from Fitch and S&P that such reduction or modification will not
adversely affect the then-current ratings assigned to the Class A, and Class M
Certificates by Fitch and S&P and the then-current ratings assigned to the
Offered Class B Certificates by Fitch. Such a reduction or modification may
adversely affect the coverage provided by subordination with respect to
Bankruptcy Losses. On and after the Cross-Over Date, the Bankruptcy Loss Amount
will be zero.
Notwithstanding the foregoing, the provisions relating to subordination will
not be applicable in connection with a Bankruptcy Loss so long as the applicable
Servicer has notified the Trust Administrator and the Master Servicer in writing
that such Servicer is diligently pursuing any remedies that may exist in
connection with the representations and warranties made regarding the related
Mortgage Loan and when (A) the related Mortgage Loan is not in default with
regard to the payments due thereunder or (B) delinquent payments of principal
and interest under the related Mortgage Loan and any premiums on any applicable
Standard Hazard Insurance Policy and any related escrow payments in respect of
such Mortgage Loan are being advanced on a current basis by such Servicer, in
either case without giving effect to any Debt Service Reduction.
Since the aggregate initial principal balance of the Class M and Class B
Certificates will be approximately $24,904,604, the risk of Special Hazard
Losses, Fraud Losses and Bankruptcy Losses will be separately borne by the Class
B Certificates and, after the principal balance of the Class B Certificates has
been reduced to zero, by the Class M Certificates to a lesser extent (I.E., only
up to the Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy Loss
Amount, respectively) than the risk of other Realized Losses, which will be
allocated first to the Class B Certificates and then the Class M Certificates to
the full extent of their initial principal balances. See "The Trust Estates --
Mortgage Loans -- Representations and Warranties" and "-- Insurance Policies,"
"Certain Legal Aspects of the Mortgage Loans -- Environmental Considerations"
and "Servicing of the Mortgage Loans -- Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Mortgage Loans" in the Prospectus.
S-72
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS(1)
GENERAL
The Mortgage Loans to be included in the Trust Estate will be fixed interest
rate, conventional, monthly pay, fully amortizing, one- to four-family,
residential first mortgage loans having original terms to stated maturity
ranging from approximately 20 to approximately 30 years, which may include loans
secured by shares ("Co-op Shares") issued by private non-profit housing
corporations ("Cooperatives"), and the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specified units in such
Cooperatives' buildings. The Mortgage Loans are expected to include 1,425
promissory notes, to have an aggregate unpaid principal balance as of the
Cut-Off Date (the "Cut-Off Date Aggregate Principal Balance") of approximately
$415,062,234 to be secured by first liens (the "Mortgages") on one- to
four-family residential properties (the "Mortgaged Properties") and to have the
additional characteristics described below and in the Prospectus.
As of the Cut-Off Date, it is expected that none of the Mortgage Loans in
the Trust Estate will be secured by Co-op Shares and that three of the Mortgage
Loans, representing approximately 0.16% of the Cut-Off Date Aggregate Principal
Balance of the Mortgage Loans, will be Buy-Down Loans. It is expected that four
of the Mortgage Loans, representing approximately 0.26% of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans, will be Subsidy Loans. See
"The Trust Estates -- Mortgage Loans" in the Prospectus.
Each of the Mortgage Loans is subject to a due-on-sale clause. See "Certain
Legal Aspects of the Mortgage Loans -- "Due-on-Sale' Clauses" and "Servicing of
the Mortgage Loans -- Enforcement of Due-on-Sale Clauses; Realization Upon
Defaulted Mortgage Loans" in the Prospectus.
As of the Cut-Off Date, each Mortgage Loan is expected to have an unpaid
principal balance of not less than approximately $39,750 or more than
approximately $1,098,261, and the average unpaid principal balance of the
Mortgage Loans is expected to be approximately $291,272. The latest stated
maturity date of any of the Mortgage Loans is expected to be October 1, 2026;
however, the actual date on which any Mortgage Loan is paid in full may be
earlier than the stated maturity date due to unscheduled payments of principal.
Based on information supplied by the mortgagors in connection with their loan
applications at origination, 1,372 of the Mortgaged Properties, which secure
approximately 96.47% of the Cut-Off Date Aggregate Principal Balance of the
Mortgage Loans, are expected to
- ------------------------
(1) The descriptions in this Prospectus Supplement of the Trust Estate and the
properties securing the Mortgage Loans to be included in the Trust Estate
are based upon the expected characteristics of the Mortgage Loans at the
close of business on the Cut-Off Date, as adjusted for the scheduled
principal payments due on or before such date. Notwithstanding the
foregoing, any of such Mortgage Loans may be excluded from the Trust Estate
(i) as a result of principal prepayment thereof in full or (ii) if, as a
result of delinquencies or otherwise, the Seller otherwise deems such
exclusion necessary or desirable. In either event, other Mortgage Loans may
be included in the Trust Estate. The Seller believes that the information
set forth herein with respect to the expected characteristics of the
Mortgage Loans on the Cut-Off Date is representative of the characteristics
as of the Cut-Off Date of the Mortgage Loans to be included in the Trust
Estate as it will be constituted at the time the Series 1996-5 Certificates
are issued, although the Cut-Off Date Aggregate Principal Balance, the range
of Mortgage Interest Rates and maturities, and certain other characteristics
of the Mortgage Loans in the Trust Estate may vary. In the event that any of
the characteristics as of the Cut-Off Date of the Mortgage Loans that
constitute the Trust Estate on the date of initial issuance of the Series
1996-5 Certificates vary materially from those described herein, revised
information regarding the Mortgage Loans will be made available to
purchasers of the Offered Certificates, on or before such issuance date, and
a Current Report on Form 8-K containing such information will be filed with
the Securities and Exchange Commission within 15 days following such date.
S-73
<PAGE>
be owner occupied primary residences and 53 of the Mortgaged Properties, which
secure approximately 3.53% of the Cut-Off Date Aggregate Principal Balance of
the Mortgage Loans, are expected to be second homes. See "The Mortgage Loan
Programs -- Mortgage Loan Underwriting" in the Prospectus.
As of the Cut-Off Date, there were 404 Discount Mortgage Loans having an
aggregate unpaid principal balance of approximately $123,121,128, a range of
unpaid principal balances of approximately $48,484 to approximately $890,081, an
average unpaid principal balance of approximately $304,755, a range of Mortgage
Interest Rates from 7.125% to 8.250% per annum, a weighted average Mortgage
Interest Rate of approximately 8.037% per annum, a range of remaining terms to
stated maturity of 236 months to 360 months, a weighted average remaining term
to stated maturity of approximately 356 months, a range of original
Loan-to-Value Ratios of 33.85% to 95.00%, a weighted average original
Loan-to-Value Ratio of approximately 76.51% and the following geographic
concentration of Mortgaged Properties securing Mortgage Loans in excess of 5.00%
of the aggregate unpaid principal balance of the Discount Mortgage Loans:
approximately 26.12% in California, 10.67% in Virginia, 6.21% in Maryland, 6.15%
in New Jersey and 5.92% in Minnesota.
As of the Cut-Off Date, there were 1,021 Mortgage Loans that were not
Discount Mortgage Loans (the "Premium Mortgage Loans") having an aggregate
unpaid principal balance of approximately $291,941,106, a range of unpaid
principal balances of approximately $39,750 to approximately $1,098,261, an
average unpaid principal balance of approximately $285,936, a range of Mortgage
Interest Rates from 8.375% to 9.875% per annum, a weighted average Mortgage
Interest Rate of approximately 8.656% per annum, a range of remaining terms to
stated maturity of 238 months to 360 months, a weighted average remaining term
to stated maturity of approximately 357 months, a range of original
Loan-to-Value Ratios of 15.00% to 95.00%, a weighted average original
Loan-to-Value Ratio of approximately 78.10% and the following geographic
concentration of Mortgaged Properties securing Mortgage Loans in excess of 5.00%
of the aggregate unpaid principal balance of the Premium Mortgage Loans:
approximately 27.58% in California, 9.62% in New York, 7.14% in New Jersey and
6.25% in Colorado.
The Mortgage Loans will have been acquired by the Seller from Norwest
Mortgage. On May 7, 1996 Norwest Mortgage and an affiliate acquired from PHMC
certain mortgage loans and a substantial portion of PHMC's mortgage servicing
portfolio (such transaction, the "PHMC Acquisition"). The Mortgage Loans
included in the Trust Estate consist of (i) Mortgage Loans originated by Norwest
Mortgage or an affiliate or purchased by Norwest Mortgage or an affiliate from
originators other than PHMC and (ii) Mortgage Loans originated or purchased by
PHMC and acquired by Norwest Mortgage or an affiliate from PHMC as part of the
PHMC Acquisition. See "Norwest Mortgage" in the Prospectus. The Mortgage Loans
that were not originated by Norwest Mortgage or acquired by Norwest Mortgage
from PHMC were acquired by Norwest Mortgage or an affiliate from various
entities (each, a "Norwest Correspondent") which either originated the Mortgage
Loans or acquired the Mortgage Loans pursuant to mortgage loan purchase programs
operated by such Norwest Correspondents. The Mortgage Loans acquired by Norwest
Mortgage from PHMC that were not originated by PHMC were acquired by PHMC from
various entities (each a "PHMC Correspondent") which either originated the
Mortgage Loans or acquired the Mortgage Loans pursuant to mortgage loan purchase
programs operated by such PHMC Correspondents. Approximately 96.94% (by Cut-Off
Date Aggregate Principal Balance) of the Mortgage Loans were originated in
conformity with the underwriting standards described in the Prospectus under the
heading "The Mortgage Loan Programs -- Mortgage Loan Underwriting -- Norwest
Mortgage Underwriting" (the "Underwriting Standards") as applied by Norwest
Mortgage, PHMC, or by eligible originators to whom Norwest Mortgage or PHMC had
delegated all underwriting functions. In certain instances, exceptions to the
Underwriting Standards may have been granted by Norwest Mortgage or by PHMC. See
"The Mortgage Loan Programs -- Mortgage Loan Underwriting" in the Prospectus.
Approximately 0.17% (by Cut-Off Date Aggregate Principal Balance) of the
Mortgage Loans (the "Pool Certification Underwritten Loans") will have been
reviewed by UGRIC to ensure compliance with such company's credit, appraisal and
underwriting standards. Neither the Series 1996-5 Certificates nor any of the
Mortgage Loans are insured or
S-74
<PAGE>
guaranteed under a mortgage pool insurance policy issued by UGRIC. The Pool
Certification Underwritten Loans were evaluated using credit scoring as
described in the Prospectus under "The Mortgage Loan Programs -- Mortgage Loan
Underwriting" and, based on the credit scores of such Mortgage Loans, some of
such Mortgage Loans were re-underwritten. The remaining approximate 2.89% (by
Cut-Off Date Aggregate Principal Balance) of the Mortgage Loans (the "Bulk
Purchase Underwritten Loans") will have been underwritten in connection with
bulk purchase transactions under varying standards which have been reviewed by
Norwest Mortgage or PHMC, who determined that such varying standards did not
depart materially from the Underwriting Standards. Neither the Seller, Norwest
Mortgage nor PHMC has underwritten any of the Bulk Purchase Underwritten Loans.
Approximately 34.14% (by Cut-Off Date Aggregate Principal Balance) of the
Mortgage Loans were generally underwritten in accordance with the Underwriting
Standards used by PHMC, underwriting guidelines of the originators of the Bulk
Purchase Underwritten Loans or the standards of UGRIC. Approximately 65.86% (by
Cut-Off Date Aggregate Principal Balance) of the Mortgage Loans were generally
underwritten in accordance with the Underwriting Standards used by Norwest
Mortgage. See "The Mortgage Loan Programs -- Mortgage Loan Underwriting" in the
Prospectus.
As of September 17, 1996, as a result of a hurricane and related storms
(together, the "Hurricane"), 48 counties in North Carolina, 21 counties in
Virginia, 10 counties in West Virginia and 5 counties in Pennsylvania (the
"Hurricane Counties") were declared federal disaster areas eligible for federal
disaster assistance. It is expected that 17 of the Mortgage Loans, representing
approximately 1.23% of the Cut-Off Date Aggregate Principal Balance of the
Mortgage Loans will be located in the Hurricane Counties. In addition, other
counties may have been affected by the Hurricane.
Based on information received by the Seller as of the date of this
Prospectus Supplement, as a result of wildfires (the "Wildfires"), 3 counties in
California (the "Wildfire Counties") were declared federal disaster areas
eligible for federal disaster assistance. It is expected that 157 Mortgage
Loans, representing approximately 12.46% of the Cut-Off Date Aggregate Principal
Balance of the Mortgage Loans will be located in the Wildfire Counties. In
addition, other counties may have been affected by the Wildfires, and such other
counties may ultimately be declared federal disaster areas.
Based on information received by the Seller as of the date of this
Prospectus Supplement, as a result of floods (the "Northeast Floods"), 5
counties in Massachusetts and 2 counties in Maine (the "Flood Counties") were
declared federal disaster areas eligible for federal disaster assistance. It is
expected that 34 Mortgage Loans, representing approximately 2.35% of the Cut-Off
Date Aggregate Principal Balance of the Mortgage Loans will be located in the
Flood Counties. In addition, other counties may have been affected by the
Northeast Floods, and such other counties may ultimately be declared federal
disaster areas.
Neither the Seller nor Norwest Mortgage has undertaken the physical
inspection of any of the Mortgaged Properties. As a result, there can be no
assurance that material damage to any Mortgaged Property in the affected region
has not occurred. In the Pooling and Servicing Agreement, the Seller will
represent and warrant that, as of the date of issuance of the Certificates, each
Mortgaged Property is undamaged by flood, water, fire, earthquake or earth
movement, windstorm, tornado or similar casualty (excluding casualty from the
presence of hazardous wastes or hazardous substances, as to which the Seller
makes no representation) so as to adversely affect the value of such Mortgaged
Property as security for such Mortgage Loan or the use for which such premises
were intended. In the event of a breach of such representation with respect to a
Mortgaged Property, including by virtue of the Hurricane, the Wildfires and the
Northeast Floods, which materially and adversely affects the interests of
Certificateholders in the related Mortgage Loan, the Seller will be obligated to
repurchase or substitute for such Mortgage Loan, as described under "The
Mortgage Loan Programs--Representations and Warranties" and "The Pooling and
Servicing Agreement--Assignment of Mortgage Loans to the Trustee" in the
Prospectus. Repurchase of any such Mortgage Loan will affect in varying degrees
the yields and weighted average lives of the Subclasses and Class of Offered
Certificates and could adversely affect the yield of any Offered Certificates
purchased at a premium or the Class A-8 Certificates which have no principal
balance.
S-75
<PAGE>
MORTGAGE LOAN DATA
Set forth below is a description of certain additional expected
characteristics of the Mortgage Loans as of the Cut-Off Date (except as
otherwise indicated).
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
MORTGAGE INTEREST RATE LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
7.125%............................ 1 $ 365,405.77 0.09 %
7.250%............................ 4 1,447,972.40 0.35
7.375%............................ 2 564,182.13 0.14
7.500%............................ 11 3,729,946.99 0.90
7.625%............................ 19 5,981,636.15 1.44
7.750%............................ 34 9,969,384.43 2.40
7.875%............................ 38 11,119,491.95 2.68
8.000%............................ 77 24,038,742.71 5.79
8.125%............................ 64 17,793,077.19 4.29
8.250%............................ 154 48,111,288.33 11.59
8.375%............................ 186 56,432,884.03 13.60
8.500%............................ 225 66,257,010.80 15.95
8.625%............................ 176 53,712,227.60 12.94
8.750%............................ 163 49,426,873.78 11.91
8.875%............................ 134 36,629,819.74 8.83
9.000%............................ 54 12,619,479.23 3.04
9.125%............................ 27 7,154,942.50 1.72
9.250%............................ 26 4,539,413.60 1.09
9.375%............................ 8 1,112,526.29 0.27
9.500%............................ 9 1,502,938.47 0.36
9.625%............................ 4 733,864.72 0.18
9.750%............................ 8 1,544,399.96 0.37
9.875%............................ 1 274,725.13 0.07
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Interest Rate of the
Mortgage Loans is expected to be approximately 8.472% per annum. The Net
Mortgage Interest Rate of each Mortgage Loan will be equal to the Mortgage
Interest Rate of such Mortgage Loan minus the sum of (a) the applicable
Servicing Fee Rate and (b) the Master Servicing Fee Rate and (c) the Fixed
Retained Yield, if any, for such Mortgage Loan. As of the Cut-Off Date, the
weighted average Net Mortgage Interest Rate of the Mortgage Loans is expected to
be approximately 7.931% per annum.
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
REMAINING STATED TERM (MONTHS) LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
236................................ 1 $ 48,484.21 0.01 %
238................................ 2 650,961.68 0.16
239................................ 3 772,573.12 0.19
240................................ 1 250,000.00 0.06
300................................ 1 325,000.00 0.08
306................................ 1 221,313.47 0.05
315................................ 2 388,980.72 0.09
321................................ 2 698,857.17 0.17
322................................ 1 386,395.10 0.09
323................................ 1 579,352.13 0.14
325................................ 1 432,962.45 0.10
326................................ 1 297,191.58 0.07
327................................ 1 303,234.78 0.07
336................................ 1 102,222.40 0.02
340................................ 2 155,544.77 0.04
342................................ 1 255,500.03 0.06
343................................ 1 278,110.35 0.07
347................................ 5 1,034,996.65 0.25
348................................ 2 354,218.83 0.09
349................................ 1 279,801.75 0.07
350................................ 3 1,744,554.44 0.42
351................................ 5 1,280,445.81 0.31
352................................ 7 1,524,518.48 0.37
353................................ 16 4,812,292.74 1.16
354................................ 31 8,386,060.22 2.02
355................................ 37 13,061,152.87 3.15
356................................ 60 21,696,046.64 5.23
357................................ 161 47,761,621.33 11.51
358................................ 421 121,050,343.98 29.16
359................................ 520 150,658,628.20 36.29
360................................ 133 35,270,868.00 8.50
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans is expected to be approximately 357 months.
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
YEAR OF ORIGINATION LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
1992............................... 3 $ 610,294.19 0.15 %
1993............................... 7 2,697,993.21 0.65
1994............................... 1 102,222.40 0.02
1995............................... 19 5,092,738.80 1.23
1996............................... 1,395 406,558,985.30 97.95
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
It is expected that the earliest month and year of origination of any
Mortgage Loan was March 1992 and the latest month and year of origination was
September 1996.
S-76
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
ORIGINAL LOAN-TO- VALUE RATIO LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
50% or less........................ 38 $ 13,543,244.02 3.26 %
50.01- 55.00%...................... 32 9,845,596.35 2.37
55.01- 60.00%...................... 31 9,875,625.41 2.38
60.01- 65.00%...................... 63 20,075,084.26 4.84
65.01- 70.00%...................... 98 31,997,896.94 7.71
70.01- 75.00%...................... 157 46,882,775.50 11.30
75.01- 80.00%...................... 615 180,753,193.90 43.54
80.01- 85.00%...................... 28 7,576,020.65 1.83
85.01- 90.00%...................... 245 66,077,762.14 15.92
90.01- 95.00%...................... 118 28,435,034.73 6.85
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
As of the Cut-Off Date, the minimum and maximum Loan-to-
Value Ratios at origination of the Mortgage Loans are expected to be 15.00% and
95.00%, respectively, and the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately 77.63%. The
Loan-to-Value Ratio of a Mortgage Loan is calculated using the lesser of (i) the
appraised value of the related Mortgaged Property, as established by an
appraisal obtained by the originator from an appraiser at the time of
origination and (ii) the sale price for such property. See "The Trust Estates --
Mortgage Loans" in the Prospectus. No assurance can be given that the values of
the Mortgaged Properties securing the Mortgage Loans have remained or will
remain at the levels used in calculating the Loan-to-Value Ratios shown above.
See "Risk Factors -- Risks of the Mortgage Loans" in the Prospectus. It is
expected that 23 of the Mortgage Loans having Loan-to-Value Ratios at
origination in excess of 80%, representing approximately 1.44% (by Cut-Off Date
Aggregate Principal Balance) of the Mortgage Loans, were originated without
primary mortgage insurance.
MORTGAGE LOAN DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
DOCUMENTATION LEVEL LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
Full Documentation................. 1,234 $377,898,670.26 91.04 %
Income Verification................ 0 0.00 0.00
Asset Verification................. 172 31,822,055.27 7.67
Preferred Processing............... 19 5,341,508.37 1.29
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
Documentation levels vary depending upon several factors, including loan
amount, Loan-to-Value Ratio and the type and purpose of the Mortgage Loan.
Asset, income and mortgage verifications were obtained for Mortgage Loans
processed with "full documentation." In the case of "preferred processing,"
neither asset, income nor mortgage verifications were obtained. In most
instances, a verification of the borrower's employment was obtained. However,
for all of the Mortgage Loans, a credit report on the borrower and a property
appraisal were obtained. See "The Mortgage Loan Programs -- Mortgage Loan
Underwriting" in the Prospectus.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
ORIGINAL MORTGAGE LOAN PRINCIPAL OF MORTGAGE PRINCIPAL PRINCIPAL
BALANCE LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
Less than or equal to $200,000..... 141 $ 15,918,178.12 3.84 %
$200,001-$250,000.................. 435 100,818,602.97 24.29
$250,001-$300,000.................. 377 103,471,861.15 24.93
$300,001-$350,000.................. 207 67,075,032.47 16.16
$350,001-$400,000.................. 92 34,702,795.51 8.36
$400,001-$450,000.................. 48 20,337,783.08 4.90
$450,001-$500,000.................. 46 22,141,427.41 5.33
$500,001-$550,000.................. 25 13,158,882.26 3.17
$550,001-$600,000.................. 15 8,722,059.63 2.10
$600,001-$650,000.................. 24 15,221,211.72 3.67
$650,001-$700,000.................. 2 1,396,088.54 0.34
$700,001-$750,000.................. 2 1,498,713.17 0.36
$800,001-$850,000.................. 1 849,471.68 0.20
$850,001-$900,000.................. 2 1,769,097.71 0.43
$900,001-$950,000.................. 1 907,882.73 0.22
$950,001-$1,000,000................ 6 5,974,884.77 1.44
Over $ 1 Million................... 1 1,098,260.98 0.26
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans is expected to be approximately $291,272. As of the Cut-Off Date, the
weighted average Loan-to-Value Ratio at origination and the maximum
Loan-to-Value Ratio at origination of the Mortgage Loans which had original
principal balances in excess of $600,000 are expected to be approximately 67.15%
and 80.00%, respectively. See "The Trust Estates -- Mortgage Loans" in the
Prospectus.
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
PROPERTY LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
Single-family detached............. 1,249 $367,189,236.73 88.47 %
Two- to four-family units.......... 11 4,127,810.04 0.99
Condominiums
High-rise(greater than four
stories)........................ 10 1,806,791.83 0.44
Low-rise(four stories or less)... 42 9,076,955.14 2.19
Planned unit developments.......... 110 31,854,944.84 7.67
Townhouses......................... 3 1,006,495.32 0.24
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
S-77
<PAGE>
GEOGRAPHIC DISTRIBUTION OF
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
GEOGRAPHIC AREA LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
Alabama............................ 1 $ 247,576.00 0.06 %
Arizona............................ 40 12,512,034.70 3.01
Arkansas........................... 4 1,061,452.77 0.26
California......................... 347 112,673,645.24 27.13
Colorado........................... 72 22,677,021.22 5.46
Connecticut........................ 20 5,842,534.54 1.41
Delaware........................... 3 853,391.49 0.21
District of Columbia............... 6 2,103,732.33 0.51
Florida............................ 46 11,550,812.29 2.78
Georgia............................ 32 8,903,308.54 2.15
Hawaii............................. 5 2,184,802.94 0.53
Idaho.............................. 7 1,821,953.40 0.44
Illinois........................... 25 7,559,351.26 1.82
Indiana............................ 6 1,502,507.86 0.36
Iowa............................... 7 1,662,822.54 0.40
Kansas............................. 3 764,787.13 0.18
Kentucky........................... 2 615,603.87 0.15
Louisiana.......................... 6 1,692,287.33 0.41
Maryland........................... 50 14,591,838.14 3.52
Massachusetts...................... 45 12,369,878.41 2.98
Michigan........................... 10 2,284,074.75 0.55
Minnesota.......................... 69 19,601,227.21 4.72
Mississippi........................ 5 1,162,134.55 0.28
Missouri........................... 5 1,577,606.85 0.38
Montana............................ 8 2,219,941.94 0.53
Nebraska........................... 7 1,920,801.95 0.46
Nevada............................. 35 12,121,709.64 2.92
New Hampshire...................... 7 1,696,344.19 0.41
New Jersey......................... 103 28,412,030.55 6.85
New Mexico......................... 8 2,141,239.97 0.52
New York........................... 135 33,799,753.56 8.14
North Carolina..................... 17 4,921,985.89 1.19
North Dakota....................... 2 703,383.30 0.17
Ohio............................... 10 2,398,897.39 0.58
Oklahoma........................... 2 659,282.12 0.16
Oregon............................. 29 7,911,739.61 1.91
Pennsylvania....................... 30 8,451,082.05 2.04
Rhode Island....................... 3 419,529.97 0.10
South Carolina..................... 10 2,645,180.85 0.64
South Dakota....................... 3 681,546.05 0.16
Tennessee.......................... 11 3,399,382.08 0.82
Texas.............................. 46 12,455,779.59 3.00
Utah............................... 33 9,213,875.73 2.22
Virginia........................... 66 18,449,190.05 4.44
Washington......................... 38 10,907,739.41 2.63
Wisconsin.......................... 6 1,715,432.65 0.41
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
No more than approximately 0.79% of the Cut-Off Date Aggregate Principal
Balance of the Mortgage Loans is expected to be secured by Mortgaged Properties
located in any one five-digit zip code.
ORIGINATORS OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
ORIGINATOR LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
NMI, PHMC or Affiliate............. 951 $283,198,129.34 68.23 %
Other Originators.................. 474 131,864,104.56 31.77
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
No single "Other Originator" is expected to have accounted for more than
5.00% of the Cut-Off Date Aggregate Principal Balance.
PURPOSES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
LOAN PURPOSE LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
Purchase........................... 1,181 $338,023,708.73 81.44 %
Equity Take Out Refinance.......... 74 24,310,709.39 5.86
Rate/Term Refinance................ 170 52,727,815.78 12.70
----- --------------- -------
Total...................... 1,425 $415,062,233.90 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/ term" refinance
purposes, substantially all of the proceeds are used to pay in full the
principal balance of a previous mortgage loan of the mortgagor with respect to a
Mortgaged Property and to pay origination and closing costs associated with such
refinancing. However, in the case of a Mortgage Loan made for "equity take out"
refinance purposes, all or a portion of the proceeds are generally retained by
the mortgagor for uses unrelated to the Mortgaged Property. The amount of such
proceeds retained by the mortgagor may be substantial. See "The Trust Estates --
Mortgage Loans" and "The Mortgage Loan Programs -- Mortgage Loan Underwriting"
in the Prospectus.
S-78
<PAGE>
MANDATORY REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
The Seller is required, with respect to Mortgage Loans that are found by the
Trustee to have defective documentation, or in respect of which the Seller has
breached a representation or warranty, either to repurchase such Mortgage Loans
or, if within two years of the date of initial issuance of the Series 1996-5
Certificates, to substitute new Mortgage Loans therefor. Any Mortgage Loan so
substituted must, among other things, have an unpaid principal balance equal to
or less than the Scheduled Principal Balance of the Mortgage Loan for which it
is being substituted (after giving effect to the scheduled principal payment due
in the month of substitution on the Mortgage Loan for which a new Mortgage Loan
is being substituted), a Loan-to-Value Ratio less than or equal to, and a
Mortgage Interest Rate equal to that of the Mortgage Loan for which it is being
substituted. See "Prepayment and Yield Considerations" herein and "The Pooling
and Servicing Agreement -- Assignment of Mortgage Loans to the Trustee" in the
Prospectus.
OPTIONAL REPURCHASE OF DEFAULTED MORTGAGE LOANS
Subject to certain limitations, the Seller may, in its sole discretion,
repurchase any defaulted Mortgage Loan, or any Mortgage Loan as to which default
is reasonably foreseeable, from the Trust Estate at a price equal to the unpaid
principal balance of such Mortgage Loan, together with accrued interest at a
rate equal to the Mortgage Interest Rate through the last day of the month in
which such repurchase occurs. See "The Pooling and Servicing Agreement --
Optional Purchases" in the Prospectus. A Servicer may, in its sole discretion,
allow the assumption of a defaulted Mortgage Loan serviced by such Servicer,
subject to certain conditions specified in the applicable Underlying Servicing
Agreement, or encourage the refinancing of a defaulted Mortgage Loan. See
"Prepayment and Yield Considerations" herein and "Servicing of the Mortgage
Loans -- Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage
Loans" in the Prospectus.
S-79
<PAGE>
DELINQUENCY AND FORECLOSURE EXPERIENCE
The following tables set forth certain information concerning recent
delinquency, foreclosure and loan loss experience on (i) the conventional
mortgage loans included in various mortgage pools underlying all series of The
Prudential Home Mortgage Securities Company, Inc.'s and NASCOR's mortgage
pass-through certificates or mortgage loans owned by third-party,
non-governmental entities included in Norwest Mortgage's servicing portfolio and
serviced from Norwest Mortgage's servicing center located in Frederick,
Maryland, which mortgage loans either (A) were originated by Norwest Mortgage
for its own account or the account of an affiliate, which (B) were acquired by
Norwest Mortgage for its own account or the account of an affiliate, or (C) are
loans as to which Norwest Mortgage acquired the servicing rights or as to which
Norwest Mortgage acts as subservicer (collectively, the "NMI Frederick Portfolio
Loans"), (ii) the NMI Frederick Portfolio Loans which are fixed interest rate
mortgage loans (the "Fixed NMI Frederick Portfolio Loans"), including, in both
clause (i) and this clause (ii) mortgage loans originated in connection with the
purchases of residences by relocated employees ("Relocation Mortgage Loans"),
(iii) the Fixed 30-Year NMI Frederick Portfolio Loans, other than Relocation
Mortgage Loans, having original terms to maturity of approximately 20 to
approximately 30 years (the "Fixed 30-Year Non-relocation NMI Frederick
Portfolio Loans"), (iv) the conventional mortgage loans having an original
principal balance in excess of the principal balance acceptable for purchase by
FNMA or FHLMC ("Jumbo Loans") included in Norwest Mortgage's servicing portfolio
and serviced from servicing centers other than in Frederick, Maryland (the "NMI
Non-Frederick Portfolio Loans") and (v) the NMI Non-Frederick Portfolio Loans
which are fixed interest rate Jumbo Loans, having original terms to maturity of
approximately 20 to approximately 30 years (the "Fixed 30-year NMI Non-Frederick
Portfolio Loans"), including in both clause (iv) and this clause (v) Relocation
Mortgage Loans. Mortgage loans previously included in PHMC's mortgage servicing
portfolio prior to the PHMC Acquisition became serviced or subserviced by
Norwest Mortgage on May 7, 1996 and, to the extent described above, are included
in the NMI Frederick Portfolio Loans. Prior to May 7, 1996 such mortgage loans
were serviced by PHMC. See "Description of the Mortgage Loans" herein and "The
Mortgage Loan Programs -- Mortgage Loan Underwriting" in the Prospectus. The
delinquency, foreclosure and loan loss experience represents the recent
experience of Norwest Mortgage and, in the case of the NMI Frederick Portfolio
Loans prior to May 7, 1996, that of PHMC. There can be no assurance that the
delinquency, foreclosure and loan loss experience set forth with respect to the
NMI Frederick Portfolio Loans or the NMI Non-Frederick Portfolio Loans, which
include both fixed and adjustable interest rate mortgage loans and loans having
a variety of original terms to stated maturity including Relocation Mortgage
Loans and non-relocation mortgage loans, and the Fixed NMI Frederick Portfolio
Loans, the Fixed 30-Year NMI Non-Frederick Portfolio Loans or the Fixed 30-Year
Non-relocation NMI Frederick Portfolio Loans, each of which includes loans
having a variety of payment characteristics, such as Subsidy Loans, Buy-Down
Loans and Balloon Loans, will be representative of the results that may be
experienced with respect to the Mortgage Loans included in the Trust Estate.
Historically, Relocation Mortgage Loans, which constitute a significant
percentage of the NMI Frederick Portfolio Loans, have experienced a
significantly lower rate of delinquency and foreclosure than other mortgage
loans included in the NMI Frederick Portfolio Loans, the NMI Non-Frederick
Portfolio Loans, the Fixed NMI Frederick Portfolio Loans and the Fixed 30-Year
NMI Non-Frederick Portfolio Loans. There can be no assurance that the future
experience on the Mortgage Loans contained in the Trust Estate, all of which are
fixed interest rate mortgage loans having original terms to stated maturity
ranging from approximately 20 to approximately 30 years and none of which are
Relocation Mortgage Loans, will be comparable to that of the NMI Frederick
Portfolio Loans, the NMI Non-Frederick Portfolio Loans, the Fixed NMI Frederick
Portfolio Loans, the Fixed 30-Year NMI Non-Frederick Portfolio Loans or the
Fixed 30-Year Non-relocation NMI Frederick Portfolio Loans.
Delinquencies, foreclosures and loan losses generally are expected to occur
more frequently after the first full year of the life of mortgage loans.
Accordingly, because a large number of mortgage loans serviced by Norwest
Mortgage have been recently originated, the current level of delinquencies,
foreclosures and loan losses may not be representative of the levels which may
be experienced over the lives of such mortgage loans. If the volume of Norwest
Mortgage's new loan originations and acquisitions does not continue to grow at
the rate experienced in recent years, the levels of delinquencies, foreclosures
and loan losses as percentages of the portfolio of the NMI Frederick Portfolio
Loans and the NMI Non-Frederick Portfolio Loans could rise significantly above
the rates indicated in the following tables.
S-80
<PAGE>
TOTAL NMI FREDERICK PORTFOLIO LOANS
<TABLE>
<CAPTION>
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- --------- ----------- --------- ----------- ---------
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ---------------------- ----------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total NMI Frederick
Portfolio Loans............ 145,339 $37,213,000 147,478 $36,537,000 143,949 $35,319,000
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Period of Delinquency (1)
30 to 59 days............. 1,165 $ 303,741 1,502 $ 359,137 1,561 $ 368,529
60 to 89 days............. 294 75,871 310 75,162 301 70,500
90 days or more........... 697 217,595 277 77,103 233 61,139
----------- --------- ----------- --------- ----------- ---------
Total Delinquent Loans...... 2,156 $ 597,207 2,089 $ 511,402 2,095 $ 500,168
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Percent of NMI Frederick
Portfolio Loans............ 1.48% 1.60% 1.42% 1.40% 1.46% 1.42%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures (2)........................ $ 277,406 $ 346,096 $ 331,150
Foreclosure Ratio (3)................... 0.75% 0.95% 0.94%
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss) (4)..................... $ (95,087) $ (150,948) $ (72,192)
Net Gain (Loss) Ratio (5)............... (0.26)% (0.41)% (0.20)%
</TABLE>
FIXED NMI FREDERICK PORTFOLIO LOANS
<TABLE>
<CAPTION>
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT OF BY NO. AMOUNT OF BY NO. AMOUNT OF
OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS
----------- --------- ----------- --------- ----------- ---------
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ---------------------- ----------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Fixed NMI Frederick
Portfolio Loans............ 112,820 $28,295,000 119,734 $29,152,000 119,907 $28,988,000
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Period of Delinquency (1)
30 to 59 days............. 781 $ 195,686 1,073 $ 241,976 1,175 $ 265,414
60 to 89 days............. 192 46,754 200 44,225 195 43,849
90 days or more........... 424 127,441 171 46,094 148 36,818
----------- --------- ----------- --------- ----------- ---------
Total Delinquent Loans...... 1,397 369,881 1,444 332,295 1,518 346,081
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Percent of Fixed NMI
Frederick Portfolio
Loans...................... 1.24% 1.31% 1.21% 1.14% 1.27% 1.19%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures (2)........................ $ 151,448 $ 186,359 $ 177,894
Foreclosure Ratio (3)................... 0.54% 0.64% 0.61%
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss) (4)..................... $ (78,867) $ (115,100) $ (52,137)
Net Gain (Loss) Ratio (5)............... (0.28)% (0.39)% (0.18)%
</TABLE>
- ------------------------------
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure
proceedings had been instituted or with respect to which the related
property had been acquired as of the dates indicated.
(3) Foreclosures as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Does not include gain or loss with respect to loans in the applicable
portfolio for which foreclosure proceedings had been instituted but not
completed as of the dates indicated, or for which the related properties
have been acquired in foreclosure proceedings but not yet sold.
(5) Net gain (loss) as a percentage of total loans in the applicable portfolio
at the end of each period.
S-81
<PAGE>
FIXED 30-YEAR NON-RELOCATION NMI FREDERICK PORTFOLIO LOANS
<TABLE>
<CAPTION>
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT OF BY NO. AMOUNT OF BY NO. AMOUNT OF
OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS
----------- --------- ----------- --------- ----------- ---------
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ---------------------- ----------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Fixed 30-Year
Non-relocation NMI Frederick
Portfolio Loans............... 76,909 $19,766,000 82,336 $20,598,000 81,530 $20,236,000
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Period of Delinquency (1)
30 to 59 days................ 628 $ 159,514 843 $ 194,207 940 $ 217,535
60 to 89 days................ 162 40,038 160 36,678 166 37,893
90 days or more.............. 374 113,023 147 39,194 127 30,555
----------- --------- ----------- --------- ----------- ---------
Total Delinquent Loans......... 1,164 $ 312,575 1,150 $ 270,079 1,233 $ 285,983
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Percent of Fixed 30-Year
Non-relocation NMI Frederick
Portfolio Loans............... 1.51% 1.58% 1.40% 1.31% 1.51% 1.41%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------- -----------------
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Foreclosures (2)........................ $ 139,636 $ 167,035 $ 158,038
Foreclosure Ratio (3)................... 0.71% 0.81% 0.78%
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss) (4)..................... $ (53,322) $ (80,721) $ (33,606)
Net Gain (Loss) Ratio (5)............... (0.27)% (0.39)% (0.17)%
</TABLE>
TOTAL NMI NON-FREDERICK PORTFOLIO LOANS
<TABLE>
<CAPTION>
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- --------- ----------- --------- ----------- ---------
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ---------------------- ----------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total NMI Non-Frederick
Portfolio Loans............... 15,516 $4,348,072 27,984 $7,811,431 33,949 $9,358,116
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Period of Delinquency (1)
30 to 59 days................ 125 $ 38,300 330 $ 96,145 380 $ 107,043
60 to 89 days................ 56 9,404 68 21,389 70 19,621
90 days or more.............. 31 9,972 97 30,867 73 23,403
----------- --------- ----------- --------- ----------- ---------
Total Delinquent Loans......... 212 $ 57,676 495 $ 148,401 523 $ 150,067
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Percent of NMI Non-Frederick
Portfolio Loans............... 1.37% 1.33% 1.77% 1.90% 1.54% 1.60%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Foreclosures (2)........................ $ 9,755 $ 30,626 $ 37,421
Foreclosure Ratio (3)................... 0.22% 0.39% 0.40%
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss) (4)..................... $ (982) $ (1,530) $ (1,582)
Net Gain (Loss) Ratio (5)............... (0.02)% (0.02)% (0.02)%
</TABLE>
- ----------------------------------
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure
proceedings had been instituted or with respect to which the related
property had been acquired as of the dates indicated.
(3) Foreclosures as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Does not include gain or loss with respect to loans in the applicable
portfolio for which foreclosure proceedings had been instituted but not
completed as of the dates indicated, or for which the related properties
have been acquired in foreclosure proceedings but not yet sold.
(5) Net gain (loss) as a percentage of total loans in the applicable portfolio
at the end of each period.
S-82
<PAGE>
FIXED 30-YEAR NMI NON-FREDERICK PORTFOLIO LOANS
<TABLE>
<CAPTION>
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- --------- ----------- --------- ----------- ---------
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ---------------------- ----------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Fixed 30-Year NMI Non-
Frederick Portfolio
Loans...................... 7,574 2,114,666 14,485 3,993,876 18,678 4,980,558
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Period of Delinquency (1)
30 to 59 days............. 60 16,797 167 49,830 189 51,044
60 to 89 days............. 47 7,036 30 9,507 34 9,140
90 days or more........... 13 3,874 49 14,756 39 12,389
----------- --------- ----------- --------- ----------- ---------
Total Delinquent Loans...... 120 27,707 246 74,093 262 72,573
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Percent of Fixed 30-Year NMI
Non-Frederick Portfolio
Loans...................... 1.58% 1.31% 1.70% 1.86% 1.40% 1.46%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures (2)........................ $ 4,605 $ 13,806 $ 19,981
Foreclosure Ratio (3)................... 0.22% 0.35% 0.40%
</TABLE>
- ------------------------------
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure
proceedings had been instituted or with respect to which the related
property had been acquired as of the dates indicated.
(3) Foreclosures as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Does not include gain or loss with respect to loans in the applicable
portfolio for which foreclosure proceedings had been instituted but not
completed as of the dates indicated, or for which the related properties
have been acquired in foreclosure proceedings but not yet sold.
(5) Net gain (loss) as a percentage of total loans in the applicable portfolio
at the end of each period.
S-83
<PAGE>
The likelihood that a mortgagor will become delinquent in the payment of his
or her mortgage loan, the rate of any subsequent foreclosures, and the severity
of any loan loss experience, may be affected by a number of factors related to a
borrower's personal circumstances, including, but not limited to, unemployment
or change in employment (or in the case of self-employed mortgagors or
mortgagors relying on commission income, fluctuations in income), marital
separation and the mortgagor's equity in the related mortgaged property. In
addition, delinquency, foreclosure and loan loss experience may be sensitive to
adverse economic conditions, either nationally or regionally, may exhibit
seasonal variations and may be influenced by the level of interest rates and
servicing decisions on the applicable mortgage loans. Regional economic
conditions (including declining real estate values) may particularly affect
delinquency, foreclosure and loan loss experience on mortgage loans to the
extent that mortgaged properties are concentrated in certain geographic areas.
Furthermore, the level of foreclosures reported is affected by the length of
time legally required to complete the foreclosure process and take title to the
related property, which varies from jurisdiction to jurisdiction. The changes in
the delinquency, foreclosure and loan loss experience of Norwest Mortgage's
servicing portfolio during the periods set forth in the preceding table may be
attributable to factors such as those described above, although there can be no
assurance as to whether these changes are the result of any particular factor or
a combination of factors. The delinquency, foreclosure and loan loss experience
on the Mortgage Loans serviced by Norwest Mortgage may be particularly affected
to the extent that the related Mortgaged Properties are concentrated in areas
which experience adverse economic conditions or declining real estate values.
See "Description of the Mortgage Loans" in the Prospectus Supplement.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of distributions in reduction of the principal balance of any
Subclass or Class of the Offered Certificates (other than the Class A-8
Certificates), the aggregate amount of distributions on any Subclass or Class of
the Offered Certificates and the yield to maturity of any Subclass or Class of
the Offered Certificates purchased at a discount or premium will be directly
related to the rate of payments of principal on the Mortgage Loans in the Trust
Estate and the amount and timing of mortgagor defaults resulting in Realized
Losses. The rate of principal payments on the Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans, the rate of
principal prepayments (including partial prepayments and those resulting from
refinancing) thereon by mortgagors, liquidations of defaulted Mortgage Loans,
repurchases by the Seller of Mortgage Loans as a result of defective
documentation or breaches of representations and warranties and optional
purchases by the Seller of all of the Mortgage Loans in connection with the
termination of the Trust Estate. See "Description of the Mortgage Loans --
Mandatory Repurchase or Substitution of Mortgage Loans" and "Pooling and
Servicing Agreement -- Optional Termination" herein and "The Pooling and
Servicing Agreement -- Assignment of Mortgage Loans to the Trustee," "--
Optional Purchases" and "-- Termination; Purchase of Mortgage Loans" in the
Prospectus. Mortgagors are permitted to prepay the Mortgage Loans, in whole or
in part, at any time without penalty. As described under "Description of the
Certificates -- Principal (Including Prepayments)" herein, all or a
disproportionate percentage of principal prepayments on the Mortgage Loans
(including liquidations and repurchases of Mortgage Loans) will be distributed,
to the extent of the Non-PO Fraction, to the holders of the Class A Certificates
(other than the Class A-16 Certificates with respect to the Class A-16 PO
Component) then entitled to distributions in respect of principal during the
nine years beginning on the first Distribution Date, and, to the extent that
such principal prepayments are made in respect of a Discount Mortgage Loan, to
the Class A-16 Certificates in proportion to the interest of the Class A-16 PO
Component in such Discount Mortgage Loan represented by the PO Fraction. As a
result of the method of calculating the Class A-17 Priority Amount and the
priorities for the allocation of the Class A Non-PO Principal Amount, it is
expected that, absent an exceptionally high rate of principal prepayments on the
Mortgage Loans, no principal payments will be made on the Class A-17
Certificates during the first five years following the issuance of the Series
1996-5 Certificates. Thereafter, with respect to principal prepayments, while
the percentage of principal prepayments allocated to the Class A-17 Certificates
during the four years thereafter will gradually increase, such percentage, until
the tenth year following the issuance of the Series 1996-5
S-84
<PAGE>
Certificates, will be disproportionately lower than the percentage of such
principal prepayments allocated to the other Class A Certificates (other than
the Class A-16 Certificates with respect to the Class A-16 PO Component). See
"Description of the Certificates -- Principal (Including
Prepayments) -- Allocation of Amount to be Distributed." Prepayments (which, as
used herein, include all unscheduled payments of principal, including payments
as the result of liquidations, purchases and repurchases) of the Mortgage Loans
in the Trust Estate will result in distributions to Certificateholders then
entitled to distributions in respect of principal of amounts which would
otherwise be distributed over the remaining terms of such Mortgage Loans. Since
the rate of prepayment on the Mortgage Loans will depend on future events and a
variety of factors (as described more fully below and in the Prospectus under
"Prepayment and Yield Considerations"), no assurance can be given as to such
rate or the rate of principal payments on any Subclass or Class of the Offered
Certificates or the aggregate amount of distributions on any Subclass or Class
of the Offered Certificates.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing rates for similar mortgage loans fall below the Mortgage Interest
Rates on the Mortgage Loans, the rate of prepayment would generally be expected
to increase. Conversely, if interest rates on similar mortgage loans rise above
the Mortgage Interest Rates on the Mortgage Loans, the rate of prepayment would
generally be expected to decrease. The rate of prepayment on the Mortgage Loans
may also be influenced by programs offered by mortgage loan originators
(including Norwest Mortgage), servicers (including Norwest Mortgage) and
mortgage loan brokers to encourage refinancing through such originators,
servicers and brokers, including, but not limited to, general or targeted
solicitations (which may be based on characteristics including, but not limited
to, the mortgage loan interest rate or payment history and the geographic
location of the Mortgaged Property), reduced origination fees or closing costs,
pre-approved applications, waiver of pre-closing interest accrued with respect
to a refinanced loan prior to the pay-off of such loan, or other financial
incentives. See "Prepayment and Yield Considerations -- Weighted Average Life of
Certificates" in the Prospectus. In addition, Norwest Mortgage or third parties
may enter into agreements with borrowers providing for the bi-weekly payment of
principal and interest on the related mortgage loan, thereby accelerating
payment of the mortgage loan resulting in partial prepayments.
Other factors affecting prepayment of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment or, in the case of
self-employed mortgagors or mortgagors relying on commission income, substantial
fluctuations in income, significant declines in real estate values and adverse
economic conditions either generally or in particular geographic areas,
mortgagors' equity in the Mortgaged Properties, including the use of second or
"home equity" mortgage loans by mortgagors or the use of the properties as
second or vacation homes, and servicing decisions. In addition, all of the
Mortgage Loans contain due-on-sale clauses which will generally be exercised
upon the sale of the related Mortgaged Properties. Consequently, acceleration of
mortgage payments as a result of any such sale will affect the level of
prepayments on the Mortgage Loans. The extent to which defaulted Mortgage Loans
are assumed by transferees of the related Mortgaged Properties will also affect
the rate of principal payments. The rate of prepayment and, therefore, the yield
to maturity of the Offered Certificates will be affected by the extent to which
(i) the Seller elects to repurchase, rather than substitute for, Mortgage Loans
which are found by the Trustee to have defective documentation or with respect
to which the Seller has breached a representation or warranty or (ii) a Servicer
elects to encourage the refinancing of any defaulted Mortgage Loan rather than
to permit an assumption thereof by a mortgagor. See "Servicing of the Mortgage
Loans -- Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage
Loans" in the Prospectus. There can be no certainty as to the rate of
prepayments on the Mortgage Loans during any period or over the life of the
Series 1996-5 Certificates. See "Prepayment and Yield Considerations" in the
Prospectus.
THE YIELD TO MATURITY OF THE OFFERED CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS, WHICH MAY BE MADE AT ANY TIME WITHOUT PENALTY) ON THE MORTGAGE
LOANS. INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE ASSOCIATED
RISKS, INCLUDING, IN
S-85
<PAGE>
THE CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER
THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING
PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER
THAN ANTICIPATED AND, IN THE CASE OF THE OFFERED CERTIFICATES PURCHASED AT A
PREMIUM, OR IN THE CASE OF THE CLASS A-8 CERTIFICATES, WHICH HAVE NO PRINCIPAL
BALANCE, THAT A FASTER THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL
(INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD
THAT IS LOWER THAN ANTICIPATED. INVESTORS PURCHASING OFFERED CERTIFICATES AT A
PREMIUM SHOULD ALSO CONSIDER THE RISK THAT A RAPID RATE OF PAYMENTS IN RESPECT
OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN THE
FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS.
The timing of changes in the rate of prepayment on the Mortgage Loans may
significantly affect the actual yield to maturity experienced by an investor who
purchases an Offered Certificate at a price other than par, even if the average
rate of principal payments experienced over time is consistent with such
investor's expectation. In general, the earlier a prepayment of principal on the
underlying Mortgage Loans, the greater the effect on such investor's yield to
maturity. As a result, the effect on such investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Offered Certificates
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
The yield to maturity on the Class M Certificates will be more sensitive
than the yield to maturity on the Class A Certificates to losses due to defaults
on the Mortgage Loans (and the timing thereof), to the extent not covered by the
Class B Certificates, because the entire amount of such losses will be allocable
to the Class M Certificates prior to the Class A Certificates, except as
otherwise provided herein. To the extent not covered by Periodic Advances,
delinquencies on Mortgage Loans may also have a relatively greater effect on the
yield to investors in the Class M Certificates. Amounts otherwise distributable
to holders of the Class M Certificates will be made available to protect the
holders of the Class A Certificates against interruptions in distributions due
to certain mortgagor delinquencies. Such delinquencies, to the extent not
covered by the Class B Certificates, even if subsequently cured, may affect the
timing of the receipt of distributions by the holders of Class M Certificates,
because the entire amount of those delinquencies would be borne by the Class M
Certificates prior to the Class A Certificates.
The yield to maturity on the Subclasses of Class B Certificates with higher
numerical designations will generally be more sensitive to losses than the
Subclasses with lower numerical designations, and the yield to maturity on the
Class B Certificates in the aggregate will generally be more sensitive to losses
than the other Classes of the Series 1996-5 Certificates, because the entire
amount of such losses (except for the portion of Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses allocated to the Class A
Certificates, Class M Certificates and Subclasses of Class B Certificates with
lower numerical designations) will be allocable to the Subclasses of Class B
Certificates in reverse numerical order, except as provided herein. To the
extent not covered by Periodic Advances, delinquencies on Mortgage Loans will
also have a relatively greater effect (i) on the yield to maturity on the
Subclasses of Class B Certificates with higher numerical designations and (ii)
on the yield to maturity on the Class B Certificates in the aggregate than on
the Class A Certificates and Class M Certificates. Amounts otherwise
distributable to holders of the Class B Certificates will be made available to
protect the holders of the Class A and Class M Certificates against
interruptions in distributions due to certain mortgagor delinquencies. Such
delinquencies, even if subsequently cured, may affect the timing of the receipt
of distributions by the holders of the Class B Certificates.
The actual yield to maturity experienced by an investor may also be affected
by the occurrence of interest shortfalls resulting from Unscheduled Principal
Receipts to the extent, if any, to which such interest shortfalls are not
covered by Compensating Interest or the subordination of, (i) in the case of the
Class A Certificates (other than the Class A-16 Certificates with respect to the
A-16 PO Component), the Class M and Class B Certificates, (ii) in the case of
the Class M Certificates, the Class B
S-86
<PAGE>
Certificates and (iii) in the case of a Subclass of Class B Certificates, the
Subclass or Subclasses of Class B Certificates with higher numerical
designations. See "Description of the Certificates -- Interest" and "Servicing
of the Mortgage Loans -- Anticipated Changes in Servicing."
The yield to maturity on the Offered Certificates and more particularly on
the Class M Certificates and the Offered Class B Certificates, especially the
Class B-2 Certificates, may be affected by the geographic concentration of the
Mortgaged Properties securing the Mortgage Loans. In recent periods, California
and several other regions in the United States have experienced significant
declines in housing prices. In addition, California and several other regions
have experienced natural disasters, including earthquakes, floods and
hurricanes, which may adversely affect property values. Any deterioration in
housing prices in California, as well as New York, New Jersey and Colorado and
the other states in which the Mortgaged Properties are located, and any
deterioration of economic conditions in such states which adversely affects the
ability of borrowers to make payments on the Mortgage Loans, may increase the
likelihood of losses on the Mortgage Loans. Such losses, if they occur, may have
an adverse effect on the yield to maturity of the Offered Certificates and more
particularly on the Class M Certificates and the Offered Class B Certificates,
especially the Class B-2 Certificates.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of any Subclass or Class of
Offered Certificates. An investor is urged to make an investment decision with
respect to any Subclass or Class of Offered Certificates based on the
anticipated yield to maturity of such Subclass or Class of Offered Certificates
resulting from its purchase price and such investor's own determination as to
anticipated Mortgage Loan prepayment rates under a variety of scenarios and, in
the case of the Class A-7 and Class A-8 Certificates, such investor's own
determination of LIBOR. The extent to which any Subclass or Class of Offered
Certificates is purchased at a discount or a premium and the degree to which
such Subclass or Class is sensitive to the timing of prepayments and, in the
case of the Class A-7 and Class A-8 Certificates, the degree to which LIBOR
varies from the level anticipated by an investor, will determine the extent to
which the yield to maturity of such Subclass or Class may vary from the
anticipated yield. An investor should carefully consider the associated risks,
including, in the case of any Subclass or Class of Offered Certificates
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Subclass or Class of Offered Certificates purchased at a premium, or in the case
of the Class A-8 Certificates, which have no principal balance, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield to such investor that is lower than the anticipated yield.
An investor should consider the risk that rapid rates of prepayments on the
Mortgage Loans, and therefore of amounts distributable in reduction of principal
balance of the Offered Certificates, may coincide with periods of low prevailing
interest rates. During such periods, the effective interest rates on securities
in which an investor may choose to reinvest amounts distributed in reduction of
the principal balance of such investor's Offered Certificate may be lower than
the applicable Pass-Through Rate. Conversely, slower rates of prepayments on the
Mortgage Loans, and therefore of amounts distributable in reduction of principal
balance of the Offered Certificates, may coincide with periods of high
prevailing interest rates. During such periods, the amount of principal
distributions available to an investor for reinvestment at such high prevailing
interest rates may be relatively small.
Investors in the Class A-7 Certificates should understand that if LIBOR is
greater than or equal to 8.30% per annum the Pass-Through Rate of such Subclass
will remain at its maximum rate of 9.00% per annum. Investors in the Class A-7
Certificates should also consider the risk that if LIBOR is lower than
anticipated, the actual yields to such investors could be lower than the
anticipated yields. Conversely, investors in the Class A-8 Certificates should
consider the risk that if LIBOR is higher than anticipated, the actual yields to
such investors could be significantly lower than anticipated yields. Investors
in the Class A-8 Certificates should also understand that if LIBOR is greater
than or equal to 8.30% per annum the Class A-8 Certificates will accrue interest
at the minimum rate of 0.00%
S-87
<PAGE>
per annum. Further, based on the Structuring Assumptions, high constant rates of
LIBOR, especially when combined with certain high constant prepayment rates, are
expected to produce a negative yield to investors in the Class A-8 Certificates.
See "-- Sensitivity of the Class A-8 Certificates" below.
Investors in the Class A-7 and Class A-8 Certificates should understand that
the timing of changes in LIBOR may affect the actual yields to such investors
even if the average rate of LIBOR is consistent with such investors'
expectations. Each investor must make an independent decision as to the
appropriate LIBOR assumptions to be used in deciding whether to purchase a Class
A-7 or Class A-8 Certificate.
As indicated under "Federal Income Tax Considerations" herein, the Class A-R
and Class A-LR Certificateholders' REMIC taxable income and the tax liability
thereon may exceed, and may substantially exceed, cash distributions to such
holders during certain periods. There can be no assurance as to the amount by
which such taxable income or such tax liability will exceed cash distributions
in respect of the Class A-R and Class A-LR Certificates during any such period
and no representation is made with respect thereto under any principal
prepayment scenario or otherwise. DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL
INTERESTS, THE AFTER-TAX RETURN OF THE CLASS A-R AND CLASS A-LR CERTIFICATES MAY
BE SIGNIFICANTLY LOWER THAN WOULD BE THE CASE IF THE CLASS A-R AND CLASS A-LR
CERTIFICATES WERE TAXED AS DEBT INSTRUMENTS, OR MAY BE NEGATIVE.
As referred to herein, the weighted average life of a Subclass or Class of
Offered Certificates (other than the Class A-8 Certificates) refers to the
average amount of time that will elapse from the date of issuance of such
Subclass or Class until each dollar in reduction of the principal balance of
such Subclass or Class is distributed to the investor. The weighted average life
of a Class A-8 Certificate is the average amount of time that will elapse
between the date of issuance of the Series 1996-5 Certificates and the date on
which each dollar in reduction of the principal balance of the Class A-7
Certificates (which balance is equal to the notional amount of the Class A-8
Certificates) is distributed to the investors in the Class A-7 Certificates. The
weighted average life of each Subclass or Class of the Offered Certificates will
be influenced by, among other things, the rate and timing of principal payments
on the Mortgage Loans, which may be in the form of scheduled amortization,
prepayments or other recoveries of principal.
THE WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFICATES WILL BE HIGHLY
SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE
MORTGAGE LOANS. Specifically, on each Distribution Date up to and including the
Distribution Date on which the Class A Subclass Principal Balance of the
Companion Certificates is reduced to zero, after the PAC Principal Amounts and
the TAC Principal Amount have been distributed for such Distribution Date any
remaining Excess Principal Payments for such Distribution Date will be applied
to the Companion Certificates before being distributed to the PAC Certificates
and the Class A-16 Certificates with respect to the Class A-16 PAC Component and
the Class A-16 TAC Component in the proportions and priorities set forth above
under "Description of the Certificates -- Principal (Including Prepayments) --
Principal Payment Characteristics of the PAC Certificates, the Class A-16 PAC
Component, the Class A-16 TAC Component and the Companion Certificates."
Further, the Companion Certificates will receive no distributions in reduction
of principal on such Distribution Date if the portion of the Class A Non-PO
Principal Amount available to make distributions of principal to the PAC
Certificates and the Class A-16 Certificates with respect to the Class A-16 PAC
Component and the Class A-16 TAC Component in accordance with the proportions
and priorities, set forth under "Description of the Certificates -- Principal
(including Prepayments) -- Allocation of Amount to Be Distributed" is equal to
or less than the PAC Principal Amounts and TAC Principal Amount on such
Distribution Date.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Standard
Prepayment Assumption ("SPA"), represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans
S-88
<PAGE>
in the first month of the life of the mortgage 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 mortgage
loans, 100% SPA assumes a constant prepayment rate of 6% per annum each month.
As used in the table below, "0% SPA" assumes prepayment rates equal to 0% of
SPA, I.E., no prepayments. Correspondingly, "245% SPA" assumes prepayment rates
equal to 245% of SPA, and so forth. SPA DOES NOT PURPORT TO BE A HISTORICAL
DESCRIPTION OF PREPAYMENT EXPERIENCE OR A PREDICTION OF THE ANTICIPATED RATE OF
PREPAYMENT OF ANY POOL OF MORTGAGE LOANS, INCLUDING THE MORTGAGE LOANS.
The tables set forth below have been prepared assuming, among other things,
the following (the "Structuring Assumptions"): (i) the Trust Estate consists of
one Discount Mortgage Loan and one Premium Mortgage Loan with the
characteristics set forth below, (ii) the scheduled payment in each month for
each Mortgage Loan has been based on its outstanding balance as of the first day
of the month preceding the month of such payment, its Mortgage Interest Rate and
its remaining term to stated maturity, so that such scheduled payments would
amortize the remaining balance by its remaining term to maturity, (iii)
scheduled monthly payments of principal and interest on the Mortgage Loans will
be timely received on the first day of each month (with no defaults), commencing
in November 1996, (iv) the Seller does not repurchase any Mortgage Loan, as
described under "Description of the Mortgage Loans -- Mandatory Repurchase or
Substitution of Mortgage Loans" herein, and the Seller does not exercise its
option to purchase the Mortgage Loans and thereby cause a termination of the
Trust Estate, (v) principal prepayments in full on the Mortgage Loans will be
received on the last day of each month commencing in October 1996 at the
respective constant percentages of SPA set forth in the tables and there are no
partial principal prepayments or Prepayment Interest Shortfalls, (vi) the Series
1996-5 Certificates will be issued on October 30, 1996 and (vii) distributions
to Certificateholders will be made on the 25th day of each month, commencing in
November 1996.
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
REMAINING TERM
PRINCIPAL BALANCE TO STATED
AS OF THE CUT-OFF MORTGAGE MATURITY ORIGINAL TERM
DATE INTEREST RATE (IN MONTHS) (IN MONTHS)
------------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Discount Mortgage Loan....................... $ 123,121,128.05 8.0365758824% 356 360
Premium Mortgage Loan........................ $ 291,941,105.85 8.6560218844% 357 359
</TABLE>
IT IS HIGHLY UNLIKELY THAT THE MORTGAGE LOANS WILL PREPAY AT ANY CONSTANT
RATE, THAT ALL OF THE MORTGAGE LOANS WILL PREPAY AT THE SAME RATE OR THAT THE
MORTGAGE LOANS WILL NOT EXPERIENCE ANY LOSSES. In addition, there will be
differences between the characteristics of the actual Mortgage Loans ultimately
included in the Trust Estate and the characteristics which are assumed in
preparing the tables, as described above. Any difference may have an effect upon
the actual percentages of initial Class A Subclass Principal Balance of the
Subclasses of Class A Certificates (or, in the case of the Class A-8
Certificates, the initial Class A-8 Notional Amount), initial principal balances
of the Class M Certificates and initial Class B Subclass Principal Balance of
the Subclasses of Class B Certificates outstanding, the actual weighted average
lives of the Subclasses of Class A Certificates, the Class M Certificates and
the Subclasses of Class B Certificates and the date on which the Class A
Subclass Principal Balance of any Subclass of Class A Certificates (or, in the
case of the Class A-8 Certificates, the Class A-8 Notional Amount), the
principal balance of the Class M Certificates and the Class B Subclass Principal
Balance of any Subclass of Class B Certificates are reduced to zero.
Based upon the foregoing assumptions, the following tables indicate the
weighted average life of each Subclass and Class of Offered Certificates, and
set forth the percentages of the initial Class A Subclass Principal Balance of
each such Subclass (or, in the case of the Class A-8 Certificates, the initial
Class A-8 Notional Amount), the initial Class M Principal Balance of the Class M
Certificates and the initial Class B Subclass Principal Balance of each Subclass
of Offered Class B Certificates that would be outstanding after each of the
dates shown at the constant percentages of SPA presented.
S-89
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS OR CLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-2
CERTIFICATES
CLASS A-1 AT THE
CERTIFICATES AT THE FOLLOWING
FOLLOWING PERCENTAGES PERCENTAGES
OF SPA OF SPA
DISTRIBUTION -------------------------------------------------------------------------- ---------
DATE 0% 100% 245% 375% 500% 750% 0%
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ -------------------------------------------------------------------------- ---------
Initial............................. 100 100 100 100 100 100
100
October 1997........................ 98 92 85 77 71 57
100
October 1998........................ 95 78 53 32 12 0
100
October 1999........................ 93 59 15 0 0 0
100
October 2000........................ 90 41 0 0 0 0
100
October 2001........................ 87 25 0 0 0 0
100
October 2002........................ 84 10 0 0 0 0
100
October 2003........................ 81 0 0 0 0 0
100
October 2004........................ 77 0 0 0 0 0
100
October 2005........................ 74 0 0 0 0 0
100
October 2006........................ 69 0 0 0 0 0
100
October 2007........................ 65 0 0 0 0 0
100
October 2008........................ 60 0 0 0 0 0
100
October 2009........................ 55 0 0 0 0 0
100
October 2010........................ 49 0 0 0 0 0
100
October 2011........................ 43 0 0 0 0 0
100
October 2012........................ 36 0 0 0 0 0
100
October 2013........................ 29 0 0 0 0 0
100
October 2014........................ 20 0 0 0 0 0
100
October 2015........................ 12 0 0 0 0 0
100
October 2016........................ 2 0 0 0 0 0
100
October 2017........................ 0 0 0 0 0 0
77
October 2018........................ 0 0 0 0 0 0
46
October 2019........................ 0 0 0 0 0 0
12
October 2020........................ 0 0 0 0 0 0
0
October 2021........................ 0 0 0 0 0 0
0
October 2022........................ 0 0 0 0 0 0
0
October 2023........................ 0 0 0 0 0 0
0
October 2024........................ 0 0 0 0 0 0
0
October 2025........................ 0 0 0 0 0 0
0
October 2026........................ 0 0 0 0 0 0
0
Weighted Average
Life (years) (1).................. 12.71 3.58 2.03 1.59 1.35 1.07 21.87
<CAPTION>
CLASS A-3
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION ----------------------
DATE 100% 245% 375% 500% 750% 0% 100%
<S> <C> <C> <C> <C>
- ------------------------------------ ----------------------
Initial.............................
100 100 100 100 100
100 100
October 1997........................
100 100 100 100 100
98 94
October 1998........................
100 100 100 100 28
97 84
October 1999........................
100 100 42 0 0
95 70
October 2000........................
100 49 0 0 0
93 57
October 2001........................
100 0 0 0 0
90 45
October 2002........................
100 0 0 0 0
88 34
October 2003........................
91 0 0 0 0
86 24
October 2004........................
58 0 0 0 0
83 16
October 2005........................
29 0 0 0 0
81 8
October 2006........................
3 0 0 0 0
78 1
October 2007........................
0 0 0 0 0
74 0
October 2008........................
0 0 0 0 0
71 0
October 2009........................
0 0 0 0 0
67 0
October 2010........................
0 0 0 0 0
63 0
October 2011........................
0 0 0 0 0
58 0
October 2012........................
0 0 0 0 0
53 0
October 2013........................
0 0 0 0 0
48 0
October 2014........................
0 0 0 0 0
42 0
October 2015........................
0 0 0 0 0
35 0
October 2016........................
0 0 0 0 0
28 0
October 2017........................
0 0 0 0 0
21 0
October 2018........................
0 0 0 0 0
12 0
October 2019........................
0 0 0 0 0
3 0
October 2020........................
0 0 0 0 0
0 0
October 2021........................
0 0 0 0 0
0 0
October 2022........................
0 0 0 0 0
0 0
October 2023........................
0 0 0 0 0
0 0
October 2024........................
0 0 0 0 0
0 0
October 2025........................
0 0 0 0 0
0 0
October 2026........................
0 0 0 0 0
0 0
Weighted Average
Life (years) (1).................. 8.36 4.03 2.97 2.47 1.94 15.15 4.85
<CAPTION>
DISTRIBUTION
DATE 245% 375% 500% 750%
- ------------------------------------
Initial.............................
100 100 100 100
October 1997........................
89 83 78 68
October 1998........................
66 50 35 8
October 1999........................
37 11 0 0
October 2000........................
13 0 0 0
October 2001........................
0 0 0 0
October 2002........................
0 0 0 0
October 2003........................
0 0 0 0
October 2004........................
0 0 0 0
October 2005........................
0 0 0 0
October 2006........................
0 0 0 0
October 2007........................
0 0 0 0
October 2008........................
0 0 0 0
October 2009........................
0 0 0 0
October 2010........................
0 0 0 0
October 2011........................
0 0 0 0
October 2012........................
0 0 0 0
October 2013........................
0 0 0 0
October 2014........................
0 0 0 0
October 2015........................
0 0 0 0
October 2016........................
0 0 0 0
October 2017........................
0 0 0 0
October 2018........................
0 0 0 0
October 2019........................
0 0 0 0
October 2020........................
0 0 0 0
October 2021........................
0 0 0 0
October 2022........................
0 0 0 0
October 2023........................
0 0 0 0
October 2024........................
0 0 0 0
October 2025........................
0 0 0 0
October 2026........................
0 0 0 0
Weighted Average
Life (years) (1).................. 2.56 1.96 1.65 1.30
</TABLE>
- ------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass or Class.
S-90
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS OR CLASS PRINCIPAL BALANCE(1) OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-5, CLASS A-6, CLASS A-7 AND
CLASS A-4 CLASS A-8
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
DISTRIBUTION ------------------------------------------------------------------------ -----------------------------------
DATE 0% 100% 245% 375% 500% 750% 0% 100% 245%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------- ------------------------------------------------------------------------ -----------------------------------
Initial............. 100 100 100 100 100 100
100 100 100
October 1997........ 100 100 100 100 100 100
99 96 92
October 1998........ 100 100 100 100 100 100
98 89 76
October 1999........ 100 100 100 100 72 0
96 79 56
October 2000........ 100 100 100 54 0 0
95 70 38
October 2001........ 100 100 82 0 0 0
93 61 24
October 2002........ 100 100 44 0 0 0
92 53 13
October 2003........ 100 100 15 0 0 0
90 46 4
October 2004........ 100 100 0 0 0 0
88 40 0
October 2005........ 100 100 0 0 0 0
86 35 0
October 2006........ 100 100 0 0 0 0
84 30 0
October 2007........ 100 86 0 0 0 0
82 25 0
October 2008........ 100 71 0 0 0 0
79 21 0
October 2009........ 100 57 0 0 0 0
77 17 0
October 2010........ 100 43 0 0 0 0
74 13 0
October 2011........ 100 31 0 0 0 0
70 9 0
October 2012........ 100 18 0 0 0 0
67 5 0
October 2013........ 100 7 0 0 0 0
63 2 0
October 2014........ 100 0 0 0 0 0
59 0 0
October 2015........ 100 0 0 0 0 0
54 0 0
October 2016........ 100 0 0 0 0 0
49 0 0
October 2017........ 100 0 0 0 0 0
44 0 0
October 2018........ 100 0 0 0 0 0
38 0 0
October 2019........ 100 0 0 0 0 0
32 0 0
October 2020........ 84 0 0 0 0 0
25 0 0
October 2021........ 58 0 0 0 0 0
17 0 0
October 2022........ 30 0 0 0 0 0
9 0 0
October 2023........ 0 0 0 0 0 0
0 0 0
October 2024........ 0 0 0 0 0 0
0 0 0
October 2025........ 0 0 0 0 0 0
0 0 0
October 2026........ 0 0 0 0 0 0
0 0 0
Weighted Average
Life (years)
(2)............... 25.28 13.65 5.95 4.11 3.29 2.47 18.11 7.43 3.55
<CAPTION>
CLASS A-9
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION ---------------------------------------------------------------
DATE 375% 500% 750% 0% 100% 245% 375% 500%
<S> <C>
- -------------------- ---------------------------------------------------------------
Initial.............
100 100 100
100 100 100 100 100
October 1997........
88 85 78
96 85 85 85 85
October 1998........
65 54 35
91 57 57 57 57
October 1999........
37 21 0
86 26 26 26 26
October 2000........
16 0 0
81 5 5 5 0
October 2001........
0 0 0
75 0 0 0 0
October 2002........
0 0 0
69 0 0 0 0
October 2003........
0 0 0
63 0 0 0 0
October 2004........
0 0 0
56 0 0 0 0
October 2005........
0 0 0
49 0 0 0 0
October 2006........
0 0 0
41 0 0 0 0
October 2007........
0 0 0
33 0 0 0 0
October 2008........
0 0 0
27 0 0 0 0
October 2009........
0 0 0
21 0 0 0 0
October 2010........
0 0 0
14 0 0 0 0
October 2011........
0 0 0
7 0 0 0 0
October 2012........
0 0 0
0 0 0 0 0
October 2013........
0 0 0
0 0 0 0 0
October 2014........
0 0 0
0 0 0 0 0
October 2015........
0 0 0
0 0 0 0 0
October 2016........
0 0 0
0 0 0 0 0
October 2017........
0 0 0
0 0 0 0 0
October 2018........
0 0 0
0 0 0 0 0
October 2019........
0 0 0
0 0 0 0 0
October 2020........
0 0 0
0 0 0 0 0
October 2021........
0 0 0
0 0 0 0 0
October 2022........
0 0 0
0 0 0 0 0
October 2023........
0 0 0
0 0 0 0 0
October 2024........
0 0 0
0 0 0 0 0
October 2025........
0 0 0
0 0 0 0 0
October 2026........
0 0 0
0 0 0 0 0
Weighted Average
Life (years)
(2)............... 2.59 2.13 1.64 8.62 2.25 2.25 2.25 2.21
<CAPTION>
DISTRIBUTION
DATE 750%
- --------------------
Initial.............
100
October 1997........
85
October 1998........
57
October 1999........
0
October 2000........
0
October 2001........
0
October 2002........
0
October 2003........
0
October 2004........
0
October 2005........
0
October 2006........
0
October 2007........
0
October 2008........
0
October 2009........
0
October 2010........
0
October 2011........
0
October 2012........
0
October 2013........
0
October 2014........
0
October 2015........
0
October 2016........
0
October 2017........
0
October 2018........
0
October 2019........
0
October 2020........
0
October 2021........
0
October 2022........
0
October 2023........
0
October 2024........
0
October 2025........
0
October 2026........
0
Weighted Average
Life (years)
(2)............... 1.94
</TABLE>
- ------------------
(1)With respect to the Class A-8 Certificates, percentages are expressed as
percentages of the initial Class A-8 Notional Amount.
(2) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance or notional amount, as the case may be, by the number of years from
the date of the issuance of such Certificate to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the aggregate
distributions in reduction of principal balance or notional amount, as the
case may be, referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass or Class.
S-91
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS OR CLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-10 CLASS A-11
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
DISTRIBUTION -------------------------------------------------------------------------- ----------------------
DATE 0% 100% 245% 375% 500% 750% 0% 100%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------- -------------------------------------------------------------------------- ----------------------
Initial............. 100 100 100 100 100 100
100 100
October 1997........ 100 100 100 100 100 100
100 100
October 1998........ 100 100 100 100 100 100
100 100
October 1999........ 100 77 77 77 77 0
100 100
October 2000........ 100 15 15 15 0 0
100 100
October 2001........ 100 0 0 0 0 0
100 75
October 2002........ 100 0 0 0 0 0
100 47
October 2003........ 100 0 0 0 0 0
100 21
October 2004........ 100 0 0 0 0 0
100 5
October 2005........ 100 0 0 0 0 0
100 0
October 2006........ 100 0 0 0 0 0
100 0
October 2007........ 98 0 0 0 0 0
100 0
October 2008........ 81 0 0 0 0 0
100 0
October 2009........ 62 0 0 0 0 0
100 0
October 2010........ 42 0 0 0 0 0
100 0
October 2011........ 20 0 0 0 0 0
100 0
October 2012........ 0 0 0 0 0 0
98 0
October 2013........ 0 0 0 0 0 0
83 0
October 2014........ 0 0 0 0 0 0
67 0
October 2015........ 0 0 0 0 0 0
50 0
October 2016........ 0 0 0 0 0 0
31 0
October 2017........ 0 0 0 0 0 0
11 0
October 2018........ 0 0 0 0 0 0
0 0
October 2019........ 0 0 0 0 0 0
0 0
October 2020........ 0 0 0 0 0 0
0 0
October 2021........ 0 0 0 0 0 0
0 0
October 2022........ 0 0 0 0 0 0
0 0
October 2023........ 0 0 0 0 0 0
0 0
October 2024........ 0 0 0 0 0 0
0 0
October 2025........ 0 0 0 0 0 0
0 0
October 2026........ 0 0 0 0 0 0
0 0
Weighted Average
Life (years)
(1)............... 13.54 3.46 3.46 3.46 3.35 2.58 18.92 6.02
<CAPTION>
CLASS A-12
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION ---------------------------------------------------------
DATE 245% 375% 500% 750% 0% 100% 245% 375% 500%
<S> <C>
- -------------------- ---------------------------------------------------------
Initial.............
100 100 100 100
100 100 100 100 100
October 1997........
100 100 100 100
100 100 100 74 49
October 1998........
100 100 100 100
100 100 100 22 0
October 1999........
100 100 100 69
100 100 100 0 0
October 2000........
100 100 83 0
100 100 100 0 0
October 2001........
75 75 21 0
100 100 100 0 0
October 2002........
47 47 0 0
100 100 100 0 0
October 2003........
21 21 0 0
100 100 100 0 0
October 2004........
5 5 0 0
100 100 100 0 0
October 2005........
0 0 0 0
100 100 100 0 0
October 2006........
0 0 0 0
100 100 95 0 0
October 2007........
0 0 0 0
100 100 74 0 0
October 2008........
0 0 0 0
100 100 56 0 0
October 2009........
0 0 0 0
100 100 41 0 0
October 2010........
0 0 0 0
100 100 28 0 0
October 2011........
0 0 0 0
100 100 17 0 0
October 2012........
0 0 0 0
100 100 8 0 0
October 2013........
0 0 0 0
100 100 1 0 0
October 2014........
0 0 0 0
100 100 0 0 0
October 2015........
0 0 0 0
100 100 0 0 0
October 2016........
0 0 0 0
100 100 0 0 0
October 2017........
0 0 0 0
100 100 0 0 0
October 2018........
0 0 0 0
100 83 0 0 0
October 2019........
0 0 0 0
100 65 0 0 0
October 2020........
0 0 0 0
100 49 0 0 0
October 2021........
0 0 0 0
100 33 0 0 0
October 2022........
0 0 0 0
100 18 0 0 0
October 2023........
0 0 0 0
100 3 0 0 0
October 2024........
0 0 0 0
100 0 0 0 0
October 2025........
0 0 0 0
25 0 0 0 0
October 2026........
0 0 0 0
0 0 0 0 0
Weighted Average
Life (years)
(1)............... 6.02 6.02 4.57 3.23 28.70 24.03 12.72 1.46 0.96
<CAPTION>
DISTRIBUTION
DATE 750%
- --------------------
Initial.............
100
October 1997........
0
October 1998........
0
October 1999........
0
October 2000........
0
October 2001........
0
October 2002........
0
October 2003........
0
October 2004........
0
October 2005........
0
October 2006........
0
October 2007........
0
October 2008........
0
October 2009........
0
October 2010........
0
October 2011........
0
October 2012........
0
October 2013........
0
October 2014........
0
October 2015........
0
October 2016........
0
October 2017........
0
October 2018........
0
October 2019........
0
October 2020........
0
October 2021........
0
October 2022........
0
October 2023........
0
October 2024........
0
October 2025........
0
October 2026........
0
Weighted Average
Life (years)
(1)............... 0.63
</TABLE>
- ------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass or Class.
S-92
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS OR CLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS
A-14
CERTIFICATES
CLASS A-13 AT THE
CERTIFICATES AT THE FOLLOWING
FOLLOWING PERCENTAGES PERCENTAGES
OF SPA OF SPA
DISTRIBUTION ---------------------------------------------------------------------------- ---------
DATE 0% 100% 245% 375% 500% 750% 0%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ ---------------------------------------------------------------------------- ---------
Initial............................. 100 100 100 100 100 100
100
October 1997........................ 90 90 90 90 90 90
100
October 1998........................ 79 79 79 79 79 79
100
October 1999........................ 67 67 67 67 67 15
100
October 2000........................ 55 55 55 55 34 0
100
October 2001........................ 41 41 41 34 0 0
100
October 2002........................ 26 26 26 0 0 0
100
October 2003........................ 10 10 10 0 0 0
100
October 2004........................ 0 0 0 0 0 0
100
October 2005........................ 0 0 0 0 0 0
100
October 2006........................ 0 0 0 0 0 0
100
October 2007........................ 0 0 0 0 0 0
100
October 2008........................ 0 0 0 0 0 0
100
October 2009........................ 0 0 0 0 0 0
100
October 2010........................ 0 0 0 0 0 0
100
October 2011........................ 0 0 0 0 0 0
100
October 2012........................ 0 0 0 0 0 0
100
October 2013........................ 0 0 0 0 0 0
100
October 2014........................ 0 0 0 0 0 0
100
October 2015........................ 0 0 0 0 0 0
100
October 2016........................ 0 0 0 0 0 0
100
October 2017........................ 0 0 0 0 0 0
100
October 2018........................ 0 0 0 0 0 0
100
October 2019........................ 0 0 0 0 0 0
100
October 2020........................ 0 0 0 0 0 0
100
October 2021........................ 0 0 0 0 0 0
100
October 2022........................ 0 0 0 0 0 0
100
October 2023........................ 0 0 0 0 0 0
99
October 2024........................ 0 0 0 0 0 0
59
October 2025........................ 0 0 0 0 0 0
15
October 2026........................ 0 0 0 0 0 0
0
Weighted Average
Life (years) (1).................. 4.20 4.20 4.20 3.70 3.19 2.51 28.21
<CAPTION>
CLASS A-15
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION -------------------------------
DATE 100% 245% 375% 500% 750% 0% 100% 245%
<S> <C> <C> <C>
- ------------------------------------ -------------------------------
Initial.............................
100 100 100 100 100
100 100 100
October 1997........................
100 100 100 100 100
100 100 100
October 1998........................
100 100 100 100 100
100 100 100
October 1999........................
100 100 100 100 76
100 100 100
October 2000........................
100 100 100 91 0
100 100 100
October 2001........................
100 100 97 23 0
100 100 100
October 2002........................
100 100 53 0 0
100 100 100
October 2003........................
100 100 23 0 0
100 100 100
October 2004........................
100 90 6 0 0
100 100 100
October 2005........................
100 70 0 0 0
100 100 100
October 2006........................
100 56 0 0 0
100 100 100
October 2007........................
100 43 0 0 0
100 100 100
October 2008........................
100 33 0 0 0
100 100 100
October 2009........................
100 24 0 0 0
100 100 100
October 2010........................
100 16 0 0 0
100 100 100
October 2011........................
100 10 0 0 0
100 100 100
October 2012........................
100 5 0 0 0
100 100 100
October 2013........................
100 * 0 0 0
100 100 100
October 2014........................
95 0 0 0 0
100 100 83
October 2015........................
83 0 0 0 0
100 100 67
October 2016........................
71 0 0 0 0
100 100 54
October 2017........................
60 0 0 0 0
100 100 43
October 2018........................
49 0 0 0 0
100 100 34
October 2019........................
39 0 0 0 0
100 100 26
October 2020........................
29 0 0 0 0
100 100 20
October 2021........................
19 0 0 0 0
100 100 14
October 2022........................
10 0 0 0 0
100 100 10
October 2023........................
2 0 0 0 0
100 100 7
October 2024........................
0 0 0 0 0
100 68 4
October 2025........................
0 0 0 0 0
100 28 1
October 2026........................
0 0 0 0 0
0 0 0
Weighted Average
Life (years) (1).................. 22.09 11.03 6.30 4.64 3.27 29.55 28.48 21.14
<CAPTION>
DISTRIBUTION
DATE 375% 500% 750%
- ------------------------------------
Initial.............................
100 100 100
October 1997........................
100 100 100
October 1998........................
100 100 100
October 1999........................
100 100 100
October 2000........................
100 100 13
October 2001........................
100 100 0
October 2002........................
100 43 0
October 2003........................
100 0 0
October 2004........................
100 0 0
October 2005........................
83 0 0
October 2006........................
63 0 0
October 2007........................
48 0 0
October 2008........................
36 0 0
October 2009........................
28 0 0
October 2010........................
21 0 0
October 2011........................
16 0 0
October 2012........................
12 0 0
October 2013........................
9 0 0
October 2014........................
6 0 0
October 2015........................
5 0 0
October 2016........................
3 0 0
October 2017........................
2 0 0
October 2018........................
2 0 0
October 2019........................
1 0 0
October 2020........................
1 0 0
October 2021........................
1 0 0
October 2022........................
* 0 0
October 2023........................
* 0 0
October 2024........................
* 0 0
October 2025........................
* 0 0
October 2026........................
0 0 0
Weighted Average
Life (years) (1).................. 11.93 6.00 3.93
</TABLE>
- ------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass or Class.
S-93
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS OR CLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-17 CLASS A-R AND CLASS A-LR
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
DISTRIBUTION ------------------------------------------------------------------ -------------------------------------
DATE 0% 100% 245% 375% 500% 750% 0% 100% 245%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------- ------------------------------------------------------------------ -------------------------------------
Initial................ 100 100 100 100 100 100
100 100 100
October 1997........... 100 100 100 100 100 100
0 0 0
October 1998........... 100 100 100 100 100 100
0 0 0
October 1999........... 100 100 100 100 100 100
0 0 0
October 2000........... 100 100 100 100 100 100
0 0 0
October 2001........... 100 100 100 100 100 33
0 0 0
October 2002........... 99 97 94 92 89 3
0 0 0
October 2003........... 97 93 87 82 62 0
0 0 0
October 2004........... 96 89 78 69 38 0
0 0 0
October 2005........... 94 83 68 55 25 0
0 0 0
October 2006........... 93 76 57 42 17 0
0 0 0
October 2007........... 91 70 47 32 12 0
0 0 0
October 2008........... 89 65 39 24 8 0
0 0 0
October 2009........... 86 59 33 18 5 0
0 0 0
October 2010........... 84 54 27 14 4 0
0 0 0
October 2011........... 81 49 22 10 3 0
0 0 0
October 2012........... 78 45 18 8 2 0
0 0 0
October 2013........... 75 40 15 6 1 0
0 0 0
October 2014........... 72 36 12 4 1 0
0 0 0
October 2015........... 68 32 10 3 1 0
0 0 0
October 2016........... 64 28 8 2 * 0
0 0 0
October 2017........... 60 25 6 2 * 0
0 0 0
October 2018........... 55 21 5 1 * 0
0 0 0
October 2019........... 49 18 4 1 * 0
0 0 0
October 2020........... 44 15 3 1 * 0
0 0 0
October 2021........... 38 12 2 * * 0
0 0 0
October 2022........... 31 9 1 * * 0
0 0 0
October 2023........... 23 7 1 * * 0
0 0 0
October 2024........... 15 4 1 * * 0
0 0 0
October 2025........... 7 2 * * * 0
0 0 0
October 2026........... 0 0 0 0 0 0
0 0 0
Weighted Average
Life (years) (1)..... 21.41 15.83 11.91 10.17 8.20 4.84 0.07 0.07 0.07
<CAPTION>
CLASS M, CLASS B-1 AND CLASS B-2
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION ---------------------------------------------------------
DATE 375% 500% 750% 0% 100% 245% 375% 500%
<S> <C>
- ----------------------- ---------------------------------------------------------
Initial................
100 100 100
100 100 100 100 100
October 1997...........
0 0 0
99 99 99 99 99
October 1998...........
0 0 0
98 98 98 98 98
October 1999...........
0 0 0
97 97 97 97 97
October 2000...........
0 0 0
96 96 96 96 96
October 2001...........
0 0 0
95 95 95 95 95
October 2002...........
0 0 0
94 92 90 87 85
October 2003...........
0 0 0
93 89 83 78 73
October 2004...........
0 0 0
91 84 74 66 58
October 2005...........
0 0 0
90 79 64 53 43
October 2006...........
0 0 0
88 73 54 40 29
October 2007...........
0 0 0
86 67 45 30 20
October 2008...........
0 0 0
84 62 38 23 14
October 2009...........
0 0 0
82 56 31 17 9
October 2010...........
0 0 0
80 52 26 13 6
October 2011...........
0 0 0
77 47 21 10 4
October 2012...........
0 0 0
75 43 18 7 3
October 2013...........
0 0 0
72 38 14 5 2
October 2014...........
0 0 0
68 34 12 4 1
October 2015...........
0 0 0
65 31 9 3 1
October 2016...........
0 0 0
61 27 8 2 1
October 2017...........
0 0 0
57 24 6 2 *
October 2018...........
0 0 0
52 20 5 1 *
October 2019...........
0 0 0
47 17 4 1 *
October 2020...........
0 0 0
42 14 3 1 *
October 2021...........
0 0 0
36 12 2 * *
October 2022...........
0 0 0
29 9 1 * *
October 2023...........
0 0 0
22 6 1 * *
October 2024...........
0 0 0
15 4 1 * *
October 2025...........
0 0 0
6 2 * * *
October 2026...........
0 0 0
0 0 0 0 0
Weighted Average
Life (years) (1)..... 0.07 0.07 0.07 20.54 15.22 11.48 9.83 8.87
<CAPTION>
DISTRIBUTION
DATE 750%
- -----------------------
Initial................
100
October 1997...........
99
October 1998...........
98
October 1999...........
97
October 2000...........
96
October 2001...........
95
October 2002...........
79
October 2003...........
46
October 2004...........
25
October 2005...........
13
October 2006...........
7
October 2007...........
4
October 2008...........
2
October 2009...........
1
October 2010...........
1
October 2011...........
*
October 2012...........
*
October 2013...........
*
October 2014...........
*
October 2015...........
*
October 2016...........
*
October 2017...........
*
October 2018...........
*
October 2019...........
*
October 2020...........
*
October 2021...........
*
October 2022...........
*
October 2023...........
*
October 2024...........
*
October 2025...........
*
October 2026...........
0
Weighted Average
Life (years) (1)..... 7.16
</TABLE>
- ------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass or Class.
S-94
<PAGE>
Interest accrued on the Class A, Class M and Offered Class B Certificates
will be reduced by the amount of any interest portions of Realized Losses
allocated to such Certificates as described under "Description of the
Certificates -- Interest" herein. The yield on the Class A Certificates (other
than the Class A-7 and Class A-8 Certificates), the Class M Certificates and the
Offered Class B Certificates will be less than the yield otherwise produced by
their respective Pass-Through Rates and the prices at which such Certificates
are purchased because the interest which accrues on the Mortgage Loans during
each month will not be passed through to Certificateholders until the 25th day
of the month following the end of such month (or if such 25th day is not a
business day, the following business day).
The Seller intends to file certain additional yield tables and other
computational materials with respect to one or more Subclasses or Class of
Offered Certificates with the Securities and Exchange Commission in a Report on
Form 8-K. See "Incorporation Of Certain Documents By Reference" in the
Prospectus. Such tables and materials will have been prepared by the Underwriter
at the request of certain prospective investors, based on assumptions provided
by, and satisfying the special requirements of, such investors. Such tables and
assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
HISTORIC LOSS EXPERIENCE OF SECURITIZED MORTGAGE LOANS
The historic experience regarding the cumulative amount of losses and the
frequency of liquidations experienced on securitized(1) conventional mortgage
loans having original terms to stated maturity of approximately 30 years ("30
Year Mortgage Loans") have varied based on the year of origination as set forth
below.
<TABLE>
<CAPTION>
LIQUIDATION LOSS
YEAR OF FREQUENCY SEVERITY
ORIGINATION PERCENTAGE(A) PERCENTAGES(B)
------------ --------------- -------------
<S> <C> <C>
1987............................................................. 0.61% 53.81%
1988............................................................. 8.03% 60.21%
1989............................................................. 9.52% 45.22%
1990............................................................. 5.33% 42.83%
1991............................................................. 3.13% 33.84%
1992............................................................. 0.94% 33.21%
1993............................................................. 0.23% 27.42%
1994............................................................. 0.09% 18.85%
1995............................................................. 0.02% 0.17%
1996............................................................. 0.00% 0.00%
</TABLE>
- ------------------------
(a) The liquidation frequency percentage is determined by dividing the original
principal balance of liquidated 30 Year Mortgage Loans originated during
such year by the original principal balance of 30 Year Mortgage Loans
originated during such year.
(b) The loss severity percentage is determined by dividing the amount of losses
resulting from liquidated 30 Year Mortgage Loans originated during such year
by the original principal balance of liquidated 30 Year Mortgage Loans
originated during such year.
The loss severity percentages for the more recent years of origination may
not be representative of the loss severity percentages in the future for the
indicated years of origination in part because the
- ------------------------
(1) Mortgage loans included in a mortgage pool underlying a series of The
Prudential Home Mortgage Securities Company, Inc.'s mortgage pass-through
certificates (a "PHMSC Pool") or mortgage loans included in a mortgage pool
underlying a series of NASCOR's mortgage pass-through certificates.
Currently, the 30 Year Mortgage Loans are primarily serviced or subserviced
by Norwest Mortgage, though prior to the PHMC Acquisition, PHMC was the
primary servicer of those 30 Year Mortgage Loans included in the PHMSC
Pools. Certain of the 30 Year Mortgage Loans are serviced by third-party
servicer unaffiliated with either Norwest Mortgage or PHMC.
S-95
<PAGE>
severity of loss on a liquidated mortgage loan is generally expected to increase
as the length of time increases from the initial delinquency of such mortgage
loan to the final disposition of the mortgaged property. In addition, it is
possible that because the more recent loss severity percentages resulted from
relatively low levels of liquidations (which do not include those mortgage loans
currently delinquent but not yet liquidated) such percentages may not be
representative of future loss severity percentages arising from the liquidation
of a larger number of mortgage loans. The frequency of liquidations of the
Mortgage Loans and the amount of loss experienced as a result thereof may vary
significantly from the historic experience set forth above in part because the
underwriting standards applied at origination of the 30 Year Mortgage Loans have
changed over time and may differ from those applied at origination of the
Mortgage Loans. Similarly, servicing practices with respect to delinquent 30
Year Mortgage Loans changed over time. In addition, delinquencies, foreclosures
and loan losses generally are expected to occur with increasing frequency after
the first full year of the life of a mortgage loan. Many factors contribute to
the severity of losses, particularly the length of time from the initial
delinquency of such mortgage loan to the final disposition of the mortgaged
property and the state in which the mortgaged property is located. The Seller
and Norwest Mortgage make no representation that the actual losses and
liquidation frequency experienced on the Mortgage Loans currently serviced by
Norwest Mortgage, on the Mortgage Loans generally (which include Mortgage Loans
serviced by Other Servicers) or on the Mortgage Loans originated by Norwest
Mortgage or a Norwest Mortgage Correspondent will in any way correspond to the
historic experience with respect to the 30 Year Mortgage Loans.
SENSITIVITY OF THE CLASS A-8 CERTIFICATES
THE YIELD TO AN INVESTOR IN THE CLASS A-8 CERTIFICATES WILL BE HIGHLY
SENSITIVE TO LIBOR AND TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE MORTGAGE LOANS, WHICH RATE MAY FLUCTUATE SIGNIFICANTLY FROM
TIME TO TIME. IN PARTICULAR, THERE MAY BE A MATERIAL NEGATIVE EFFECT ON THE
YIELD TO AN INVESTOR IN THE CLASS A-8 CERTIFICATES AS A RESULT OF SMALL
INCREASES IN LIBOR OR AS A RESULT OF FASTER THAN ANTICIPATED PRINCIPAL
PREPAYMENTS ON THE MORTGAGE LOANS. AN INVESTOR SHOULD FULLY CONSIDER THE
ASSOCIATED RISKS, INCLUDING THE RISK THAT AN INVESTOR IN THE CLASS A-8
CERTIFICATES MAY NOT FULLY RECOVER ITS INITIAL INVESTMENT.
Since there can be no assurance that the rate of LIBOR will correlate with
prevailing mortgage interest rates, it is possible that lower prevailing
mortgage rates, which might be expected to result in faster prepayments, could
occur concurrently with an increase in LIBOR. However, if, as generally
expected, higher mortgage rates and, accordingly, lower prepayment rates, were
to occur concurrently with an increase in LIBOR, interest would accrue on the
Class A-8 Certificates at a reduced rate at the same time that the rate of
distributions in reduction of the principal balance of the Class A-7
Certificates (which principal balance corresponds to the Class A-8 Notional
Amount) may be reduced. In such circumstances, an investor in the Class A-8
Certificates could have a significantly lower yielding instrument with a longer
weighted average life than anticipated.
To illustrate the significance of changes in LIBOR and prepayments on the
Class A-8 Certificates, the following table indicates the pre-tax yields to
maturity (on a corporate bond equivalent basis) under the assumptions specified
in the following paragraph at the different constant percentages of SPA and the
constant rates of LIBOR indicated. It is not likely that the Mortgage Loans will
prepay at a constant level of SPA until maturity or that all of the Mortgage
Loans will prepay at the same rate or that the rate of LIBOR will remain
constant. As discussed above, the timing of changes in the rate of prepayments
may significantly affect the total distributions received, the date of receipt
of such distributions and the actual yield to maturity to an investor in a Class
A-8 Certificate, even if the average rate of principal prepayments is consistent
with such investor's expectations. Moreover, the timing of changes in the rate
of LIBOR may affect the actual yield to maturity to an investor in a Class A-8
Certificate even if the average rate is consistent with such investor's
expectation.
S-96
<PAGE>
The following table has been prepared on the basis of the Structuring
Assumptions and the additional assumptions that (i) the aggregate purchase price
for the Class A-8 Certificates is approximately $1,521,300 plus accrued interest
thereon from October 25, 1996 to (but not including) October 30, 1996, (ii) such
purchase price is paid on October 30, 1996 and (iii) on the Rate Determination
Date occurring in November 1996 and each Rate Determination Date thereafter,
LIBOR is the rate specified. The Mortgage Loans will not have all of the
characteristics assumed above and there can be no assurance that the Mortgage
Loans will prepay at any of the constant rates shown in the tables or at any
other particular rate, that the pre-tax yields to maturity on the Class A-8
Certificates will correspond to any of the yields shown herein, that LIBOR will
correspond to the rates shown herein or that the aggregate purchase price of the
Class A-8 Certificates will be as assumed. The table does not constitute a
representation as to the correlation of any rate of LIBOR with any rate of
prepayments on the Mortgage Loans. Each investor must make an independent
decision as to the appropriate prepayment assumptions to be used and the
appropriate rates of LIBOR to be assumed in deciding whether or not to purchase
a Class A-8 Certificate.
The pre-tax yields to maturity set forth in the following table were
calculated by (i) determining the monthly discount rates which, when applied to
the assumed stream of cash flows to be paid on the Class A-8 Certificates would
cause the discounted present value of such assumed stream of cash flows to equal
an assumed aggregate purchase price of approximately $1,521,300 plus accrued
interest thereon from October 25, 1996 to (but not including) October 30, 1996
for the Class A-8 Certificates and (ii) converting such monthly rates to
corporate bond equivalent rates. Such calculation does not take into account the
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Class A-8 Certificates and consequently does not purport
to reflect the return on any investment in Class A-8 Certificates when such
reinvestment rates are considered.
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS A-8 CERTIFICATES
TO PREPAYMENTS AND LIBOR
<TABLE>
<CAPTION>
PERCENTAGES OF SPA
----------------------------------------------------------------------------
LIBOR 0% 100% 245% 375% 500% 750%
- ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
2.43750%....................................... 201.21% 194.65% 184.71% 175.32% 165.95% 146.85%
3.43750%....................................... 161.07% 154.43% 144.24% 134.50% 124.80% 105.33%
4.43750%....................................... 123.29% 116.45% 105.71% 95.28% 85.01% 64.89%
5.43750%....................................... 87.81% 80.57% 68.72% 57.06% 45.85% 24.74%
6.43750%....................................... 54.54% 46.57% 32.36% 18.46% 5.78% (16.75)%
7.43750%....................................... 23.15% 13.56% (6.67)% (24.91)% (40.01)% (64.51)%
8.43750%....................................... * * * * * *
</TABLE>
- ------------------------
* The pre-tax yield to maturity will be less than (99.99)%.
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS B-1 AND CLASS B-2 CERTIFICATES
Defaults on mortgage loans may be measured relative to a default standard or
model. The model used in this Prospectus Supplement, the standard default
assumption ("SDA"), represents an assumed rate of default each month relative to
the then-outstanding performing principal balance of a pool of new mortgage
loans. A default assumption of 100% SDA assumes constant default rates of 0.02%
per annum of the then-outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional 0.02% per
annum in each month thereafter until the 30th month. Beginning in the 30th month
and in each month thereafter through the 60th month of the life of the mortgage
loans, 100% SDA assumes a constant default rate of 0.60% per annum each month.
Beginning in the 61st month and in each month thereafter through the 120th month
of the life of the mortgage loans, 100% SDA assumes that the constant default
rate declines each month by 0.0095% per annum, and that the constant default
rate remains at 0.03% per annum in each month after the 120th month. For the
purposes of the following tables, it is assumed that there is no delay between
the default and liquidation of the mortgage loans. As used in the following
tables, "0% SDA" assumes default rates equal to 0% of SDA
S-97
<PAGE>
(no defaults). Correspondingly, "50% SDA" assumes default rates equal to 50% of
SDA, and so forth. SDA does not purport to be a historical description of
default experience or a prediction of the anticipated rate of default of any
pool of mortgage loans, including the Mortgage Loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class B-1 and Class B-2 Certificates to various rates of
prepayment and varying levels of aggregate Realized Losses. The tables set forth
below are based upon, among other things, the Structuring Assumptions (other
than the assumption that no defaults shall have occurred with respect to the
Mortgage Loans) and the additional assumptions that liquidations (other than
those scenarios indicated as 0% of SDA (no defaults)) occur monthly (other than
on a Due Date) at the percentages of SDA set forth in the table.
In addition, it was assumed that (i) Realized Losses on liquidations of 25%
or 50% of the outstanding principal balance of such liquidated Mortgage Loans,
as indicated in the tables below (referred to as a "Loss Severity Percentage")
will occur at the time of liquidation, (ii) there are no Special Hazard Losses,
Fraud Losses or Bankruptcy Losses, (iii) the Class B-1 and Class B-2
Certificates are purchased on October 30, 1996 at assumed purchase prices equal
to 100.25% and 97.00%, respectively, of the Class B Subclass Principal Balances
thereof plus accrued interest from October 1, 1996 to (but not including)
October 30, 1996 and (iv) that there were no delinquencies on the Mortgage
Loans.
The actual Mortgage Loans ultimately included in the Trust Estate will not
have the characteristics assumed in preparing the tables and it is unlikely that
they will prepay or liquidate at any of the rates specified. The assumed
percentages of SDA and SPA shown in the tables below are for illustrative
purposes only and the Seller makes no representations with respect to the
reasonableness of such assumptions or that the actual rates of prepayment and
liquidation and loss severity experience of the Mortgage Loans will in any way
correspond to any of the assumptions made herein. Consequently, there can be no
assurance that the pre-tax yield to maturity of the Class B-1 and Class B-2
Certificates will correspond to any of the pre-tax yields to maturity shown
below.
The pre-tax yields to maturity set forth in the following tables were
calculated by determining the monthly discount rates which, when applied to the
assumed streams of cash flows to be paid on the Class B-1 and Class B-2
Certificates, would cause the discounted present value of such assumed streams
of cash flows to equal the aggregate assumed purchase prices of the Class B-1
and Class B-2 Certificates set forth below. In all cases, monthly rates were
then converted to the semi-annual corporate bond equivalent yields shown below.
Implicit in the use of any discounted present value or internal rate of return
calculations such as these is the assumption that intermediate cash flows are
reinvested at the discount rate or internal rate of return. Thus, these
calculations do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as distributions on the
Class B-1 and Class B-2 Certificates. Consequently, these yields do not purport
to reflect the total return on any investment in the Class B-1 and Class B-2
Certificates when such reinvestment rates are considered.
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-1
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGES OF SPA
PERCENTAGE SEVERITY ---------------------------------------------
OF SDA PERCENTAGE 0% 100% 245% 375% 500% 750%
- ---------------------- ---------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
0%.................. N/A 8.05% 8.04% 8.02% 8.01% 8.00% 7.98%
50%.................. 25% 8.05% 8.03% 8.02% 8.01% 8.00% 7.98%
50%.................. 50% 8.06% 8.03% 8.02% 8.01% 8.00% 7.98%
100%.................. 25% 8.06% 8.03% 8.02% 8.01% 8.00% 7.98%
100%.................. 50% 8.06% 8.04% 8.02% 8.01% 8.00% 7.98%
150%.................. 25% 8.06% 8.03% 8.02% 8.01% 8.00% 7.98%
150%.................. 50% 5.80% 7.96% 8.02% 8.01% 8.00% 7.99%
200%.................. 25% 8.06% 8.03% 8.02% 8.01% 8.00% 7.98%
200%.................. 50% (9.52)% 4.45% 7.92% 8.01% 8.00% 7.99%
</TABLE>
S-98
<PAGE>
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-2
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
PERCENTAGE LOSS PERCENTAGES OF SPA
OF SEVERITY ---------------------------------------------------
SDA PERCENTAGE 0% 100% 245% 375% 500% 750%
- -- ---------- ------- ------- ------- ----- ----- -----
<C> <C> <C> <C> <C> <C> <C>
0%... N/A 8.41% 8.45% 8.50% 8.53% 8.56% 8.62%
50%... 25% 8.39% 8.46% 8.50% 8.53% 8.56% 8.62%
50%... 50% 8.37% 8.46% 8.50% 8.53% 8.56% 8.62%
100%... 25% 8.38% 8.46% 8.50% 8.53% 8.56% 8.62%
100%... 50% 3.33% 6.64% 8.50% 8.53% 8.56% 8.62%
150%... 25% 7.58% 8.42% 8.50% 8.54% 8.56% 8.62%
150%... 50% (26.51)% (16.89)% 3.96% 7.51% 8.56% 8.62%
200%... 25% 3.75% 6.80% 8.51% 8.53% 8.56% 8.62%
200%... 50% (40.45)% (35.17)% (22.46)% 1.09% 6.04% 8.61%
</TABLE>
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-Off
Date.
AGGREGATE REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGES OF SPA
PERCENTAGE SEVERITY ---------------------------------------------
OF SDA PERCENTAGE 0% 100% 245% 375% 500% 750%
- ---------------------- ---------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
50%.................. 25% 0.50% 0.39% 0.29% 0.23% 0.19% 0.13%
50%.................. 50% 0.99% 0.78% 0.58% 0.46% 0.37% 0.26%
100%.................. 25% 0.98% 0.77% 0.58% 0.46% 0.37% 0.25%
100%.................. 50% 1.96% 1.55% 1.15% 0.91% 0.74% 0.51%
150%.................. 25% 1.46% 1.15% 0.86% 0.68% 0.55% 0.38%
150%.................. 50% 2.92% 2.30% 1.72% 1.36% 1.11% 0.76%
200%.................. 25% 1.93% 1.52% 1.14% 0.90% 0.73% 0.51%
200%.................. 50% 3.86% 3.05% 2.28% 1.81% 1.47% 1.01%
</TABLE>
Notwithstanding the assumed percentages of SDA, Loss Severity Percentages
and prepayment rates reflected in the preceding tables, it is highly unlikely
that the Mortgage Loans will be prepaid or that the Realized Losses will be
incurred according to one particular pattern. For this reason, and because the
timing of cash flows is critical to determining yields, the pre-tax yields to
maturity on the Class B-1 and Class B-2 Certificates are likely to differ from
those shown in the tables. There can be no assurance that the Mortgage Loans
will prepay at any particular rate or that Realized Losses will be incurred at
any particular level or that the yields on the Class B-1 and Class B-2
Certificates will conform to any of the yields described herein. Moreover, the
various remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the preceding tables at the
various constant percentages of SPA specified, even if the weighted average
remaining term to maturity of the Mortgage Loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment and Realized Losses under a
variety of scenarios. Investors in Class B-1 and Class B-2 Certificates should
fully consider the risk that Realized Losses on the Mortgage Loans could result
in the failure of such investors to fully recover their investments.
S-99
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Series 1996-5 Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be dated as of the date of initial issuance of the Series
1996-5 Certificates (the "Pooling and Servicing Agreement") among the Seller,
the Master Servicer, the Trust Administrator and the Trustee. Reference is made
to the Prospectus for important additional information regarding the terms and
conditions of the Pooling and Servicing Agreement and the Series 1996-5
Certificates. See "Description of the Certificates," "Servicing of the Mortgage
Loans" and "The Pooling and Servicing Agreement" in the Prospectus.
The Trust Estate created pursuant to the Pooling and Servicing Agreement
will consist of (i) the Mortgage Loans as described under "Description of the
Mortgage Loans," (ii) such assets as from time to time are identified as
deposited in any account held for the benefit of the Certificateholders, (iii)
any Mortgaged Properties acquired on behalf of the Certificateholders by
foreclosure or by deed in lieu of foreclosure after the date of original
issuance of the Certificates and (iv) the rights of the Trust Administrator to
receive the proceeds of all insurance policies and performance bonds, if any,
required to be maintained pursuant to the Pooling and Servicing Agreement.
DISTRIBUTIONS
Distributions (other than the final distribution in retirement of the
Offered Certificates of each Class or Subclass) will be made by check mailed to
the address of the person entitled thereto as it appears on the Certificate
Register. However, with respect to any holder of an Offered Certificate
evidencing at least a $5,000,000 initial principal balance, distributions will
be made on the Distribution Date by wire transfer in immediately available
funds, provided that the Master Servicer, or the paying agent acting on behalf
of the Master Servicer, shall have been furnished with appropriate wiring
instructions not less than seven business days prior to the related Distribution
Date. The final distribution in respect of each Class or Subclass of Offered
Certificates will be made only upon presentation and surrender of the related
Certificate at the office or agency appointed by the Trust Administrator
specified in the notice of final distribution with respect to the related
Subclass or Class.
Unless Definitive Certificates are issued as described above, the Master
Servicer and the Trust Administrator will treat DTC as the Holder of the
Book-Entry Certificates for all purposes, including making distributions thereon
and taking actions with respect thereto. DTC will make book-entry transfers
among its participants with respect to the Book-Entry Certificates; it will also
receive distributions on the Book-Entry Certificates from the Trust
Administrator and transmit them to participants for distribution to Beneficial
Owners or their nominees.
VOTING
With respect to any provisions of the Pooling and Servicing Agreement
providing for the action, consent or approval of the holders of all Series
1996-5 Certificates evidencing specified Voting Interests in the Trust Estate,
the holders of the Class A Certificates will collectively be entitled to a
percentage (the "Class A Voting Interest") of the aggregate Voting Interest
represented by all Series 1996-5 Certificates equal to the sum of (A) the
product of (i) the then applicable Class A Percentage and (ii) the ratio
obtained by dividing the Pool Balance (Non-PO Portion) by the sum of the Pool
Balance (Non-PO Portion) and the Pool Balance (PO Portion) (the "Non-PO Voting
Interest") and (B) the Pool Balance (PO Portion) divided by the sum of the Pool
Balance (Non-PO Portion) and the Pool Balance (PO Portion); the holders of the
Class M Certificates will collectively be entitled to the then-applicable
percentage of the aggregate Voting Interest represented by all Series 1996-5
Certificates equal to the product of (i) the ratio obtained by dividing the
Class M Principal Balance by the sum of the Class A Non-PO Principal Balance,
the Class M Principal Balance and the Class B Principal Balance and (ii) the
Non-PO Voting Interest and the holders of the Class B Certificates will
collectively be entitled to the balance of the aggregate Voting Interest
represented by all Series 1996-5 Certificates (the "Class B Voting Interest").
The aggregate Voting Interest of each Subclass of Class A Certificates (other
than the Class A-8 Certificates) on any date will be equal to the product of (a)
99% of the Class A Voting Interest on such date represented by clause (A) above
and (b) the fraction obtained by dividing the
S-100
<PAGE>
Class A Subclass Principal Balance of such Subclass less, in the case of the
Class A-16 Certificates, the Component Principal Balance of the Class A-16 PO
Component on such date by the Class A Non-PO Principal Balance on such date. The
aggregate Voting Interest of the Class A-8 Certificates on any date will be
equal to 1% of the Class A Voting Interest represented by clause (A). In
addition to the Voting Interest of the Class A-16 Certificates determined in
accordance with the second preceding sentence, the Class A-16 Certificates will
be entitled to the Class A Voting Interest represented by clause (B) above. The
aggregate Voting Interest of each Subclass of Class B Certificates on any date
will be equal to the product of (a) the Class B Voting Interest on such date and
(b) the fraction obtained by dividing the Class B Subclass Principal Balance of
such Subclass on such date by the Class B Principal Balance on such date. Each
Certificateholder of a Class or Subclass will have a Voting Interest equal to
the product of the Voting Interest to which such Class or Subclass is
collectively entitled and the Percentage Interest in such Class or Subclass
represented by such holder's Certificates. With respect to any provisions of the
Pooling and Servicing Agreement providing for action, consent or approval of
each Class or Subclass of Certificates or specified Subclasses of Certificates,
each Certificateholder of a Subclass will have a Voting Interest in such Class
or Subclass equal to such holder's Percentage Interest in such Class or
Subclass. Unless Definitive Certificates are issued as described above,
Beneficial Owners of Book-Entry Certificates may exercise their voting rights
only through Participants.
TRUSTEE
The Trustee for the Series 1996-5 Certificates will be Firstar Trust
Company, a banking corporation organized under the laws of the State of
Wisconsin. The Corporate Trust Office of the Trustee is located at 615 East
Michigan Street, Lewis Center, 4th Floor, Milwaukee, Wisconsin 53202. The
Trustee will be responsible for monitoring the compliance of the Master Servicer
with the Pooling and Servicing Agreement and the Underlying Servicing
Agreements. See "The Pooling and Servicing Agreement -- The Trustee" in the
Prospectus.
TRUST ADMINISTRATOR
First Union National Bank of North Carolina will act as Trust Administrator
for the Series 1996-5 Certificates. The corporate trust office of the Trust
Administrator is located at 230 South Tryon Street, Charlotte, North Carolina
28288. The Trust Administrator will perform certain administrative functions on
behalf of the Trustee and will act as the initial paying agent, certificate
registrar and custodian. In addition, the Trust Administrator will be required
to make Periodic Advances to the limited extent described herein with respect to
the Mortgage Loans serviced by Norwest Mortgage if Norwest Mortgage, as
Servicer, fails to make a Periodic Advance required by the related Underlying
Servicing Agreement. See "Description of the Certificates -- Periodic Advances"
herein.
MASTER SERVICER
Norwest Bank will act as "Master Servicer" of the Mortgage Loans and, in
that capacity, will supervise the servicing of the Mortgage Loans, cause the
Mortgage Loans to be serviced in the event a Servicer is terminated and a
successor servicer is not appointed, provide certain reports to the Trust
Administrator regarding the Mortgage Loans and the Certificates and make
Periodic Advances to the limited extent described herein with respect to the
Mortgage Loans if a Servicer other than Norwest Mortgage fails to make a
Periodic Advance required by the related Underlying Servicing Agreement. The
Master Servicer will be entitled to a "Master Servicing Fee" payable monthly
equal to the product of (i) 1/12th of 0.02% (the "Master Servicing Fee Rate")
and (ii) the aggregate Scheduled Principal Balances of the Mortgage Loans as of
the first day of each month. The Master Servicer will pay all administrative
expenses to the Trust Estate subject to reimbursement as described under "Master
Servicer" in the Prospectus.
SPECIAL SERVICING AGREEMENTS
The Pooling and Servicing Agreement may permit the Master Servicer to enter
into a special servicing agreement with an unaffiliated holder of a Subclass of
Class B Certificates or of a class of securities representing interests in the
Class B Certificates and/or other subordinated mortgage pass-
S-101
<PAGE>
through certificates. Pursuant to such an agreement, such holder may instruct
the Master Servicer to instruct the Servicers, to the extent provided in the
applicable Underlying Servicing Agreement to commence or delay foreclosure
proceedings with respect to delinquent Mortgage Loans. Such commencement or
delay at such holder's direction will be taken by the Master Servicer only after
such holder deposits a specified amount of cash with the Master Servicer. Such
cash will be available for distribution to Certificateholders if Liquidation
Proceeds are less than they otherwise may have been had the Servicers acted
pursuant to their normal servicing procedures.
OPTIONAL TERMINATION
At its option, the Seller may purchase from the Trust Estate all of the
Mortgage Loans, and thereby effect early retirement of the Series 1996-5
Certificates, on any Distribution Date when the Pool Scheduled Principal Balance
is less than 10% of the Cut-Off Date Aggregate Principal Balance. Any such
purchase will be made only in connection with a "qualified liquidation" of each
of the Upper-Tier REMIC and Lower-Tier REMIC within the meaning of Section
860F(a)(4)(A) of the Code. The purchase price will generally be equal to the
unpaid principal balance of each Mortgage Loan plus the fair market value of
other property (including any Mortgaged Property title to which has been
acquired by the Trust Estate ("REO Property")) in the Trust Estate plus accrued
interest. In the event the Trust Estate is liquidated as described above,
holders of the Certificates, to the extent funds are available, will receive the
unpaid principal balance of their Certificates and any accrued and unpaid
interest thereon. The amount, if any, remaining in the Certificate Account after
the payment of all principal and interest on the Certificates and expenses of
the Lower-Tier REMIC will be distributed to the holder of the Class A-LR
Certificate. See "Description of the Certificates -- Additional Rights of the
Class A-R and Class A-LR Certificateholders" herein and "The Pooling and
Servicing Agreement -- Termination; Purchase of Mortgage Loans" in the
Prospectus. The exercise of the foregoing option will be in the Seller's sole
discretion. Without limitation, the Seller may enter into agreements with third
parties to (i) exercise such option at the direction of such third party or (ii)
forbear from the exercise of such option.
SERVICING OF THE MORTGAGE LOANS
Norwest Mortgage will service approximately 93.24% (by Cut-Off Date
Aggregate Principal Balance) of the Mortgage Loans and the other servicers
listed below (the "Other Servicers", and collectively with Norwest Mortgage, the
"Servicers") will service the balance of the Mortgage Loans, as indicated, each
pursuant to a separate Underlying Servicing Agreement. The rights to enforce the
related Servicer's obligations under each Underlying Servicing Agreement with
respect to the related Mortgage Loans will be assigned to the Trust
Administrator, on behalf of the Trustee, for the benefit of Certificateholders.
Among other things, the Servicers are obligated under certain circumstances to
advance delinquent payments of principal and interest with respect to the
Mortgage Loans. See "Servicing of the Mortgage Loans" in the Prospectus.
S-102
<PAGE>
THE SERVICERS
The Mortgage Loans initially will be serviced by the following entities:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF CUT-OFF
DATE AGGREGATE PRINCIPAL BALANCE
NAME OF SERVICER SERVICED
- --------------------------------------------------------------------- ---------------------------------
<S> <C>
Norwest Mortgage, Inc. .............................................. 93.24%
First Bank National Assoc. .......................................... 2.18%
SunTrust Mortgage, Inc. ............................................. 1.68%
HomeSide Lending..................................................... 1.25%
Citicorp Mortgage, Inc. ............................................. 0.53%
BankAmerica Mortgage................................................. 0.42%
First Union Mortgage Corp. .......................................... 0.35%
National City Mortgage Co. .......................................... 0.18%
Countrywide Home Loans, Inc.......................................... 0.10%
Cimarron Mortgage Company............................................ 0.07%
-------
Total............................................................ 100.00%
-------
-------
</TABLE>
Certain information with respect to the loan servicing experience of Norwest
Mortgage is set forth under "Delinquency and Foreclosure Experience."
The Mortgage Loans serviced by Norwest Mortgage are serviced either from
Norwest Mortgage's servicing center located in Frederick, Maryland (the "Norwest
Frederick-Serviced Loans") or from one of several other regional servicing
centers (the "Norwest Non-Frederick-Serviced Loans"). As of the Cut-Off Date, it
is expected that 447 of the Mortgage Loans in the Trust Estate, representing
approximately 27.38% of the Cut-Off Date Aggregate Principal Balance of the
Mortgage Loans will be Norwest Frederick-Serviced Loans and 880 of the Mortgage
Loans in the Trust Estate, representing approximately 65.86% of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans will be Norwest
Non-Frederick-Serviced Loans.
SERVICER CUSTODIAL ACCOUNTS
Each Servicer is required to establish and maintain a custodial account for
principal and interest (each such account, a "Servicer Custodial Account"), into
which it will deposit all collections of principal (including principal
prepayments and Liquidation Proceeds in respect of principal, if any) on any
Mortgage Loan that such Servicer services, interest (net of Servicing Fees) on
any Mortgage Loan that such Servicer services, related insurance proceeds,
advances made from the Servicer's own funds and the proceeds of any purchase of
a related Mortgage Loan for breach of a representation or warranty or the sale
of a Mortgaged Property in connection with liquidation of the related Mortgage
Loan. All Servicer Custodial Accounts are required to be held in a depository
institution and invested in the manner specified in the related Underlying
Servicing Agreement. Funds in such accounts generally must be held separate and
apart from the assets of the Servicer and generally may not be commingled with
funds held by a Servicer with respect to mortgage loans other than the Mortgage
Loans.
Not later than the Remittance Date, the Servicers are obligated to remit to
the Certificate Account all amounts on deposit in the Servicer Custodial
Accounts as of the close of business on the business day preceding the
Remittance Date other than the following:
(a) amounts received as late payments of principal or interest
respecting which such Servicer previously has made one or more unreimbursed
Periodic Advances;
(b) any unreimbursed Periodic Advances of such Servicer with respect to
Liquidated Loans;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent the applicable Servicing Fee, as adjusted where
applicable in respect of Month End Interest as described under "Description
of the Certificates -- Interest";
S-103
<PAGE>
(d) all amounts representing scheduled payments of principal and
interest due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e) unless the applicable Underlying Servicing Agreement provides for
daily remittances of Unscheduled Principal Receipts, as described below
under "-- Anticipated Changes in Servicing," all Unscheduled Principal
Receipts received by such Servicer after the applicable Unscheduled
Principal Receipt Period with respect thereto specified in the applicable
Underlying Servicing Agreement, and all related payments of interest on such
amounts;
(f) all amounts representing certain expenses reimbursable to such
Servicer and any other amounts permitted to be retained by such Servicer or
withdrawn by such Servicer from the Servicer Custodial Account pursuant to
the applicable Underlying Servicing Agreement;
(g) all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees which such Servicer is entitled to retain as
additional servicing compensation; and
(h) reinvestment earnings on payments received in respect of the
Mortgage Loans or on other amounts on deposit in the related Servicer
Custodial Account.
UNSCHEDULED PRINCIPAL RECEIPTS
The Pooling and Servicing Agreement specifies, as to each type of
Unscheduled Principal Receipt, a period (as to each type of Unscheduled
Principal Receipt, the "Unscheduled Principal Receipt Period") during which all
Unscheduled Principal Receipts of such type received by the Servicer will be
distributed to Certificateholders on the related Distribution Date. Each
Unscheduled Principal Receipt Period will either be (i) the one month period
ending on the last day of the calendar month preceding the month in which the
applicable Remittance Date occurs (such period a "Prior Month Receipt Period")
or (ii) the one month period ending on the day preceding the Determination Date
preceding the applicable Remittance Date (such period a "Mid-Month Receipt
Period").
With respect to the Norwest Frederick-Serviced Loans, the Unscheduled
Principal Receipt Period with respect to all types of Unscheduled Principal
Receipts is a Mid-Month Receipt Period. With respect to the Norwest
Non-Frederick-Serviced Loans and Mortgage Loans serviced by Other Servicers, the
Unscheduled Principal Receipt Period with respect to all types of Unscheduled
Principal Receipts is a Prior Month Receipt Period.
ANTICIPATED CHANGES IN SERVICING
CHANGES IN TIMING OF REMITTANCES OF UNSCHEDULED PRINCIPAL RECEIPTS IN FULL
AND ELIMINATION OF MONTH END INTEREST. The Pooling and Servicing Agreement will
provide that the Master Servicer may (but is not required), from time to time
and without the consent of any Certificateholder, the Trustee or the Trust
Administrator, require Norwest Mortgage as Servicer under the related Underlying
Servicing Agreement to, or enter into an amendment to any applicable Underlying
Servicing Agreement to require any Other Servicer to, remit Unscheduled
Principal Receipts in full to the Master Servicer for deposit into the
Certificate Account daily on a specified business day following receipt thereof
which will generally result in a deposit earlier than on the following
Remittance Date. In conjunction with any such change, the applicable Servicer
would be relieved of its obligation to remit Month End Interest and certain
other conforming changes may be made. Such changes would have an effect on the
amount of Compensating Interest as described herein under the heading
"Description of the Certificates -- Interest." Further, the Pooling and
Servicing Agreement will provide that the Master Servicer may (but is not
required to), without the consent of any Certificateholder, the Trustee or the
Trust Administrator, require Norwest Mortgage or any successor thereto under the
applicable Underlying Servicing Agreement to make remittances to the Certificate
Account (other than any remittances which are required to be made daily) on the
18th day of each month, or if such 18th day is not a business day, on the
preceding business day. No assurance can be given as to the timing of any such
changes or that any such changes will occur.
S-104
<PAGE>
CHANGES IN UNSCHEDULED PRINCIPAL RECEIPT PERIOD. The Pooling and Servicing
Agreement will provide that the Master Servicer may (but is not required to),
from time to time and without the consent of any Certificateholder, the Trustee
or the Trust Administrator, (i) direct Norwest Mortgage as Servicer under the
related Underlying Servicing Agreement to change the Unscheduled Principal
Receipt Period applicable to any type of Unscheduled Principal Receipt within
the parameters described in (i), (ii) and (iii) below or (ii) with respect to
any Other Servicer, enter into an amendment to any applicable Underlying
Servicing Agreement for the purpose of changing the Unscheduled Principal
Receipt Period applicable to any type of Unscheduled Principal Receipt within
the parameters described in (iv) below and making any necessary conforming
changes incident thereto. In connection therewith, (i) the Unscheduled Principal
Receipt Period for the Norwest Non-Frederick-Serviced Loans may be changed (to
achieve consistency with the Norwest Frederick-Serviced Loans) to a Mid-Month
Receipt Period with respect to all types of Unscheduled Principal Receipts; (ii)
the Unscheduled Principal Receipt Period for the Norwest Non-Frederick-Serviced
Loans may be changed to achieve an Unscheduled Principal Receipt Period regime
(the "Target Regime") under which the Unscheduled Principal Receipt Period with
respect to partial Unscheduled Principal Receipts would be a Prior Month Receipt
Period and the Unscheduled Principal Receipt Period with respect to Unscheduled
Principal Receipts in full would be a Mid-Month Receipt Period; (iii) the
Unscheduled Principal Receipt Period for the Norwest Frederick-Serviced Loans
may be changed to the Target Regime; and (iv) the Unscheduled Principal Receipt
Periods for the Mortgage Loans serviced by Other Servicers may be changed to the
Target Regime.
Because Unscheduled Principal Receipts will result in interest shortfalls to
the extent that they are not distributed to Certificateholders in the month in
which they are received by the applicable Servicer, changing the applicable
Unscheduled Principal Receipt Period from a Mid-Month Receipt Period to a Prior
Month Receipt Period may have the effect of increasing the amount of interest
shortfalls with respect to the applicable type of Unscheduled Principal Receipt.
Conversely, changing the applicable Unscheduled Principal Receipt Period from a
Prior Month Receipt Period to a Mid-Month Receipt Period may decrease the amount
of interest shortfalls with respect to the applicable type of Unscheduled
Principal Receipt. See "Description of the Certificates -- Interest." No
assurance can be given as to the timing of any change to any Unscheduled
Principal Receipt Period or that any such changes will occur.
FIXED RETAINED YIELD; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
A fixed percentage of the interest on each Mortgage Loan (the "Fixed
Retained Yield") with a per annum Mortgage Interest Rate greater than (i) the
sum of (a) 8.00%, (b) the Servicing Fee Rate and (c) the Master Servicing Fee
Rate, which will be determined on a loan by loan basis and will equal the
Mortgage Interest Rate on each Mortgage Loan minus the rate described in clause
(i), will not be included in the Trust Estate. There will be no Fixed Retained
Yield on any Mortgage Loan with a Mortgage Interest Rate equal to or less than
the rate described in clause (i). See "Servicing of the Mortgage Loans -- Fixed
Retained Yield, Servicing Compensation and Payment of Expenses" in the
Prospectus for further information regarding Fixed Retained Yield.
The primary compensation payable to each of the Servicers is the aggregate
of the Servicing Fees applicable to the related Mortgage Loans. The Servicing
Fee applicable to each Mortgage Loan is expressed as a fixed percentage (the
"Servicing Fee Rate") of the scheduled principal balance (as defined in the
Underlying Servicing Agreements) of such Mortgage Loan as of the first day of
each month. The Servicing Fee Rate for each Mortgage Loan will be a fixed
percentage rate per annum. The Servicing Fee Rate for each Mortgage Loan is
0.25% per annum. In addition to the Servicing Fees, late payment fees, loan
assumption fees and prepayment fees with respect to the Mortgage Loans, and any
interest or other income earned on collections with respect to the Mortgage
Loans pending remittance to the Certificate Account, will be paid to, or
retained by, the Servicers as additional servicing compensation.
S-105
<PAGE>
The Master Servicer will pay all routine expenses, including fees of the
Trustee and the Trust Administrator incurred in connection with its
responsibilities under the Pooling and Servicing Agreement, subject to certain
rights of reimbursement as described in the Prospectus. The servicing fees and
other expenses of the Trust Fund will be allocated to holders of the Class A-R
and Class A-LR Certificates, respectively who are individuals, estates or trusts
(whether such Certificate is held directly or through certain pass-through
entities) as additional gross income without a corresponding distribution of
cash, and any such investor (or its owners, in the case of a pass-through
entity) may be limited in its ability to deduct such expenses for regular tax
purposes and may not be able to deduct such expenses to any extent for
alternative minimum tax purposes. Unless and until applicable authority provides
otherwise, the Seller intends to treat all such expenses as incurred by the
Lower-Tier REMIC and, therefore, as allocable to the holder of the Class A-LR
Certificate. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Limitations on Deduction of Certain
Expenses" in the Prospectus.
SERVICER DEFAULTS
The Trustee will have the right pursuant to the Underlying Servicing
Agreements to terminate a Servicer in certain events, including the breach by
such Servicer of any of its material obligations under its Underlying Servicing
Agreement. In the event of such termination, (i) the Trustee may enter into a
substitute Underlying Servicing Agreement with the Master Servicer or, at the
Master Servicer's nomination, another servicing institution acceptable to the
Trustee and each Rating Agency; and (ii) the Master Servicer shall assume
certain of the Servicer's servicing obligations under such Underlying Servicing
Agreement, including the obligation to make Periodic Advances (limited as
provided herein under the heading "Pooling and Servicing Agreement -- Periodic
Advances"), until such time as a successor servicer is appointed. Any successor
Servicer, including the Master Servicer or the Trustee, will be entitled to
compensation arrangements similar to those provided to the Servicer. See
"Servicing of the Mortgage Loans -- Fixed Retained Yield, Servicing Compensation
and Payment of Expenses" in the Prospectus.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft as to the anticipated material federal income tax consequences of the
purchase, ownership and disposition of the Offered Certificates.
The Trust Estate will consist of two segregated asset groupings, each of
which will qualify as a REMIC for federal income tax purposes. One REMIC (the
"Lower-Tier REMIC") will issue certain uncertificated interests (each, a
"Lower-Tier REMIC Regular Interest"), each of which will be designated as a
regular interest in the Lower-Tier REMIC, and the Class A-LR Certificate, which
will be designated as the residual interest in the Lower-Tier REMIC. The assets
of the Lower-Tier REMIC will include the Mortgage Loans, together with the
amounts held by the Master Servicer in a separate account in which collections
on the Mortgage Loans will be deposited (the "Certificate Account"), the hazard
insurance policies and primary mortgage insurance policies, if any, relating to
the Mortgage Loans and any property that secured a Mortgage Loan that is
acquired by foreclosure or deed in lieu of foreclosure.
The second REMIC (the "Upper-Tier REMIC") will issue all Subclasses of the
Class A Certificates (other than the Class A-LR Certificate), the Class M
Certificates and all Subclasses of the Class B Certificates. The Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8,
Class A-9, Class A-10, Class A-11, Class A-12, Class A-13, Class A-14, Class
A-15 and Class A-17 Certificates, the Class M Certificates and the Class B-1 and
Class B-2 Certificates (collectively, the "Regular Certificates"), together with
the Class A-16 Accrual Component, the Class A-16 Accretion Directed Component,
the Class A-16 PAC Component, the Class A-16 IO Component, the Class A-16 TAC
Component, the Class A-16 PO Component and the Class B-3, Class B-4, and Class
B-5 Certificates, will be designated as regular interests in the Upper-Tier
REMIC, and the Class A-R Certificate
S-106
<PAGE>
will be designated as the residual interest in the Upper-Tier REMIC. The regular
interests and the residual interest in the Upper-Tier REMIC are referred to
herein collectively as the "Upper-Tier Certificates." The Class A-R and Class
A-LR Certificates are "Residual Certificates" for purposes of the Prospectus.
The assets of the Upper-Tier REMIC will include the uncertificated Lower-Tier
REMIC Regular Interests and a separate account in which distributions on the
uncertificated Lower-Tier REMIC Regular Interests will be deposited. The
aggregate amount distributed to the holders of the Upper-Tier Certificates,
payable from such separate account, will be equal to the aggregate distributions
in respect of the Mortgage Loans on the uncertificated Lower-Tier REMIC Regular
Interests.
The Offered Certificates will be treated as "qualifying real property loans"
for mutual savings banks and domestic building and loan associations, "loans ...
secured by an interest in real property which is ... residential real property"
for domestic building and loan associations, and "real estate assets" for real
estate investment trusts, to the extent described in the Prospectus.
REGULAR CERTIFICATES
The Regular Certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial Owners (or in the case
of Definitive Certificates, holders) of the Regular Certificates will be
required to report income on such Certificates in accordance with the accrual
method of accounting.
It is anticipated that the Class A-4, Certificates will be issued with
original issue discount in an amount equal to the excess of the initial
principal balance of such Subclasses (plus five days of interest at the
pass-through rate thereon) over their issue price (including accrued interest).
It is further anticipated that the Class A-1, Class A-3, Class A-5, Class A-6,
Class A-9, Class A-10, Class A-11, Class A-13, and Class A-17 Certificates will
be issued at a premium and that the Class A-2, Class A-7, Class A-12, Class
A-14, Class A-15, Class M, Class B-1 and Class B-2 Certificates will be issued
with DE MINIMIS original issue discount for federal income tax purposes. The
Class A-16, Class B-3, Class B-4 and Class B-5 Certificates, which are not
offered hereby, also will be treated as issued with original issue discount for
federal income tax purposes.
Although unclear for federal income tax purposes, it is anticipated that the
Class A-8 Certificates will be considered to be issued with original issue
discount in an amount equal to the excess of all distributions of interest
expected to be received thereon over their issue price (including accrued
interest). Any "negative" amounts of original issue discount on the Class A-8
Certificates attributable to rapid prepayments with respect to the Mortgage
Loans will not be deductible currently, but may be offset against future
positive accruals of original issue discount, if any. Finally, a holder of a
Class A-8 Certificate may be entitled to a loss deduction to the extent it
becomes certain that such holder will not recover a portion of its basis in such
Certificate, assuming no further prepayments. In the alternative, it is possible
that rules similar to the "noncontingent bond method" of the contingent interest
rules in the OID Regulations, as amended on June 12, 1996, may be promulgated
with respect to the Class A-8 Certificates. See "Certain Federal Income Taxes --
Federal Income Tax Consequences for REMIC Certificates -- Taxation of Regular
Certificates -- Original Issue Discount" in the Prospectus. Under the
noncontingent bond method, if the interest payable for any period is greater or
less than the amount projected, the amount of income included for that period
would be either increased or decreased accordingly. Any net reduction in the
income accrual for the taxable year below zero (a "Negative Adjustment") would
be treated by a Certificateholder as ordinary loss to the extent of prior income
accruals and would be carried forward to offset future interest accruals. At
maturity, any remaining Negative Adjustment would be treated as a loss on
retirement of the Certificate. The legislative history of relevant Code
provisions indicates, however, that negative amounts of original issue discount
on an instrument such as a REMIC regular interest may not give rise to taxable
losses in any accrual period prior to the instrument's disposition or
retirement. Thus, it is not clear whether any losses resulting from a Negative
Adjustment would be recognized currently or be carried forward until disposition
or retirement of the debt obligation.
S-107
<PAGE>
The Prepayment Assumption (as defined in the Prospectus) that the Master
Servicer intends to use in determining the rate of accrual of original issue
discount will be calculated using 245% SPA. No representation is made as to the
actual rate at which the Mortgage Loans will prepay.
RESIDUAL CERTIFICATES
The holders of the Class A-R and Class A-LR Certificates must include the
taxable income or loss of the Upper-Tier REMIC and Lower-Tier REMIC,
respectively, in determining their federal taxable income. The Class A-R and
Class A-LR Certificates will remain outstanding for federal income tax purposes
until there are no Certificates of any other Class outstanding. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT THE CLASS A-R AND CLASS A-LR CERTIFICATEHOLDERS'
REMIC TAXABLE INCOME AND THE TAX LIABILITY THEREON MAY EXCEED, AND MAY
SUBSTANTIALLY EXCEED, CASH DISTRIBUTIONS TO SUCH HOLDERS DURING CERTAIN PERIODS,
IN WHICH EVENT, THE HOLDER THEREOF MUST HAVE SUFFICIENT ALTERNATIVE SOURCES OF
FUNDS TO PAY SUCH TAX LIABILITY. Furthermore, it is anticipated that all or a
substantial portion of the taxable income of the Upper-Tier REMIC and Lower-Tier
REMIC includible by the holders of the Class A-R and Class A-LR Certificates,
respectively, will be treated as "excess inclusion" income, resulting in (i) the
inability of such holders to use net operating losses to offset such income from
the respective REMIC, (ii) the treatment of such income as "unrelated business
taxable income" to certain holders who are otherwise tax-exempt, and (iii) the
treatment of such income as subject to 30% withholding tax to certain non-U.S.
investors, with no exemption or treaty reduction.
The Class A-R and Class A-LR Certificates will be considered "noneconomic
residual interests," with the result that transfers thereof would be disregarded
for federal income tax purposes if any significant purpose of the transferor was
to impede the assessment or collection of tax. Accordingly, the transferee
affidavit used for transfer of the Class A-R and Class A-LR Certificates will
require the transferee to affirm that it (i) historically has paid its debts as
they have come due and intends to do so in the future, (ii) understands that it
may incur tax liabilities with respect to the Class A-R or Class A-LR
Certificate in excess of cash flows generated thereby, (iii) intends to pay
taxes associated with holding the Class A-R or Class A-LR Certificate as such
taxes become due and (iv) will not transfer the Class A-R or Class A-LR
Certificate to any person or entity that does not provide a similar affidavit.
The transferor must certify in writing to the Trust Administrator that, as of
the date of the transfer, it had no knowledge or reason to know that the
affirmations made by the transferee pursuant to the preceding sentence were
false. Additionally, the Class A-R and Class A-LR Certificates generally may not
be transferred to certain persons who are not U.S. Persons (as defined herein).
See "Description of the Certificates -- Restrictions on Transfer of the Class
A-R, Class A-LR, Class M and Offered Class B Certificates" herein and "Certain
Federal Income Tax Consequences -- Federal Income Tax Consequences For REMIC
Certificates," "-- Taxation of Residual Certificates -- Limitations on Offset or
Exemption of REMIC Income" and "-- Tax-Related Restrictions on Transfer of
Residual Certificates -- Noneconomic Residual Interests" in the Prospectus.
An individual, trust or estate that holds the Class A-R or Class A-LR
Certificate (whether such Certificate is held directly or indirectly through
certain pass-through entities) also may have additional gross income with
respect to, but may be subject to limitations on the deductibility of, Servicing
Fees on the Mortgage Loans and other administrative expenses properly allocable
to the applicable REMIC in computing such holder's regular tax liability, and
may not be able to deduct such fees or expenses to any extent in computing such
holder's alternative minimum tax liability. In addition, some portion of a
purchaser's basis, if any, in the Class A-R or Class A-LR Certificate may not be
recovered until termination of the respective REMIC. Furthermore, the federal
income tax consequences of any consideration paid to a transferee on a transfer
of the Class A-R or Class A-LR Certificate are unclear. The preamble to the
REMIC Regulations indicates that the Internal Revenue Service anticipates
providing guidance with respect to the federal tax treatment of such
consideration. Any transferee receiving consideration with respect to the Class
A-R and Class A-LR Certificates should consult its tax advisors.
S-108
<PAGE>
DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS, THE EFFECTIVE
AFTER-TAX RETURN OF THE CLASS A-R AND CLASS A-LR CERTIFICATES MAY BE
SIGNIFICANTLY LOWER THAN WOULD BE THE CASE IF THE CLASS A-R AND CLASS A-LR
CERTIFICATES WERE TAXED AS DEBT INSTRUMENTS, OR MAY BE NEGATIVE.
See "Certain Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
Neither the Class A-R Certificate nor the Class A-LR Certificate may be
purchased by or transferred to any person which is an employee benefit plan
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and which is subject to the fiduciary
responsibility rules of Sections 401-414 of ERISA or Code Section 4975 (an
"ERISA Plan") or which is a governmental plan, as defined in Section 3(32) of
ERISA, subject to any federal, state or local law ("Similar Law") which is, to a
material extent, similar to the foregoing provisions of ERISA or the Code
(collectively, with an ERISA Plan, a "Plan"), or any person utilizing the assets
of such Plan. Accordingly, the following discussion does not purport to discuss
the considerations under ERISA, Code Section 4975 or Similar Law with respect to
the purchase, acquisition or resale of the Class A-R or Class A-LR Certificate
and for purposes of the following discussion all references to the Offered
Certificates are deemed to exclude the Class A-R and Class A-LR Certificates.
In addition, under current law the purchase and holding of the Class M or
Offered Class B Certificates by or on behalf of a Plan may result in "prohibited
transactions" within the meaning of ERISA and Code Section 4975 or Similar Law.
Transfer of the Class M or Offered Class B Certificates will not be made unless
the transferee (i) executes a representation letter in form and substance
satisfactory to the Trustee stating that (a) it is not, and is not acting on
behalf of, any such Plan or using the assets of any such Plan to effect such
purchase or (b) if it is an insurance company, that the source of funds used to
purchase the Class M or Offered Class B Certificates is an "insurance company
general account" (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTE 95-60"), 60 Fed. Reg. 35925 (July 12,
1995)) and there is no Plan with respect to which the amount of such general
account's reserves and liabilities for the contract(s) held by or on behalf of
such Plan and all other Plans maintained by the same employer (or affiliate
thereof as defined in Section V(a)(1) of PTE 95-60) or by the same employee
organization exceeds 10% of the total of all reserves and liabilities of such
general account (as such amounts are determined under Section I(a) of PTE 95-60)
at the date of acquisition or (ii) provides an opinion of counsel in form and
substance satisfactory to the Trustee that the purchase or holding of the Class
M or Offered Class B Certificates by or on behalf of such Plan will not result
in the assets of the Trust Estate being deemed to be "plan assets" and subject
to the prohibited transaction provisions of ERISA and the Code or Similar Law
and will not subject the Seller, the Master Servicer or the Trustee to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement. The Class M and Offered Class B Certificates will contain a legend
describing such restrictions on transfer and the Pooling and Servicing Agreement
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Accordingly, the following discussion does not purport to
discuss the considerations under ERISA, Code Section 4975 or Similar Law with
respect to the purchase, acquisition or resale of the Class M or Offered Class B
Certificates and for purposes of the following discussion all references to the
Offered Certificates are deemed to exclude the Class M and Offered Class B
Certificates.
As described in the Prospectus under "ERISA Considerations," ERISA and the
Code impose certain duties and restrictions on ERISA Plans and certain persons
who perform services for ERISA Plans. Comparable duties and restrictions may
exist under Similar Law on governmental plans and certain persons who perform
services for governmental plans. For example, unless exempted, investment by an
ERISA Plan in the Offered Certificates may constitute a prohibited transaction
under ERISA, the Code or Similar Law. There are certain exemptions issued by the
United States Department of Labor (the "DOL") that may be applicable to an
investment by an ERISA Plan in the Offered Certificates, including the
individual administrative exemption described below and Prohibited
S-109
<PAGE>
Transaction Class Exemption 83-1 ("PTE 83-1"). For a further discussion of the
individual administrative exemption and PTE 83-1, including the necessary
conditions to their applicability, and other important factors to be considered
by an ERISA Plan contemplating investing in the Offered Certificates, see "ERISA
Considerations" in the Prospectus.
On June 25, 1990, the DOL issued to the Underwriter an individual
administrative exemption, Prohibited Transaction Exemption 90-36, 55 Fed. Reg.
25903 (the "Exemption"), from certain of the prohibited transaction rules of
ERISA with respect to the initial purchase, the holding and the subsequent
resale by an ERISA Plan of certificates in pass-through trusts that meet the
conditions and requirements of the Exemption. The Exemption might apply to the
acquisition, holding and resale of the Offered Certificates by an ERISA Plan,
provided that specified conditions are met.
Among the conditions which would have to be satisfied for the Exemption to
apply to the acquisition by an ERISA Plan of the Offered Certificates is the
condition that the ERISA Plan investing in the Offered Certificates be 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, as amended
(the "Securities Act").
Before purchasing an Offered Certificate, a fiduciary of an ERISA Plan
should make its own determination as to the availability of the exemptive relief
provided in the Exemption or the availability of any other prohibited
transaction exemptions (including PTE 83-1), and whether the conditions of any
such exemption will be applicable to the Offered Certificates and a fiduciary of
a governmental plan should make its own determination as to the need for and
availability of any exemptive relief under Similar Law. Any fiduciary of an
ERISA Plan considering whether to purchase an Offered Certificate should also
carefully review with its own legal advisors the applicability of the fiduciary
duty and prohibited transaction provisions of ERISA, the Code and Similar Law to
such investment. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Class A and Class M Certificates constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 (the "Enhancement Act") so long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization. As such, the Class A and Class M Certificates are legal
investments for certain entities to the extent provided in the Enhancement Act.
However, institutions subject to the jurisdiction of the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or state banking or
insurance authorities should review applicable rules, supervisory policies and
guidelines of these agencies before purchasing any of the Class A and Class M
Certificates, as certain Subclasses of the Class A Certificates or the Class M
Certificates may be deemed to be unsuitable investments under one or more of
these rules, policies and guidelines and whether certain restrictions may apply
to investments in other Subclasses of the Class A Certificates or the Class M
Certificates. It should also be noted that certain states recently have enacted,
or have proposed enacting, legislation limiting to varying extents the ability
of certain entities (in particular insurance companies) to invest in mortgage
related securities. Investors should consult with their own legal advisors in
determining whether and to what extent Class A and Class M Certificates
constitute legal investments for such investors. See "Legal Investment" in the
Prospectus.
The Class B-1 and Class B-2 Certificates will not constitute "mortgage
related securities" under the Enhancement Act. The appropriate characterization
of the Class B-1 and Class B-2 Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase the Class B-1 and Class B-2 Certificates, may be subject to significant
interpretative uncertainties. All investors whose investment authority is
subject to legal restrictions should consult their own legal advisors to
determine whether, and to what extent, the Class B-1 and Class B-2 Certificates
will constitute legal investments for them. See "Legal Investment" in the
Prospectus.
S-110
<PAGE>
SECONDARY MARKET
There will not be any market for the Offered Certificates prior to the
issuance thereof. The Underwriter intends to act as a market maker in the
Offered Certificates, subject to applicable provisions of federal and state
securities laws and other regulatory requirements, but is under no obligation to
do so. There can be no assurance that a secondary market in the Offered
Certificates will develop or, if such a market does develop, that it will
provide holders of Offered Certificates with liquidity of investment at any
particular time or for the life of the Offered Certificates. As a source of
information concerning the Certificates and the Mortgage Loans, prospective
investors in Certificates may obtain copies of the reports included in monthly
statements to Certificateholders described under "Description of
Certificates -- Reports" upon written request to the Trust Administrator at the
Corporate Trust Office.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated July
12, 1996 and the terms agreement dated August 28, 1996 (together, the
"Underwriting Agreement") among Norwest Mortgage, the Seller and PaineWebber
Incorporated, as underwriter (the "Underwriter"), the Offered Certificates
offered hereby are being purchased from the Seller by the Underwriter upon
issuance. The Underwriter is committed to purchase all of the Offered
Certificates if any Offered Certificates are purchased. The Underwriter has
advised the Seller that it proposes to offer the Offered Certificates, from time
to time, for sale in negotiated transactions or otherwise at prices determined
at the time of sale. Proceeds to the Seller from the sale of the Offered
Certificates will be approximately 99.57% of the aggregate initial principal
balance of the Class A Certificates (other than the Class A-16 Certificates),
approximately 98.92% of the aggregate initial principal balance of the Class M
Certificates, approximately 97.71% of the aggregate initial principal balance of
the Class B-1 Certificates and approximately 94.64% of the aggregate initial
principal balance of the Class B-2 Certificates, plus, in each case, accrued
interest thereon at the rate of 8.00% per annum from October 1, 1996 to (but not
including) October 30, 1996, before deducting expenses payable by the Seller.
The Underwriter, which is not an affiliate of the Seller, has advised the Seller
that the Underwriter has not allocated the purchase price paid to the Seller for
the Class A Certificates offered hereby among such Subclasses of Class A
Certificates. 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 discounts or commissions received by them and any profit
on the resale of Offered Certificates by them may be deemed to be underwriting
discounts or commissions, under the Securities Act.
The Underwriting Agreement provides that the Seller or Norwest Mortgage will
indemnify the Underwriter against certain civil liabilities under the Securities
Act or contribute to payments which the Underwriter may be required to make in
respect thereof.
LEGAL MATTERS
The validity of the Offered Certificates and certain tax matters with
respect thereto will be passed upon for the Seller by Cadwalader, Wickersham &
Taft, New York, New York. Certain legal matters will be passed upon for the
Underwriters by Brown & Wood LLP, New York, New York.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered Certificates
will be applied by the Seller to the purchase from Norwest Mortgage of the
Mortgage Loans underlying the Series 1996-5 Certificates.
RATINGS
It is a condition to the issuance of the Class A Certificates offered by
this Prospectus Supplement and the Prospectus that they will have been rated
"AAA" by Fitch. It is a condition to the issuance of
S-111
<PAGE>
the Class A Certificates offered by this Prospectus Supplement and the
Prospectus (other than the Class A-8 Certificates) that they will have been
rated "AAA" by S&P. It is a condition to the issuance of the Class A-8
Certificates that such Subclass will have been rated "AAAr" by S&P. S&P assigns
the additional rating of "r" to highlight classes of securities that S&P
believes may experience high volatility or high variability in expected returns
due to non-credit risks. It is a condition to the issuance of the Class M
Certificates that they will have been rated at least "AA" by Fitch and S&P. It
is a condition to the issuance of the Class B-1 and Class B-2 Certificates that
they will have been rated "A" and "BBB," respectively, by Fitch. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
Each security rating should be evaluated independently of any other security
rating.
The ratings of S&P on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of timely payments of interest
and the ultimate return of principal. S&P's ratings take into consideration the
credit quality of the mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent to
which the payment stream on the mortgage pool is adequate to make payments
required under the certificates. S&P's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
mortgage loans. S&P's rating does not address the possibility that investors may
suffer a lower than anticipated yield as a result of prepayments of the
underlying mortgages. In addition, it should be noted that in some structures a
default on a mortgage is treated as a prepayment and may have the same effect on
yield as a prepayment.
The ratings of Fitch on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
such certificateholders are entitled. Fitch's rating opinions address the
structural and legal aspects associated with the certificates, including the
nature of the underlying mortgage loans. Fitch's ratings on pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments and consequently any adverse effect the timing of such
prepayments could have on an investor's anticipated yield.
The ratings of S&P and Fitch also do not address the possibility that
holders of the Class A-8 Certificates may not fully recover their initial
investments.
The Seller has not requested a rating on the Offered Certificates of any
Subclass or Class by any rating agency other than Fitch and S&P, although data
with respect to the Mortgage Loans may have been provided to other rating
agencies solely for their informational purposes. There can be no assurance that
any rating assigned by any other rating agency to the Offered Certificates will
be as high as those assigned by Fitch and S&P.
S-112
<PAGE>
INDEX OF SIGNIFICANT
PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------- ---------
<S> <C>
Accretion Directed Certificates.............. S-12
Accretion Termination Dates.................. S-45
Adjusted Pool Amount......................... S-43
Adjusted Pool Amount (PO Portion)............ S-43
Adjustment Amount............................ S-71
Aggregate Current Bankruptcy Losses.......... S-71
Aggregate Current Fraud Losses............... S-71
Aggregate Current Special Hazard Losses...... S-70
Available Master Servicing Compensation...... S-20
Bankruptcy Loss.............................. S-50
Bankruptcy Loss Amount....................... S-72
Beneficial Owner............................. S-35
Book-Entry Certificates...................... S-4
Bulk Purchase Underwritten Loans............. S-16
Cede......................................... S-35
Certificate Account.......................... S-106
Certificateholder............................ S-4
Certificates................................. S-7
Class A Certificates......................... S-9
Class A Non-PO Distribution Amount........... S-39
Class A Non-PO Principal Amount.............. S-49
Class A Non-PO Principal Distribution
Amount...................................... S-49
Class A Non-PO Optimal Amount................ S-46
Class A Non-PO Optimal Principal Amount...... S-49
Class A Non-PO Principal Balance............. S-42
Class A Optional Amount...................... S-46
Class A Percentage........................... S-21
Class A Prepayment Percentage................ S-21
Class A Subclass Interest Accrual Amount..... S-39
Class A Subclass Interest Shortfall Amount... S-45
Class A Subclass Principal Balance........... S-41
Class A Voting Interest...................... S-100
Class A-16 Accretion Directed Component...... S-5
Class A-16 Accrual Component................. S-2
Class A-16 Accrual Component Distribution
Amount...................................... S-49
Class A-16 Component......................... S-11
Class A-16 Component Deferred Amount......... S-23
Class A-16 IO Component...................... S-2
Class A-16 IO Notational Amount.............. S-41
<CAPTION>
TERM PAGE
- --------------------------------------------- ---------
<S> <C>
Class A-16 PAC Component..................... S-2
Class A-16 PO Component...................... S-2
Class A-16 PO Component Deferred Amount...... S-52
Class A-16 PO Component Distribution
Amount...................................... S-52
Class A-16 PO Component Optimal Principal
Amount...................................... S-52
Class A-16 TAC Component..................... S-2
Class A-17 Percentage........................ S-59
Class A-17 Percentage........................ S-59
Class A-17 Priority Amount................... S-59
Class A-17 Scheduled Percentage.............. S-59
Class A-17 Shift Percentage.................. S-59
Class B Certificates......................... S-9
Class B Optimal Principal Amount............. S-53
Class B Principal Balance.................... S-43
Class B Subclass Distribution Amount......... S-39
Class B Subclass Interest Accrual Amount..... S-41
Class B Subclass Interest Shortfall Amount... S-47
Class B Subclass Principal Balance........... S-42
Class B Voting Interest...................... S-100
Class B-1 Principal Distribution Amount...... S-53
Class B-2 Principal Distribution Amount...... S-53
Class M Certificates......................... Cover
Class M Distribution Amount.................. S-39
Class M Interest Accrual Amount.............. S-41
Class M Interest Shortfall Amount............ S-46
Class M Optimal Amount....................... S-47
Class M Optimal Principal Amount............. S-53
Class M Percentage........................... S-54
Class M Prepayment Percentage................ S-54
Class M Principal Balance.................... S-42
Class M Principal Distribution Amount........ S-53
Closing Date................................. S-14
Code......................................... S-32
Companion Certificate........................ S-2
Compensating Interest........................ S-20
Component.................................... S-2
Component Interest Accrual Amount............ S-40
Component Interest Shortfall Amount.......... S-46
Component Principal Balance.................. S-41
Component Rate............................... S-40
</TABLE>
S-113
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------- ---------
<S> <C>
Cooperatives................................. S-73
Co-op Shares................................. S-73
Cross-Over Date.............................. S-69
Current Class B-1 Fractional Interest........ S-56
Current Class B-2 Fractional Interest........ S-56
Current Class B-3 Fractional Interest........ S-56
Current Class B-4 Fractional Interest........ S-56
Current Class M Fractional Interest.......... S-55
Curtailment Interest Shortfalls.............. S-44
Cut-Off Date Aggregate Principal Balance..... S-73
Debt Service Reduction....................... S-50
Deficient Valuation.......................... S-50
Definitive Certificates...................... S-12
Determination Date........................... S-35
Discount Mortgage Loans...................... S-10
Disqualified Organizations................... S-4
Distribution Date............................ S-2
DOL.......................................... S-109
DTC.......................................... S-13
Enhancement Act.............................. S-33
ERISA........................................ S-32
ERISA Plan................................... S-108
Excess Bankruptcy Loss....................... S-72
Excess Bankruptcy Losses..................... S-71
Excess Fraud Loss............................ S-71
Excess Fraud Losses.......................... S-71
Excess Principal Payment..................... S-64
Excess Special Hazard Loss................... S-70
Excess Special Hazard Losses................. S-70
Exemption.................................... S-109
Fitch........................................ S-8
Fixed 30-Year NMI Non-Frederick Portfolio
Loans....................................... S-80
Fixed 30-Year Non-Relocation NMI Frederick
Portfolio Loans............................. S-80
Fixed NMI Frederick Portfolio Loans.......... S-80
Fixed Retained Yield......................... S-105
Fraud Loss................................... S-50
Fraud Loss Amount............................ S-71
Holder....................................... S-4
Hurricane.................................... S-75
Hurricane Counties........................... S-75
Jumbo Loans.................................. S-80
LIBO......................................... S-47
LIBOR........................................ Cover
LIBOR Based Interest Accrual Period.......... S-18
Liquidated Loan.............................. S-50
Liquidated Loan Loss......................... S-50
Lower-Tier REMIC............................. S-4
Lower-Tier REMIC Regular Interest............ S-106
<CAPTION>
TERM PAGE
- --------------------------------------------- ---------
<S> <C>
Master Servicer.............................. S-101
Master Servicing Fee......................... S-101
Master Servicing Fee Rate.................... S-101
Mid-Month Receipt Period..................... S-104
Month End Interest........................... S-43
Mortgage Loans............................... S-2
Mortgaged Properties......................... S-73
Mortgages.................................... S-73
NASCOR....................................... Cover
Net Foreclosure Profits...................... S-65
Net Mortgage Interest Rate................... S-43
Net Partial Liquidation Proceeds............. S-37
NMI Frederick Portfolio Loans................ S-80
NMI Non-Frederick Portfolio Loans............ S-80
NMI Portfolio Loans.......................... S-80
Non-PO Fraction.............................. S-21
Non-PO Voting Interest....................... S-100
Non-Supported Interest Shortfalls............ S-20
Norwest Bank................................. S-2
Norwest Correspondent........................ S-74
Norwest Frederick-Serviced Loans............. S-102
Norwest Mortgage............................. S-2
Norwest Mortgage Correspondent............... S-2
Norwest Non-Frederick-Serviced Loans......... S-103
Offered Certificates......................... Cover
Offered Class B Certificates................. Cover
Original Class B-1 Fractional Interest....... S-56
Original Class B-2 Fractional Interest....... S-56
Original Class B-3 Fractional Interest....... S-56
Original Class B-4 Fractional Interest....... S-56
Original Class M Fractional Interest......... S-55
Original Subordinated Principal Balance...... S-51
Other Originator............................. S-78
Other Originators............................ S-78
Other Servicers.............................. S-102
PAC Certficates.............................. S-11
PAC Principal Amount.........................
Partial Liquidation Proceeds................. S-37
Pass-Through Rate............................ S-18
Percentage Interest.......................... S-39
Periodic Advance............................. S-66
PHMC......................................... S-2
PHMC Acquisition............................. S-14
PHMC Correspondent........................... S-7
PHMC Portfolio Loans......................... S-80
PHMSC Pool................................... S-95
Plan......................................... S-32
PO Fraction.................................. S-22
Pool Balance (Non-PO Portion)................ S-10
</TABLE>
S-114
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------- ---------
<S> <C>
Pool Balance (PO Portion).................... S-10
Pool Certification Underwritten Loans........ S-15
Pool Distribution Amount..................... S-36
Pool Distribution Amount Allocation.......... S-37
Pooling and Servicing Agreement.............. S-100
Premium Mortgage Loans....................... S-74
Prepayments in Full.......................... S-43
Prepayment Interest Shortfalls............... S-43
Prior Month Receipt Period................... S-104
Prospectus................................... S-7
PTE 83-1..................................... S-109
PTE 96-60.................................... S-109
Rate Determination Date...................... S-40
Realized Loss................................ S-50
Record Date.................................. S-36
Reference Banks.............................. S-47
Regular Certificates......................... S-106
Regular Interest Accrual Period.............. S-18
Relocation Mortgage Loans.................... S-80
REMIC........................................ S-4
Remittance Date.............................. S-37
REO Property................................. S-102
Reserve Interest Rate........................ S-48
Residual Certificate......................... S-106
Reuters Screen LIBO Page..................... S-47
S&P.......................................... S-8
Scheduled Principal Amount................... S-59
Scheduled Principal Balance.................. S-49
SDA.......................................... S-97
Securities Act............................... S-109
Seller....................................... S-2
Senior Certificates.......................... S-9
Series 1996-5 Certificates................... Cover
Servicer..................................... S-2
<CAPTION>
TERM PAGE
- --------------------------------------------- ---------
<S> <C>
Servicers.................................... S-102
Servicer Custodial Account................... S-103
Servicing Fee Rate........................... S-105
Similar Law.................................. S-32
SPA.......................................... S-12
Special Hazard Loss.......................... S-50
Special Hazard Loss Amount................... S-71
Structuring Assumptions...................... S-89
Subclass..................................... Cover
Subclass B Optimal Amount.................... S-47
Subclass B Optimal Principal Amount.......... S-53
Subclass B Percentage........................ S-54
Subclass B Prepayment Percentage............. S-54
Subordinated Certificates.................... Cover
Subordinated Percentage...................... S-51
Subordinated Prepayment Percentage........... S-51
TAC Certificates............................. Cover
TAC Principal Amount......................... S-59
Target Regime................................ S-104
Trust Administrator.......................... S-8
Trust Estate................................. S-2
Trustee...................................... S-8
U.S. Person.................................. S-66
UGRIC........................................ S-15
Underlying Servicing Agreement............... S-7
Underwriter.................................. Cover
Underwriting Agreement....................... S-110
Underwriting Standards....................... S-15
Unscheduled Principal Amount................. S-59
Unscheduled Principal Receipt Period......... S-103
Unscheduled Principal Receipts............... S-36
Upper-Tier Certificates...................... S-106
Upper-Tier REMIC............................. S-4
30 Year Mortgage Loans....................... S-95
</TABLE>
S-115
<PAGE>
NORWEST ASSET SECURITIES CORPORATION
("NASCOR")
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
---------------------
Norwest Asset Securities Corporation (the "Seller" or "NASCOR") may sell
from time to time, under this Prospectus and applicable Prospectus Supplements,
Mortgage Pass-Through Certificates (the "Certificates"), issuable in series
(each, a "Series") consisting of one or more classes (each, a "Class") of
Certificates. Any Class of Certificates may be divided into two or more
subclasses (each, a "Subclass").
The Certificates of a Series will represent beneficial ownership interests
in a separate trust formed by the Seller. The property of each such trust (for
each Series, the "Trust Estate") will be comprised primarily of fixed or
adjustable interest rate, conventional, first mortgage loans (the "Mortgage
Loans"), secured by one- to four-family residential properties. The Mortgage
Loans will have been acquired by the Seller from its affiliate, Norwest
Mortgage, Inc. ("Norwest Mortgage"), and will have been underwritten either to
Norwest Mortgage's underwriting standards, to the underwriting standards of a
Pool Insurer (as defined herein) or to such other standards as are described in
the applicable Prospectus Supplement. All of the Mortgage Loans will be serviced
by Norwest Mortgage individually or together with one or more other servicers
(each, a "Servicer"). Norwest Bank Minnesota, National Association ("Norwest
Bank"), an affiliate of Norwest Mortgage, will act as master servicer with
respect to each Trust Estate (in such capacity, the "Master Servicer").
Each Series of Certificates may include one or more Classes of Certificates
(the "Subordinated Certificates") that are subordinate in right of distributions
or otherwise to one or more of the other Classes of such Series (the "Senior
Certificates"). If specified in the applicable Prospectus Supplement, the
relative interests of the Senior Certificates and the Subordinated Certificates
of a Series in the Trust Estate may be subject to adjustment from time to time
on the basis of distributions received in respect thereof and losses allocated
to the Subordinated Certificates. If and to the extent specified in the
Prospectus Supplement, credit support may be provided for any Series of
Certificates, or any Classes or Subclasses thereof, in the form of a limited
guarantee, financial guaranty insurance policy, surety bond, letter of credit,
mortgage pool insurance policy, reserve fund, cross-support or other form of
credit enhancement as described herein or therein.
Except for the Seller's limited obligations in connection with certain
breaches of its representations and warranties, certain undertakings and
obligations of the Master Servicer and Norwest Mortgage's obligations as
Servicer, the Certificates will not represent obligations of the Seller, the
Master Servicer or Norwest Mortgage, or any affiliate of the Seller, the Master
Servicer or Norwest Mortgage.
If specified in the applicable Prospectus Supplement, an election will be
made to treat the Trust Estate (or one or more segregated pools of assets
therein) underlying a Series of Certificates as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes. See "Certain
Federal Income Tax Consequences."
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market will
develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Certificates may be sold from time to time through one or more different
methods, including through underwriting syndicates led by one or more managing
underwriters or through one or more underwriters acting alone. See "Plan of
Distribution." Affiliates of the Seller may from time to time act as agents or
underwriters in connection with the sale of the Certificates.
This Prospectus may not be used to consummate sales of Certificates unless
accompanied by the Prospectus Supplement relating to the offering of such
Certificates.
------------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 24, 1996
<PAGE>
REPORTS
The Master Servicer will prepare, and the Trustee or other Paying Agent
appointed for each Series by the Master Servicer will forward to the
Certificateholders of each Series statements containing information with respect
to principal and interest payments and the related Trust Estate, as described
herein and in the applicable Prospectus Supplement for such Series. No
information contained in such reports will have been examined or reported upon
by an independent public accountant. See "The Pooling and Servicing Agreement --
Reports to Certificateholders." In addition, each Servicer for each Series will
furnish to the Master Servicer (who will be required to furnish promptly to the
Trustee for such Series), a statement from a firm of independent public
accountants with respect to the examination of certain documents and records
relating to a random sample of mortgage loans serviced by such Servicer pursuant
to the related Underlying Servicing Agreement and/or other similar agreements.
See "Servicing of the Mortgage Loans -- Evidence as to Compliance." Copies of
the statements provided by the Master Servicer to the Trustee will be furnished
to Certificateholders of each Series upon request addressed to the Trustee for
the applicable Series or to the Master Servicer c/o Norwest Bank Minnesota,
National Association, 11000 Broken Land Parkway, Columbia, Maryland 21044-3562,
Attention: Securities Administration Services Manager.
ADDITIONAL INFORMATION
This Prospectus contains, and the Prospectus Supplement for each Series of
Certificates will contain, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor will contain all of the
information set forth in the Registration Statement of which this Prospectus is
a part. For further information, reference is made to such Registration
Statement and the exhibits thereto which the Seller has filed with the
Securities and Exchange Commission (the "Commission"), Washington, D.C., under
the Securities Act of 1933, as amended (the "Securities Act"). Statements
contained in this Prospectus and any Prospectus Supplement as to the contents of
any contract or other document referred to are summaries and, in each instance,
reference is made to the copy of the contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement may be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549 upon payment of the prescribed charges, or may be examined free of charge
at the Commission's offices, 450 Fifth Street N.W., Washington, D.C. 20549 or at
the regional offices of the Commission located at Room 1400, 75 Park Place, New
York, New York 10007 and 14th Floor, 500 West Madison Street, Chicago, Illinois
60661. The Commission also maintains a site on the World Wide Web at "http://
www.sec.gov" at which users can view and download copies of reports, proxy and
information statements and other information filed electronically through the
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system. The Seller
has filed the Registration Statement, including all exhibits thereto, through
the EDGAR system and therefore such materials should be available by logging
onto the Commission's Web site. The Commission maintains computer terminals
providing access to the EDGAR system at each of the offices referred to above.
Copies of any documents incorporated herein by reference will be provided to
each person to whom a Prospectus is delivered upon written or oral request
directed to Norwest Asset Securities Corporation, 5325 Spectrum Drive,
Frederick, Maryland 21701, telephone number (301) 846-8881.
ADDITIONAL DETAILED INFORMATION
The Seller intends to offer by subscription detailed mortgage loan
information in machine readable format updated on a monthly basis (the "Detailed
Information") with respect to each outstanding Series of Certificates. The
Detailed Information will reflect payments made on the individual mortgage
loans, including prepayments in full and in part made on such mortgage loans, as
well as the liquidation of any such mortgage loans, and will identify various
characteristics of the mortgage loans. Subscribers of the Detailed Information
are expected to include a number of major investment brokerage firms as well as
financial information service firms. Some of such firms, including certain
2
<PAGE>
investment brokerage firms as well as Bloomberg L.P. through the "The
Bloomberg-Registered Trademark-" service and Merrill Lynch Mortgage Capital Inc.
through the "CMO Passport -Registered Trademark-" service, may, in accordance
with their individual business practices and fee schedules, if any, make
portions of, or summaries of portions of, the Detailed Information available to
their customers and subscribers. The Seller, the Master Servicer and their
respective affiliates have no control over and take no responsibility for the
actions of such firms in processing, analyzing or disseminating such
information. For further information regarding the Detailed Information and
subscriptions thereto, please contact Norwest Asset Securities Corporation, 5325
Spectrum Drive, Frederick, Maryland 21701, telephone number (301) 846-8881.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by NASCOR with respect to a Trust Estate pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Certificates evidencing interests therein. Upon request, the
Master Servicer will provide or cause to be provided without charge to each
person to whom this Prospectus is delivered in connection with the offering of
one or more Classes of Certificates a list identifying all filings with respect
to a Trust Estate pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act since NASCOR's latest fiscal year covered by its annual report on Form 10-K
and a copy of any or all documents or reports incorporated herein by reference,
in each case to the extent such documents or reports relate to one or more of
such Classes of such Certificates, other than the exhibits to such documents
(unless such exhibits are specifically incorporated by reference in such
documents). Requests to the Master Servicer should be directed to: Norwest Asset
Securities Corporation, 5325 Spectrum Drive, Frederick, Maryland 21701,
telephone number (301) 846-8881.
3
<PAGE>
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Reports.................................................................................................... 2
Additional Information..................................................................................... 2
Additional Detailed Information............................................................................ 2
Incorporation of Certain Information by Reference.......................................................... 3
Summary of Prospectus...................................................................................... 8
Title of Securities...................................................................................... 8
Seller................................................................................................... 8
Servicers................................................................................................ 8
Master Servicer.......................................................................................... 8
The Trust Estates........................................................................................ 8
Description of the Certificates.......................................................................... 9
Distributions on the Certificates........................................................................ 9
Cut-Off Date............................................................................................. 9
Distribution Dates....................................................................................... 9
Record Dates............................................................................................. 10
Credit Enhancement....................................................................................... 10
Periodic Advances........................................................................................ 10
Forms of Certificates.................................................................................... 11
Optional Purchase of Defaulted Mortgage Loans............................................................ 11
Optional Purchase of All Mortgage Loans.................................................................. 11
ERISA Limitations........................................................................................ 11
Tax Status............................................................................................... 12
Legal Investment......................................................................................... 12
Rating................................................................................................... 12
Risk Factors............................................................................................... 13
Limited Liquidity........................................................................................ 13
Limited Obligations...................................................................................... 13
Limitations, Reduction and Substitution of Credit Enhancement............................................ 13
Risks of the Mortgage Loans.............................................................................. 14
Yield and Prepayment Considerations...................................................................... 14
Book-Entry System for Certain Classes and Subclasses of Certificates..................................... 15
The Trust Estates.......................................................................................... 15
General.................................................................................................. 15
Mortgage Loans........................................................................................... 15
Fixed Rate Loans....................................................................................... 16
Adjustable Rate Loans.................................................................................. 17
Graduated Payment Loans................................................................................ 17
Subsidy Loans.......................................................................................... 17
Buy-Down Loans......................................................................................... 18
Balloon Loans.......................................................................................... 19
The Seller................................................................................................. 19
Norwest Mortgage........................................................................................... 19
Norwest Bank............................................................................................... 20
The Mortgage Loan Programs................................................................................. 20
Mortgage Loan Production Sources......................................................................... 20
Acquisition of Mortgage Loans from Correspondents........................................................ 21
Mortgage Loan Underwriting............................................................................... 21
Norwest Mortgage Underwriting.......................................................................... 21
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Pool Certification Underwriting........................................................................ 25
Representations and Warranties........................................................................... 27
Description of the Certificates............................................................................ 30
General.................................................................................................. 30
Definitive Form.......................................................................................... 31
Book-Entry Form.......................................................................................... 32
Distributions to Certificateholders...................................................................... 33
General................................................................................................ 33
Distributions of Interest.............................................................................. 35
Distributions of Principal............................................................................. 35
Other Credit Enhancement................................................................................. 37
Limited Guarantee...................................................................................... 37
Financial Guaranty Insurance Policy or Surety Bond..................................................... 37
Letter of Credit....................................................................................... 37
Pool Insurance Policies................................................................................ 38
Special Hazard Insurance Policies...................................................................... 38
Mortgagor Bankruptcy Bond.............................................................................. 38
Reserve Fund........................................................................................... 38
Cross Support.......................................................................................... 38
Prepayment and Yield Considerations........................................................................ 39
Pass-Through Rates....................................................................................... 39
Scheduled Delays in Distributions........................................................................ 39
Effect of Principal Prepayments.......................................................................... 39
Weighted Average Life of Certificates.................................................................... 40
Servicing of the Mortgage Loans............................................................................ 41
The Master Servicer...................................................................................... 41
The Servicers............................................................................................ 42
Payments on Mortgage Loans............................................................................... 43
Periodic Advances and Limitations Thereon................................................................ 46
Collection and Other Servicing Procedures................................................................ 47
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans............................ 47
Insurance Policies....................................................................................... 49
Fixed Retained Yield, Servicing Compensation and Payment of Expenses..................................... 50
Evidence as to Compliance................................................................................ 51
Certain Matters Regarding the Master Servicer.............................................................. 52
The Pooling and Servicing Agreement........................................................................ 53
Assignment of Mortgage Loans to the Trustee.............................................................. 53
Optional Purchases....................................................................................... 54
Reports to Certificateholders............................................................................ 55
List of Certificateholders............................................................................... 56
Events of Default........................................................................................ 56
Rights Upon Event of Default............................................................................. 56
Amendment................................................................................................ 57
Termination; Optional Purchase of Mortgage Loans......................................................... 58
The Trustee.............................................................................................. 58
Certain Legal Aspects of the Mortgage Loans................................................................ 59
General.................................................................................................. 59
Foreclosure.............................................................................................. 59
Foreclosure on Shares of Cooperatives.................................................................... 60
Rights of Redemption..................................................................................... 61
Anti-Deficiency Legislation and Other Limitations on Lenders............................................. 61
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Soldiers' and Sailors' Civil Relief Act and Similar Laws................................................. 63
Environmental Considerations............................................................................. 63
"Due-on-Sale" Clauses.................................................................................... 64
Applicability of Usury Laws.............................................................................. 65
Enforceability of Certain Provisions..................................................................... 65
Certain Federal Income Tax Consequences.................................................................... 66
Federal Income Tax Consequences for REMIC Certificates................................................... 66
General.................................................................................................. 66
Status of REMIC Certificates............................................................................. 67
Qualification as a REMIC................................................................................. 67
Taxation of Regular Certificates......................................................................... 69
General................................................................................................ 69
Original Issue Discount................................................................................ 69
Acquisition Premium.................................................................................... 72
Variable Rate Regular Certificates..................................................................... 72
Market Discount........................................................................................ 73
Premium................................................................................................ 74
Election to Treat All Interest Under the Constant Yield Method......................................... 74
Treatment of Losses.................................................................................... 75
Sale or Exchange of Regular Certificates............................................................... 75
Taxation of Residual Certificates........................................................................ 76
Taxation of REMIC Income............................................................................... 76
Basis and Losses....................................................................................... 76
Treatment of Certain Items of REMIC Income and Expense................................................. 78
Original Issue Discount and Premium.................................................................... 78
Market Discount........................................................................................ 78
Premium................................................................................................ 78
Limitations on Offset or Exemption of REMIC Income..................................................... 79
Tax-Related Restrictions on Transfer of Residual Certificates.......................................... 79
Disqualified Organizations............................................................................. 79
Noneconomic Residual Interests......................................................................... 81
Foreign Investors...................................................................................... 81
Sale or Exchange of a Residual Certificate............................................................. 82
Mark to Market Regulations............................................................................. 82
Taxes That May Be Imposed on the REMIC Pool.............................................................. 82
Prohibited Transactions................................................................................ 82
Contributions to the REMIC Pool After the Startup Day.................................................. 83
Net Income from Foreclosure Property................................................................... 83
Liquidation of the REMIC Pool............................................................................ 83
Administrative Matters................................................................................... 83
Limitations on Deduction of Certain Expenses............................................................. 84
Taxation of Certain Foreign Investors.................................................................... 84
Regular Certificates................................................................................... 84
Residual Certificates.................................................................................. 85
Backup Withholding....................................................................................... 85
Reporting Requirements................................................................................... 85
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Federal Income Tax Consequences for Certificates as to Which No REMIC Election is Made................... 86
General................................................................................................ 86
Tax Status............................................................................................. 87
Premium and Discount................................................................................... 87
Premium................................................................................................ 87
Original Issue Discount................................................................................ 87
Market Discount........................................................................................ 88
Recharacterization of Servicing Fees................................................................... 88
Sale or Exchange of Certificates....................................................................... 89
Stripped Certificates.................................................................................... 89
General................................................................................................ 89
Status of Stripped Certificates........................................................................ 90
Taxation of Stripped Certificates...................................................................... 91
Original Issue Discount................................................................................ 91
Sale or Exchange of Stripped Certificates.............................................................. 91
Purchase of More Than One Class of Stripped Certificates............................................... 92
Possible Alternative Characterizations................................................................. 92
Reporting Requirements and Backup Withholding............................................................ 92
Taxation of Certain Foreign Investors.................................................................... 92
ERISA Considerations....................................................................................... 93
General.................................................................................................. 93
Certain Requirements Under ERISA......................................................................... 93
General................................................................................................ 93
Parties in Interest/Disqualified Persons............................................................... 93
Delegation of Fiduciary Duty........................................................................... 94
Administrative Exemptions................................................................................ 94
Individual Administrative Exemptions................................................................... 94
PTE 83-1............................................................................................... 95
Exempt Plans............................................................................................. 96
Unrelated Business Taxable Income -- Residual Certificates............................................... 96
Legal Investment........................................................................................... 97
Plan of Distribution....................................................................................... 98
Use of Proceeds............................................................................................ 99
Legal Matters.............................................................................................. 99
Rating..................................................................................................... 99
Index of Significant Definitions........................................................................... 100
</TABLE>
7
<PAGE>
SUMMARY OF PROSPECTUS
THE FOLLOWING IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS, AND BY REFERENCE TO THE
INFORMATION WITH RESPECT TO EACH SERIES OF CERTIFICATES CONTAINED IN THE
APPLICABLE PROSPECTUS SUPPLEMENT. CERTAIN CAPITALIZED TERMS USED AND NOT
OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN ELSEWHERE IN THIS
PROSPECTUS.
<TABLE>
<CAPTION>
Title of Securities............... Mortgage Pass-Through Certificates (Issuable in Series).
<S> <C>
Seller............................ Norwest Asset Securities Corporation (the "Seller"), a
direct, wholly-owned subsidiary of Norwest Mortgage,
Inc. ("Norwest Mortgage"), which is an indirect,
wholly-owned subsidiary of Norwest Corporation ("Norwest
Corporation"). See "The Seller."
Servicers......................... Norwest Mortgage and, to the extent specified in the
applicable Prospectus Supplement, one or more other
entities identified therein (each, a "Servicer") will
service the Mortgage Loans contained in each Trust
Estate. Each Servicer will perform certain servicing
functions with respect to the Mortgage Loans serviced by
it pursuant to a related Servicing Agreement (each, an
"Underlying Servicing Agreement"). See "Servicing of the
Mortgage Loans."
Master Servicer................... Norwest Bank Minnesota, National Association ("Norwest
Bank" and, in such capacity, the "Master Servicer").
Norwest Bank is a direct, wholly-owned subsidiary of
Norwest Corporation and an affiliate of the Seller. The
Master Servicer will perform certain administration,
calculation and reporting functions with respect to each
Trust Estate and will supervise the Servicers, in each
case, pursuant to a Pooling and Servicing Agreement. In
addition, the Master Servicer will generally be required
to make Periodic Advances (to the extent described
herein) with respect to the Mortgage Loans in each Trust
Estate to the extent that the related Servicer (other
than Norwest Mortgage) fails to make a required Periodic
Advance. See "Servicing of the Mortgage Loans -- The
Master Servicer" and "-- Periodic Advances and
Limitations Thereon."
The Trust Estates................. Each Trust Estate will be formed and each Series of
Certificates will be issued pursuant to a pooling and
servicing agreement (each, a "Pooling and Servicing
Agreement") among the Seller, the Master Servicer and
the Trustee specified in the applicable Prospectus
Supplement. Each Trust Estate will consist of the
related Mortgage Loans (other than the Fixed Retained
Yield (as defined herein), if any) and certain other
related property, as specified in the applicable
Prospectus Supplement. The Mortgage Loans will be
conventional, fixed or adjustable interest rate,
mortgage loans secured by first liens on one- to
four-family residential properties.
The Mortgage Loans will have been acquired by the Seller
from its affiliate Norwest Mortgage. The Mortgage Loans
will have been originated by Norwest Mortgage or an
affiliate or will have been acquired by Norwest Mortgage
directly or indirectly from other mortgage loan
originators. All of the Mortgage Loans will have been
underwritten either to Norwest
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Mortgage's standards, to the extent specified in the
applicable Prospectus Supplement, to the standards of a
Pool Insurer or to standards otherwise specified in the
Prospectus Supplement. See "The Trust Estates" and "The
Mortgage Loan Programs -- Mortgage Loan Underwriting."
The particular characteristics or expected
characteristics of the Mortgage Loans and a description
of the other property, if any, included in a Trust
Estate will be set forth in the applicable Prospectus
Supplement.
Description of the Certificates... Each Series of Certificates will include one or more
Classes, any of which may consist of multiple
Subclasses. A Class or Subclass of Certificates will be
entitled, to the extent of funds available, to either
(i) principal and interest payments in respect of the
related Mortgage Loans, (ii) principal distributions,
with no interest distributions, (iii) interest
distributions, with no principal distributions or (iv)
such other distributions as are described in the
applicable Prospectus Supplement.
Distributions on the
Certificates...................... INTEREST. With respect to each Series of Certificates,
interest on the related Mortgage Loans at the weighted
average of the applicable Mortgage Interest Rates
thereof (net of servicing fees and certain other amounts
as described herein or in the applicable Prospectus
Supplement), will be passed through to holders of the
related Classes of Certificates in the aggregate, in
accordance with the particular terms of each such Class
of Certificates. See "Description of the Certificates --
Distributions to Certificateholders -- Distributions of
Interest" herein. Except as otherwise specified in the
applicable Prospectus Supplement, interest on each Class
and Subclass of Certificates of each Series will accrue
at the pass-through rate for each Class and Subclass
indicated in the applicable Prospectus Supplement (each,
a "Pass-Through Rate") on the outstanding principal
balance or notional amount thereof.
PRINCIPAL. With respect to a Series of Certificates,
principal payments (including prepayments) will be
passed through to holders of the related Certificates or
otherwise applied in accordance with the related Pooling
and Servicing Agreement on each Distribution Date.
Distributions in reduction of principal balance will be
allocated among the Classes and Subclasses of
Certificates of a Series in the manner specified in the
applicable Prospectus Supplement. See "Description of
the Certificates -- Distributions to Certificateholders
-- Distributions of Principal."
Cut-Off Date...................... The date specified in the applicable Prospectus
Supplement.
Distribution Dates................ Distributions on the Certificates will generally be made
on the 25th day (or, if such day is not a business day,
the business day following the 25th day) of each month,
commencing with the month following the month in which
the applicable Cut-Off Date occurs (each, a
"Distribution Date"). If so specified in the applicable
Prospectus Supplement, distributions on
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Certificates may be made on a different day of each
month or may be made quarterly, or semi-annually, on the
dates specified in such Prospectus Supplement.
Record Dates...................... Distributions will be made on each Distribution Date to
Certificateholders of record at the close of business on
(unless a different date is specified in the applicable
Prospectus Supplement) the last business day of the
month preceding the month in which such Distribution
Date occurs (each, a "Record Date").
Credit Enhancement................ A Series of Certificates may include one or more Classes
of Senior Certificates and one or more Classes of
Subordinated Certificates. The rights of the holders of
Subordinated Certificates of a Series to receive
distributions with respect to the related Mortgage Loans
will be subordinated to such rights of the holders of
the Senior Certificates of the same Series to the extent
and in the manner specified in the applicable Prospec-
tus Supplement. This subordination is intended to
enhance the likelihood of the timely receipt by the
Senior Certificateholders of their proportionate share
of scheduled monthly principal and interest payments on
the related Mortgage Loans and to protect them against
losses. This protection will be effected by (i) the
preferential right of the Senior Certificateholders to
receive, prior to any distribution being made in respect
of the related Subordinated Certificates on each Dis-
tribution Date, current distributions on the related
Mortgage Loans of principal and interest due them on
each Distribution Date out of the funds available for
distributions on such date, (ii) by the right of such
holders to receive future distributions on the Mortgage
Loans that would otherwise have been payable to the
holders of Subordinated Certificates and/or (iii) by the
prior allocation to the Subordinated Certificate of all
or a portion of losses realized on the underlying
Mortgage Loans.
If so specified in the applicable Prospectus Supplement,
the Certificates of any Series, or any one or more
Classes thereof, may be entitled to the benefits of a
limited guarantee, financial guaranty insurance policy,
surety bond, letter of credit, mortgage pool insurance
policy, reserve fund, cross-support or other form of
credit enhancement as specified in the applicable
Prospectus Supplement. See "Description of the Certifi-
cates -- Other Credit Enhancement."
Periodic Advances................. In the event of delinquencies in payments on any
Mortgage Loan, the Servicer servicing such Mortgage Loan
will be obligated to make advances of cash ("Periodic
Advances") to the Servicer Custodial Account (as defined
herein) to the extent that such Servicer determines such
Periodic Advances would be recoverable from future
payments and collections on such Mortgage Loan. Any such
Periodic Advances will be reimbursable to such Servicer
as described herein and in the applicable Prospectus
Supplement. The Master Servicer or Trustee will,
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
in certain circumstances, be required to make Periodic
Advances upon a Servicer default. See "Servicing of the
Mortgage Loans -- Periodic Advances and Limitations
Thereon."
Forms of Certificates............. The Certificates will be issued either (i) in book-entry
form ("Book-Entry Certificates") through the facilities
of The Depository Trust Company ("DTC") or (ii) in fully
registered, certificated form ("Definitive
Certificates").
An investor in a Class or Subclass of Book-Entry
Certificates will not receive a physical certificate
representing its ownership interest in such Book-Entry
Certificates, except under extraordinary circumstances
which are discussed in "Description of the Certificates
-- Definitive Form" in this Prospectus. Instead, DTC
will effect payments and transfers by means of its
electronic recordkeeping services, acting through
certain participating organizations. This may result in
certain delays in receipt of distributions by an
investor and may restrict an investor's ability to
pledge its securities. The rights of investors in the
Book-Entry Certificates may generally only be exercised
through DTC and its participating organizations. See
"Description of the Certificates -- Book-Entry Form" in
this Prospectus.
Optional Purchase of Defaulted
Mortgage Loans.................... The Seller or the Master Servicer, may, subject to the
terms of the applicable Pooling and Servicing Agreement,
purchase any defaulted Mortgage Loan or any Mortgage
Loan as to which default is reasonably foreseeable from
the related Trust Estate. See "Pooling and Servicing
Agreement -- Optional Purchases."
Optional Purchase of All Mortgage
Loans............................. If so specified in the Prospectus Supplement with
respect to a Series, all, but not less than all, of the
Mortgage Loans in the related Trust Estate and any
property acquired in respect thereof at the time, may be
purchased by the Seller, Norwest Mortgage or such other
party as is specified in the applicable Prospectus
Supplement, in the manner and at the price specified in
such Prospectus Supplement. In the event that an
election is made to treat the related Trust Estate (or
one or more segregated pools of assets therein) as a
REMIC, any such purchase will be effected only pursuant
to a "qualified liquidation," as defined under Section
860F(a)(4)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"). Exercise of the right of purchase
will effect the early retirement of the Certificates of
that Series. See "Prepayment and Yield Considerations."
ERISA Limitations................. A fiduciary of any employee benefit plan subject to the
fiduciary responsibility provisions of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), including the "prohibited transaction" rules
thereunder, and to the corresponding provisions of the
Code, should carefully review with its own legal
advisors whether the purchase or holding of
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Certificates could give rise to a transaction prohibited
or otherwise impermissible under ERISA or the Code. See
"ERISA Considerations."
Tax Status........................ The treatment of the Certificates for federal income tax
purposes will be determined by whether a REMIC election
is made with respect to a Series of Certificates and, if
a REMIC election is made, by whether the Certificates
are Regular Interests or Residual Interests. See
"Certain Federal Income Tax Consequences."
Legal Investment.................. The applicable Prospectus Supplement will specify
whether the Class or Classes of Certificates offered
will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement
Act of 1984. Investors whose investment authority is
subject to legal restrictions should consult their own
legal advisors to determine whether and to what extent
such Certificates constitute legal investments for them.
See "Legal Investment" herein and in the applicable
Prospectus Supplement.
Rating............................ It is a condition to the issuance of the Certificates of
any Series offered pursuant to this Prospectus and a
Prospectus Supplement that each Class or Subclass be
rated in one of the four highest rating categories by at
least one nationally recognized statistical rating
organization (a "Rating Agency"). A security rating is
not a recommendation to buy, sell or hold the
Certificates of any Series and is subject to revision or
withdrawal at any time by the assigning rating agency.
Further, such ratings do not address the effect of
prepayments on the yield anticipated by an investor.
</TABLE>
12
<PAGE>
RISK FACTORS
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE FOLLOWING FACTORS IN
CONNECTION WITH THE PURCHASE OF 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 that it will continue for the
life of the Certificates of any Series. The Prospectus Supplement for any Series
of Certificates may indicate that an underwriter specified therein intends to
establish a secondary market in such Certificates, however no underwriter will
be obligated to do so. Unless specified in the applicable Prospectus Supplement,
the Certificates will not be listed on any securities exchange.
LIMITED OBLIGATIONS
Except for any related insurance policies and any reserve fund or credit
enhancement described in the applicable Prospectus Supplement, Mortgage Loans
included in the related Trust Estate will be the sole source of payments on the
Certificates of a Series. The Certificates of any Series will not represent an
interest in or obligation of NASCOR, Norwest Mortgage, Norwest Bank, the Trustee
or any of their affiliates, except for NASCOR's limited obligations with respect
to certain breaches of its representations and warranties, Norwest Mortgage's
obligations as Servicer and Norwest Bank's obligations as Master Servicer.
Neither the Certificates of any Series nor the related Mortgage Loans will be
guaranteed or insured by any governmental agency or instrumentality, NASCOR,
Norwest Mortgage, Norwest Bank, the Trustee, any of their affiliates or any
other person. Consequently, in the event that payments on the Mortgage Loans are
insufficient or otherwise unavailable to make all payments required on the
Certificates, there will be no recourse to NASCOR, Norwest Mortgage, Norwest
Bank, the Trustee or, except as specified in the applicable Prospectus
Supplement, any other entity.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
With respect to each Series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the underlying
Mortgage Loans. Credit enhancement will be provided in one or more of the forms
referred to herein, including, but not limited to: subordination of other
Classes of Certificates of the same Series; a limited guarantee; a financial
guaranty insurance policy; a surety bond; a letter of credit; a pool insurance
policy; a special hazard insurance policy; a mortgagor bankruptcy bond; a
reserve fund; cross-support; and any combination thereof. See "Description of
the Certificates -- Other Credit Enhancement" herein. Regardless of the form of
credit enhancement provided, the amount of coverage will be limited in amount
and in most cases will be subject to periodic reduction in accordance with a
schedule or formula. Furthermore, such credit enhancements may provide only very
limited coverage as to certain types of losses, and may provide no coverage as
to certain other types of losses. All or a portion of the credit enhancement for
any Series of Certificates will generally be permitted to be reduced, terminated
or substituted for, in the sole discretion of the Master Servicer, if each
applicable Rating Agency indicates that the then current rating thereof will not
be adversely affected. In the event losses exceed the amount of coverage
provided by any credit enhancement or losses of a type not covered by any credit
enhancement occur, such losses will be borne by the holders of the related
Certificates (or certain Classes thereof). The rating of any Series of
Certificates by any applicable Rating Agency may be lowered following the
initial issuance thereof as a result of the downgrading of the obligations of
any applicable credit support provider, or as a result of losses on the related
Mortgage Loans in excess of the levels contemplated by such Rating Agency at the
time of its initial rating analysis. Neither NASCOR, Norwest Mortgage, Norwest
Bank, nor any of their affiliates will have any obligation to replace or
supplement any credit enhancement, or to take any other action to maintain any
rating of any Class of Certificates. See "Description of the Certificates --
Other Credit Enhancement."
13
<PAGE>
RISKS OF THE MORTGAGE LOANS
An investment in securities such as the Certificates, which generally
represent interests in pools of residential mortgage loans, may be affected by,
among other things, a decline in real estate values and changes in the
mortgagor's financial condition. No assurance can be given that the values of
the Mortgaged Properties (as defined herein) securing the Mortgage Loans
underlying any Series of Certificates have remained or will remain at their
levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of the Mortgage Loans contained in a
particular Trust Estate, and any secondary financing on the Mortgaged
Properties, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry and
those experienced in Norwest Mortgage's or other Servicers' servicing
portfolios. In addition to risk factors related to the residential real estate
market generally, certain geographic regions of the United States from time to
time will experience weaker regional economic conditions and housing markets or
be directly or indirectly affected by natural disasters or civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots and, consequently,
will experience higher rates of loss and delinquency than on mortgage loans
generally. Although Mortgaged Properties located in certain identified flood
zones will be required to be covered, to the maximum extent available, by flood
insurance, as described under "Servicing of the Mortgage Loans -- Insurance
Policies," no Mortgaged Properties will otherwise be required to be insured
against earthquake damage of any other loss not covered by Standard Hazard
Insurance Policies, as described under "Servicing of the Mortgage Loans --
Insurance Policies." Adverse economic conditions generally, in particular
geographic areas or industries, or affecting particular segments of the
borrowing community (such as mortgagors relying on commission income and
self-employed mortgagors) and other factors which may or may not affect real
property values (including the purposes for which the Mortgage Loans were made
and the uses of the Mortgaged Properties) may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies, foreclosures and losses
with respect to any Trust Estate. The Mortgage Loans underlying certain Series
of Certificates may be concentrated in certain regions, and such concentration
may present risk considerations in addition to those generally present for
similar mortgage-backed securities without such concentration. See "The Mortgage
Loan Programs -- Mortgage Loan Underwriting" and "Prepayment and Yield
Considerations -- Weighted Average Life of Certificates" herein. To the extent
that such losses are not covered by the applicable credit enhancement, holders
of Certificates of the Series evidencing interests in the related Trust Estate
will bear all risk of loss resulting from default by mortgagors and will have to
look primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans. See
"The Trust Estates -- Mortgage Loans" and "The Mortgage Loan Programs --
Mortgage Loan Underwriting."
YIELD AND PREPAYMENT CONSIDERATIONS
The yield of the Certificates of each Series will depend in part on the rate
of principal payment on the Mortgage Loans (including prepayments, liquidations
due to defaults and mortgage loan repurchases). Such yield may be adversely
affected, depending upon whether a particular Certificate is purchased at a
premium or discount price, by a higher or lower than anticipated rate of
prepayments on the related Mortgage Loans. In particular, the yield on Classes
of Certificates entitling the holders thereof primarily or exclusively to
payments of interest or primarily or exclusively to payments of principal will
be extremely sensitive to the rate of prepayments on the related Mortgage Loans.
In addition, the yield on certain Classes of Certificates may be relatively more
sensitive to the rate of prepayment of specified Mortgage Loans than other
Classes of Certificates. In particular, prepayments are influenced by a number
of factors, including prevailing mortgage market interest rates, local and
national economic conditions and homeowner mobility. In addition, the yield to
investors may be adversely affected by interest shortfalls which may result from
the timing of the receipt of prepayments or liquidations to the extent that such
interest shortfalls are not covered by aggregate Servicing Fees or other
mechanisms specified in the applicable Prospectus Supplement. The yield to
14
<PAGE>
investors in Classes of Certificates will be adversely affected to the extent
that losses on the Mortgage Loans in the related Trust Estate are allocated to
such Classes and may be adversely affected to the extent of unadvanced
delinquencies on the Mortgage Loans in the related Trust Estate. Classes of
Certificates identified in the applicable Prospectus Supplement as Subordinated
Certificates are more likely to be affected by delinquencies and losses than
other Classes of Certificates. See "Prepayment and Yield Considerations."
BOOK-ENTRY SYSTEM FOR CERTAIN CLASSES AND SUBCLASSES OF CERTIFICATES
Since transactions in the Classes and Subclasses of Book-Entry Certificates
of any Series generally can be effected only through DTC, DTC Participants and
Indirect DTC Participants, the ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
DTC system, or to otherwise act with respect to such Book-Entry Certificates,
may be limited due to the lack of a physical certificate for such Book-Entry
Certificates. In addition, under a book-entry format, Beneficial Owners may
experience delays in their receipt of payments, since distributions will be made
by the Master Servicer, or a Paying Agent on behalf of the Master Servicer, to
Cede, as nominee for DTC. Also, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity thereof in any secondary trading market
that may develop therefor because investors may be unwilling to purchase
securities for which they cannot obtain delivery of physical certificates. See
"Description of the Certificates -- Book-Entry Form" herein.
THE TRUST ESTATES
GENERAL
The Trust Estate for each Series of Certificates will consist primarily of
Mortgage Loans evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other instruments creating first liens (the
"Mortgages") on some or all of the following six types of property (as so
secured, the "Mortgaged Properties"), to the extent set forth in the applicable
Prospectus Supplement: (i) one- to four-family detached residences, (ii)
townhouses, (iii) condominium units, (iv) units within planned unit
developments, (v) long-term leases with respect to any of the foregoing, and
(vi) shares issued by private non-profit housing corporations ("cooperatives")
and the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specified units in such cooperatives' buildings. In addition, a
Trust Estate will also include (i) amounts held from time to time in the related
Certificate Account, (ii) the Seller's interest in any primary mortgage
insurance, hazard insurance, title insurance or other insurance policies
relating to a Mortgage Loan, (iii) any property which initially secured a
Mortgage Loan and which has been acquired by foreclosure or trustee's sale or
deed in lieu of foreclosure or trustee's sale, (iv) if applicable, and to the
extent set forth in the applicable Prospectus Supplement, any reserve fund or
funds, (v) if applicable, and to the extent set forth in the applicable
Prospectus Supplement, contractual obligations of any person to make payments in
respect of any form of credit enhancement or any interest subsidy agreement and
(vi) such other assets as may be specified in the applicable Prospectus
Supplement. The Trust Estate will not include the portion of interest on the
Mortgage Loans which constitutes the Fixed Retained Yield, if any. See
"Servicing of the Mortgage Loans -- Fixed Retained Yield, Servicing Compensation
and Payment of Expenses."
MORTGAGE LOANS
The Mortgage Loans will have been acquired by the Seller from its affiliate,
Norwest Mortgage. The Mortgage Loans will have been originated by Norwest
Mortgage or will have been acquired by Norwest Mortgage from other affiliated or
unaffiliated mortgage loan originators. Each Mortgage Loan will have been
underwritten either to Norwest Mortgage's standards, to the extent specified in
the applicable Prospectus Supplement, to the standards of a Pool Insurer or to
such other standards set forth in the applicable Prospectus Supplement. See "The
Mortgage Loan Programs -- Mortgage Loan Production Sources" and " -- Mortgage
Loan Underwriting." The Prospectus Supplement for each Series will set forth the
respective number and principal amounts of Mortgage Loans
15
<PAGE>
(i) originated by Norwest Mortgage or its affiliate and (ii) purchased by
Norwest Mortgage or its affiliates from unaffiliated mortgage loan originators
through Norwest Mortgage's mortgage loan purchase programs.
Each of the Mortgage Loans will be secured by a Mortgage on a Mortgaged
Property located in any of the 50 states or the District of Columbia. Generally,
the land underlying a Mortgaged Property will consist of five acres or less but
may consist of greater acreage in Norwest Mortgage's discretion.
If specified in the applicable Prospectus Supplement, the Mortgage Loans may
be secured by leases on real property under circumstances that Norwest Mortgage
determines in its discretion are commonly acceptable to institutional mortgage
investors. A Mortgage Loan secured by a lease on real property is secured not by
a fee simple interest in the Mortgaged Property but rather by a lease under
which the mortgagor has the right, for a specified term, to use the related real
estate and the residential dwelling located thereon. Generally, a Mortgage Loan
will be secured by a lease only if the use of leasehold estates as security for
mortgage loans is customary in the area, the lease is not subject to any prior
lien that could result in termination of the lease and the term of the lease
ends at least five years beyond the maturity date of the related Mortgage Loan.
The provisions of each lease securing a Mortgage Loan will expressly permit (i)
mortgaging of the leasehold estate, (ii) assignment of the lease without the
lessor's consent and (iii) acquisition by the holder of the Mortgage, in its own
or its nominee's name, of the rights of the lessee upon foreclosure or
assignment in lieu of foreclosure, unless alternative arrangements provide the
holder of the Mortgage with substantially similar protections. No lease will
contain provisions which (i) provide for termination upon the lessee's default
without the holder of the Mortgage being entitled to receive written notice of,
and opportunity to cure, such default, (ii) provide for termination in the event
of damage or destruction as long as the Mortgage is in existence or (iii)
prohibit the holder of the Mortgage from being insured under the hazard
insurance policy or policies related to the premises.
The Prospectus Supplement will set forth the geographic distribution of
Mortgaged Properties and the number and aggregate unpaid principal balances of
the Mortgage Loans by category of Mortgaged Property. The Prospectus Supplement
for each Series will also set forth the range of original terms to maturity of
the Mortgage Loans in the Trust Estate, the weighted average remaining term to
stated maturity at the Cut-Off Date of such Mortgage Loans, the earliest and
latest months of origination of such Mortgage Loans, the range of Mortgage
Interest Rates borne by such Mortgage Loans, if such Mortgage Loans have varying
Net Mortgage Interest Rates, the weighted average Net Mortgage Interest Rate at
the Cut-Off Date of such Mortgage Loans, the range of Loan-to-Value Ratios at
the time of origination of such Mortgage Loans and the range of principal
balances at origination of such Mortgage Loans.
The information with respect to the Mortgage Loans and Mortgaged Properties
described in the preceding two paragraphs may be presented in the Prospectus
Supplement for a Series as ranges in which the actual characteristics of such
Mortgage Loans and Mortgaged Properties are expected to fall. In all such cases,
information as to the final characteristics of the Mortgage Loans and Mortgaged
Properties will be available in a Current Report on Form 8-K which will be filed
with the Commission within 15 days of the initial issuance of the related
Series.
The Mortgage Loans in a Trust Estate will generally have monthly payments
due on the first of each month (each, a "Due Date") but may, if so specified in
the applicable Prospectus Supplement, have payments due on a different day of
each month and will be of one of the following types of mortgage loans:
A. FIXED RATE LOANS. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fixed-rate, fully-amortizing mortgage
loans providing for level monthly payments of principal and interest and terms
at origination or modification of not more than 30 years. If specified in the
applicable Prospectus Supplement, fixed rates on certain Mortgage Loans may be
converted to adjustable rates after origination of such Mortgage Loans and upon
the satisfaction of other conditions specified in the applicable Prospectus
Supplement. If so specified in the applicable Prospectus
16
<PAGE>
Supplement, the Pooling and Servicing Agreement will require the Seller or
another party to repurchase each such converted Mortgage Loan at the price set
forth in the applicable Prospectus Supplement. A Trust Estate containing fixed
rate Mortgage Loans may contain convertible Mortgage Loans which have converted
from an adjustable interest rate prior to the formation of the Trust Estate and
which are subject to no further conversions.
B. ADJUSTABLE RATE LOANS. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fully-amortizing adjustable-rate mortgage
loans having an original or modified term to maturity of not more than 30 years
with a related Mortgage Interest Rate which generally adjusts initially either
six months, one, three, five, seven or ten years subsequent to the initial
payment date, and thereafter at either six-month, one-year or other intervals
over the term of the mortgage loan to equal the sum of a fixed margin set forth
in the related Mortgage Note and an index. The applicable Prospectus Supplement
will set forth the relevant index and the highest, lowest and weighted average
margin with respect to the adjustable rate mortgage loans in the related Trust
Estate. The applicable Prospectus Supplement will also indicate any periodic or
lifetime limitations on changes in any per annum Mortgage Rate at the time of
any adjustment.
If specified in the applicable Prospectus Supplement, adjustable rates on
certain Mortgage Loans may be converted to fixed rates after origination of such
Mortgage Loans and upon the satisfaction of the conditions specified in the
applicable Prospectus Supplement. If specified in the applicable Prospectus
Supplement, the Seller or another party will generally be required to repurchase
each such converted Mortgage Loan at the price set forth in the applicable
Prospectus Supplement. A Trust Estate containing adjustable rate Mortgage Loans
may contain convertible Mortgage Loans which have converted from a fixed
interest rate prior to the formation of the Trust Estate.
If so specified in the applicable Prospectus Supplement, the Trust Estate
may contain adjustable-rate mortgage loans which have Mortgage Interest Rates
that generally adjust monthly or may adjust at other intervals as specified in
the applicable Prospectus Supplement. The scheduled monthly payment will be
adjusted as and when described in the applicable Prospectus Supplement (at
intervals different from those at which the Mortgage Interest Rate is adjusted)
to an amount that would fully amortize the Mortgage Loan over its remaining term
on a level debt service basis; provided that increases in the scheduled monthly
payment may be subject to certain limitations as specified in the applicable
Prospectus Supplement, thereby resulting in negative amortization of principal.
If an adjustment to the Mortgage Interest Rate on such a Mortgage Loan causes
the amount of interest accrued thereon in any month to exceed the current
scheduled monthly payment on such mortgage loan, the resulting amount of
interest that has accrued but is not then payable ("Deferred Interest") will be
added to the principal balance of such Mortgage Loan.
C. GRADUATED PAYMENT LOANS. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fixed-rate, graduated payment mortgage
loans having original or modified terms to maturity of not more than 30 years
with monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage Rate on
such mortgage loan. Such monthly payments increase at the beginning of the
second year by a specified percentage of the monthly payment during the
preceding year and each year specified thereafter to the extent necessary to
amortize the mortgage loan over the remainder of its term. Deferred Interest, if
any, will be added to the principal balance of such mortgage loans.
D. SUBSIDY LOANS. If so specified in the applicable Prospectus Supplement,
a Trust Estate may contain Mortgage Loans subject to temporary interest subsidy
agreements ("Subsidy Loans") pursuant to which the monthly payments made by the
related mortgagors will be less than the scheduled monthly payments on such
Mortgage Loans with the present value of the resulting difference in payment
("Subsidy Payments") being provided by the employer of the mortgagor, generally
on an annual basis. Subsidy Payments will generally be placed in a custodial
account ("Subsidy Account")
17
<PAGE>
by the related Servicer. Despite the existence of a subsidy program, a mortgagor
remains primarily liable for making all scheduled payments on a Subsidy Loan and
for all other obligations provided for in the related Mortgage Note and Mortgage
Loan.
Subsidy Loans are offered by employers generally through either a graduated
or fixed subsidy loan program, or a combination thereof. The terms of the
subsidy agreements relating to Subsidy Loans generally range from one to ten
years. The subsidy agreements relating to Subsidy Loans made under a graduated
program generally will provide for subsidy payments that result in effective
subsidized interest rates between three percentage points and five percentage
points below the Mortgage Interest Rates specified in the related Mortgage
Notes. Generally, under a graduated program, the subsidized rate for a Mortgage
Loan will increase approximately one percentage point per year until it equals
the full Mortgage Interest Rate. For example, if the initial subsidized interest
rate is five percentage points below the Mortgage Interest Rate in year one, the
subsidized rate will increase to four percentage points below the Mortgage
Interest Rate in year two, and likewise until year six, when the subsidized rate
will equal the Mortgage Interest Rate. Where the subsidy agreements relating to
Subsidy Loans are in effect for longer than five years, the subsidized interest
rates generally increase at smaller percentage increments for each year. The
subsidy agreements relating to Subsidy Loans made under a fixed program
generally will provide for subsidized interest rates at fixed percentages
(generally one percentage point to two percentage points) below the Mortgage
Interest Rates for specified periods, generally not in excess of ten years.
Subsidy Loans are also offered pursuant to combination fixed/graduated programs.
The subsidy agreements relating to such Subsidy Loans generally will provide for
an initial fixed subsidy of up to five percentage points below the related
Mortgage Interest Rate for up to five years, and then a periodic reduction in
the subsidy for up to five years, at an equal fixed percentage per year until
the subsidized rate equals the Mortgage Interest Rate.
Generally, employers may terminate subsidy programs in the event of (i) the
mortgagor's death, retirement, resignation or termination of employment, (ii)
the full prepayment of the Subsidy Loan by the mortgagor, (iii) the sale or
transfer by the mortgagor of the related Mortgaged Property as a result of which
the mortgagee is entitled to accelerate the Subsidy Loan pursuant to the
"due-on-sale" clause contained in the Mortgage, or (iv) the commencement of
foreclosure proceedings or the acceptance of a deed in lieu of foreclosure. In
addition, some subsidy programs provide that if prevailing market rates of
interest on mortgage loans similar to a Subsidy Loan are less than the Mortgage
Interest Rate of such Subsidy Loan, the employer may request that the mortgagor
refinance such Subsidy Loan and may terminate the related subsidy agreement if
the mortgagor fails to refinance such Subsidy Loan. In the event the mortgagor
refinances such Subsidy Loan, the new loan will not be included in the Trust
Estate. See "Prepayment and Yield Considerations" herein. In the event a subsidy
agreement is terminated, the amount remaining in the Subsidy Account will be
returned to the employer, and the mortgagor will be obligated to make the full
amount of all remaining scheduled payments, if any. The mortgagor's reduced
monthly housing expense as a consequence of payments under a subsidy agreement
is used by Norwest Mortgage in determining certain expense-to-income ratios
utilized in underwriting a Subsidy Loan. See "The Mortgage Loan Programs --
Mortgage Loan Underwriting."
E. BUY-DOWN LOANS. If so specified in the applicable Prospectus Supplement,
a Trust Estate may contain Mortgage Loans subject to temporary buy-down plans
("Buy-Down Loans") pursuant to which the monthly payments made by the mortgagor
during the early years of the Mortgage Loan will be less than the scheduled
monthly payments on the Mortgage Loan. The resulting difference in payment will
be compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source, including the originator of the Mortgage
Loan (generally on a present value basis) and, if so specified in the applicable
Prospectus Supplement, placed in a custodial account (the "Buy-Down Fund") by
the related Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage
Loan in its entirety, or defaults on such Mortgage Loan and the Mortgaged
Property is sold in liquidation thereof, during the period when the mortgagor is
not obligated, on account of the buy-
18
<PAGE>
down plan, to pay the full monthly payment otherwise due on such loan, the
unpaid principal balance of such Buy-Down Loan will be reduced by the amounts
remaining in the Buy-Down Fund with respect to such Buy-Down Loan, and such
amounts will be deposited in the Servicer Custodial Account or the Certificate
Account, net of any amounts paid with respect to such Buy-Down Loan by any
insurer, guarantor or other person pursuant to a credit enhancement arrangement
described in the applicable Prospectus Supplement.
F. BALLOON LOANS. If so specified in the applicable Prospectus Supplement,
a Trust Estate may include Mortgage Loans which are amortized over a fixed
period not exceeding 30 years but which have shorter terms to maturity (each
such Mortgage Loan, a "Balloon Loan") that causes the outstanding principal
balance of the related Mortgage Loan to be due and payable at the end of a
certain specified period (the "Balloon Period"). The borrower of such Balloon
Loan will be obligated to pay the entire outstanding principal balance of the
Balloon Loan at the end of the related Balloon Period. In the event Norwest
Mortgage refinances a mortgagor's Balloon Loan at maturity, the new loan will
not be included in the Trust Estate. See "Prepayment and Yield Considerations"
herein.
A Trust Estate may also include other types of first lien, residential
Mortgage Loans to the extent set forth in the applicable Prospectus Supplement.
THE SELLER
Norwest Asset Securities Corporation (the "Seller" or "NASCOR") is a direct,
wholly owned subsidiary of Norwest Mortgage, Inc. and an indirect, wholly owned
subsidiary of Norwest Corporation, a corporation organized under the laws of
Delaware ("Norwest Corporation"). The Seller was incorporated in the State of
Delaware on March 28, 1996.
The limited purposes of the Seller are, in general, to acquire, own and sell
mortgage loans; to issue, acquire, own, hold and sell mortgage pass-through
securities which represent ownership interests in mortgage loans, collections
thereon and related properties; and to engage in any acts which are incidental
to, or necessary, suitable or convenient to accomplish, the foregoing.
The Seller maintains its principal office at 5325 Spectrum Drive, Frederick,
Maryland 21701. Its telephone number is (301) 846-8881.
At the time of the formation of any Trust Estate, the Seller will be the
sole owner of all the related Mortgage Loans. The Seller will have acquired the
Mortgage Loans included in any Trust Estate from Norwest Mortgage. Except to the
extent otherwise specified in the applicable Prospectus Supplement, the Seller's
only obligation with respect to the Certificates of any Series will be to
repurchase or substitute for Mortgage Loans in a Trust Estate in the event of
defective documentation or upon the breach of certain representations and
warranties made by the Seller. See "The Pooling and Servicing Agreement --
Assignment of Mortgage Loans to the Trustee."
NORWEST MORTGAGE
Norwest Mortgage, Inc. ("Norwest Mortgage") was originally incorporated as a
Minnesota corporation on July 1, 1983. On August 30, 1995, Norwest Mortgage and
Directors Mortgage Loan Corporation, a California corporation, completed a
statutory merger. As a result of the merger, Norwest became a California
corporation as of September 1, 1995. Norwest Mortgage is engaged principally in
the business of (i) originating and purchasing residential mortgage loans in its
own name and through its affiliates, Norwest Funding, Inc. and Norwest Funding
II, Inc. (collectively, "Norwest Funding") and (ii) servicing residential
mortgage loans for its own account or for the account of others. Norwest
Mortgage is a direct, wholly owned subsidiary of Norwest Nova, Inc. and an
indirect, wholly owned subsidiary of Norwest Corporation. The executive offices
of Norwest Mortgage are located at 405 Southwest 5th Street, Des Moines, Iowa
50309-4603, and its telephone number is (515) 221-7300.
On May 7, 1996 Norwest Mortgage and Norwest Funding acquired all of the
mortgage origination, servicing and secondary marketing operations of The
Prudential Home Mortgage Company, Inc.
19
<PAGE>
("PHMC"), an indirect, wholly owned subsidiary of The Prudential Insurance
Company of America, and purchased certain mortgage loans from PHMC and a
substantial portion of PHMC's mortgage servicing portfolio (such transaction,
the "PHMC Acquisition"). The Mortgage Loans included in any Trust Estate
underlying a Series of Certificates may consist of (i) Mortgage Loans originated
by Norwest Mortgage or Norwest Funding or purchased by Norwest Mortgage or
Norwest Funding from originators other than PHMC ("Norwest Mortgage Loans"),
(ii) Mortgage Loans originated or purchased by PHMC and acquired by Norwest
Mortgage or Norwest Funding from PHMC as part of the PHMC Acquisition ("PHMC
Mortgage Loans") or (iii) a combination of Norwest Mortgage Loans and PHMC
Mortgage Loans.
Norwest Mortgage is an approved servicer of FNMA, FHLMC and the Government
National Mortgage Association. As of December 31, 1995, Norwest Mortgage had a
net worth of approximately $314.8 million.
NORWEST BANK
Norwest Bank Minnesota, National Association ("Norwest Bank") will act as
Master Servicer with respect to each Series. Norwest Bank is a direct, wholly
owned subsidiary of Norwest Corporation. Norwest Bank is a national banking
association originally chartered in 1872 and is engaged in a wide range of
activities typical of a national bank.
Norwest Bank's principal office is located at Norwest Center, Sixth and
Marquette, Minneapolis, Minnesota 55479. Norwest Bank conducts its master
servicing and securities administration services at its offices in Columbia,
Maryland. Its address there is 11000 Broken Land Parkway, Columbia, Maryland
21044-3662 and its telephone number is (410) 884-2000.
THE MORTGAGE LOAN PROGRAMS
MORTGAGE LOAN PRODUCTION SOURCES
Norwest Mortgage conducts a significant portion of its mortgage loan
originations through more than 700 loan production offices (the "Loan Stores")
located throughout all 50 states. Norwest Mortgage also conducts a significant
portion of its mortgage loan originations through centralized production offices
located in Springfield, Illinois, Frederick, Maryland and Minneapolis,
Minnesota. At the latter locations, Norwest Mortgage receives applications for
home mortgage loans on toll-free telephone numbers that can be called from
anywhere in the United States.
The following are Norwest Mortgage's primary sources of mortgage loan
originations: (i) direct contact with prospective borrowers (including borrowers
with mortgage loans currently serviced by Norwest Mortgage or borrowers referred
by borrowers with mortgage loans currently serviced by Norwest Mortgage), (ii)
referrals by realtors, other real estate professionals and prospective borrowers
to the Loan Stores, (iii) referrals from selected corporate clients, (iv)
referrals from the private mortgage banking group, a division of Norwest
Funding, Inc., which specializes in mortgage loans with original principal
balances in excess of the limits of FNMA and FHLMC, (v) several joint ventures
into which Norwest Mortgage, through its wholly owned subsidiary, Norwest
Mortgage Ventures, Inc., has entered with realtors and banking institutions (the
"Joint Ventures") and (vi) referrals from mortgage brokers and similar entities.
In addition to its own mortgage loan originations, Norwest Mortgage acquires
qualifying mortgage loans from other unaffiliated originators
("Correspondents"). See " -- Acquisition of Mortgage Loans from Correspondents"
below. The relative contribution of each of these sources to Norwest Mortgage's
business, measured by the volume of loans generated, tends to fluctuate over
time.
Norwest Mortgage Ventures, Inc. owns at least a 50% interest in each of the
Joint Ventures, with the remaining ownership interest in each being owned by a
realtor or a banking institution having significant contact with potential
borrowers. Mortgage loans that are originated by Joint Ventures in which Norwest
Mortgage's partners are realtors are generally made to finance the acquisition
of
20
<PAGE>
properties marketed by such Joint Venture partners. Applications for mortgage
loans originated through Joint Ventures are generally taken by Joint Venture
employees and underwritten by Norwest Mortgage in accordance with its standard
underwriting criteria. Such mortgage loans are then closed by the Joint Ventures
in their own names and subsequently purchased by Norwest Mortgage or Norwest
Funding.
Norwest Mortgage may directly contact prospective borrowers (including
borrowers with mortgage loans currently serviced by Norwest Mortgage) through
general and targeted solicitations. Such solicitations are made through direct
mailings, mortgage loan statement inserts and television, radio and print
advertisements and by telephone. Norwest Mortgage's targeted solicitations may
be based on characteristics such as the borrower's mortgage loan interest rate
or payment history and the geographic location of the mortgaged property. See
"Prepayment and Yield Considerations" herein.
A majority of Norwest Mortgage's corporate clients are companies that
sponsor relocation programs for their employees and in connection with which
Norwest Mortgage provides mortgage financing. Eligibility for a relocation loan
is based, in general, on an employer's providing financial assistance to the
relocating employee in connection with a job-required move. Although Subsidy
Loans are typically generated through such corporate-sponsored programs, the
assistance extended by the employer need not necessarily take the form of a loan
subsidy. (Not all relocation loans are generated by Norwest Mortgage through
referrals from its corporate clients; some relocation loans are generated as a
result of referrals from mortgage brokers and similar entities and others are
generated through Norwest Mortgage's acquisition of mortgage loans from other
originators.) Also among Norwest Mortgage's corporate clients are various
professional associations. These associations, as well as the other corporate
clients, promote the availability of a broad range of Norwest Mortgage mortgage
products to their members or employees, including refinance loans, second-home
loans and investment-property loans.
ACQUISITION OF MORTGAGE LOANS FROM CORRESPONDENTS
In order to qualify for participation in Norwest Mortgage's mortgage loan
purchase programs, lending institutions must (i) meet and maintain certain net
worth and other financial standards, (ii) demonstrate experience in originating
residential mortgage loans, (iii) meet and maintain certain operational
standards, (iv) evaluate each loan offered to Norwest Mortgage for consistency
with Norwest Mortgage's underwriting guidelines or the standards of a Pool
Insurer and represent that each loan was underwritten in accordance with Norwest
Mortgage standards or the standards of a Pool Insurer and (v) utilize the
services of qualified appraisers.
The contractual arrangements with Correspondents may involve the commitment
by Norwest Mortgage to accept delivery of a certain dollar amount of mortgage
loans over a period of time; this commitment may be satisfied either by delivery
of mortgage loans one at a time or in multiples as aggregated by the
Correspondent. The contractual arrangements with Correspondents may also involve
the delegation of all underwriting functions to such Correspondents ("Delegated
Underwriting"), which will result in Norwest Mortgage not performing any
underwriting functions prior to acquisition of the loan but instead relying on
such originators' representations, and Norwest Mortgage's post-purchase reviews
of samplings of mortgage loans acquired from such originators regarding the
originators' compliance with Norwest Mortgage's underwriting standards. In all
instances, however, acceptance by Norwest Mortgage is contingent upon the loans
being found to satisfy Norwest Mortgage's program standards or the standards of
a Pool Insurer. Norwest Mortgage may also acquire portfolios of seasoned loans
in negotiated transactions.
MORTGAGE LOAN UNDERWRITING
NORWEST MORTGAGE UNDERWRITING. Norwest Mortgage's underwriting standards
are applied by or on behalf of Norwest Mortgage to evaluate the applicant's
credit standing and ability to repay the loan, as well as the value and adequacy
of the mortgaged property as collateral. The underwriting standards that guide
the determination represent a balancing of several factors that may affect the
ultimate recovery of the loan amount, including, among others, the amount of the
loan, the ratio of the
21
<PAGE>
loan amount to the property value (i.e., the lower of the appraised value of the
mortgaged property and the purchase price), the borrower's means of support and
the borrower's credit history. Norwest Mortgage's guidelines for underwriting
may vary according to the nature of the borrower or the type of loan, since
differing characteristics may be perceived as presenting different levels of
risk. With respect to certain Mortgage Loans, the originators of such loans may
have contracted with unaffiliated third parties to perform the underwriting
process. Except as described below, Mortgage Loans were underwritten by or on
behalf of Norwest Mortgage or, in the case of PHMC Mortgage Loans, PHMC,
generally in accordance with the standards and procedures described herein.
Norwest Mortgage utilizes various systems of credit scoring as a tool to
supplement the mortgage loan underwriting process. Credit scoring assists
Norwest Mortgage in the mortgage loan approval process by providing consistent,
objective measures of borrower credit and loan attributes. Such objective
measures are used to evaluate loan applications and assign each application a
"Credit Score." The Credit Score is used to determine the type of underwriting
process and which level of underwriter will review the loan file. For
transactions which are determined to be low-risk transactions, based upon the
Credit Score and other parameters (including the mortgage loan production
source), the lowest underwriting authority is generally required. For moderate
and higher risk transactions, higher level underwriters and a full review of the
mortgage file are generally required. Borrowers who have a satisfactory Credit
Score (based upon the mortgage loan production source) are generally subject to
streamlined credit review (which relies on the credit scoring process for
various elements of the underwriting assessments). Such borrowers may also be
eligible for a limited documentation program and are generally permitted a
greater latitude in the application of borrower debt-to-income ratios.
With respect to all mortgage loans underwritten by Norwest Mortgage, Norwest
Mortgage's underwriting of a mortgage loan may be based on data obtained by
parties other than Norwest Mortgage that are involved at various stages in the
mortgage origination or acquisition process. This typically occurs under
circumstances in which loans are subject to more than one approval process, as
when correspondents, certain mortgage brokers or similar entities that have been
approved by Norwest Mortgage to process loans on its behalf, or independent
contractors hired by Norwest Mortgage to perform underwriting services on its
behalf ("contract underwriters") make initial determinations as to the
consistency of loans with Norwest Mortgage underwriting guidelines. The
underwriting of mortgage loans acquired by Norwest Mortgage pursuant to a
Delegated Underwriting arrangement with a Correspondent is not reviewed prior to
acquisition of the mortgage loan by Norwest Mortgage although the mortgage loan
file is reviewed by Norwest Mortgage to confirm that certain documents are
included in the file. Instead, Norwest Mortgage relies on (i) the
Correspondent's representations that such mortgage loan was underwritten in
accordance with Norwest Mortgage's underwriting standards and (ii) a
post-purchase review of a sampling of all mortgage loans acquired from such
originator. In addition, in order to be eligible to sell mortgage loans to
Norwest Mortgage pursuant to a Delegated Underwriting arrangement, the
originator must meet certain requirements including, among other things, certain
quality, operational and financial guidelines.
A prospective borrower applying for a mortgage loan is required to complete
a detailed application. The loan application elicits pertinent information about
the applicant, with particular emphasis on the applicant's financial health
(assets, liabilities, income and expenses), the property being financed and the
type of loan desired. A self-employed applicant may be required to submit his or
her most recent signed federal income tax returns. With respect to every
applicant, credit reports are obtained from commercial reporting services,
summarizing the applicant's credit history with merchants and lenders.
Significant unfavorable credit information reported by the applicant or a credit
reporting agency must be explained by the applicant. The credit review process
generally is streamlined for borrowers with a qualifying Credit Score.
Verifications of employment, income, assets or mortgages may be used to
supplement the loan application and the credit report in reaching a
determination as to the applicant's ability to meet his or her monthly
obligations on the proposed mortgage loan, as well as his or her other mortgage
22
<PAGE>
payments (if any), living expenses and financial obligations. A mortgage
verification involves obtaining information regarding the borrower's payment
history with respect to any existing mortgage the applicant may have. This
verification is accomplished by either having the present lender complete a
verification of mortgage form, evaluating the information on the credit report
concerning the applicant's payment history for the existing mortgage,
communicating, either verbally or in writing, with the applicant's present
lender or analyzing cancelled checks provided by the applicant. Verifications of
income, assets or mortgages may be waived under certain programs offered by
Norwest Mortgage, but Norwest Mortgage's underwriting guidelines require, in
most instances, a verbal or written verification of employment to be obtained.
In some cases, employment histories may be obtained through V.I.E., Inc., an
affiliate of Norwest Mortgage, that obtains employment data from state
unemployment insurance departments or other state agencies. In addition, the
loan applicant may be eligible for a loan approval process permitting limited
documentation. The above referenced reduced documentation options and waivers
limit the amount of documentation required for an underwriting decision and have
the effect of increasing the relative importance of the credit report and the
appraisal. Documentation requirements vary based upon a number of factors,
including the purpose of the loan, the amount of the loan, the ratio of the loan
amount to the property value and the mortgage loan production source. Norwest
Mortgage accepts alternative methods of verification, in those instances where
verifications are part of the underwriting decision; for example, salaried
income may be substantiated either by means of a form independently prepared and
signed by the applicant's employer or by means of the applicant's most recent
paystub and W-2. In cases where two or more persons have jointly applied for a
mortgage loan, the gross incomes and expenses of all of the applicants,
including nonoccupant co-mortgagors, are combined and considered as a unit.
In general, except for borrowers meeting certain standards who apply for
loans with certain qualifying characteristics under Norwest Mortgage's
"retention program" applicable to then-current borrowers, borrowers applying for
loans must demonstrate that the ratio of their total monthly housing debt to
their monthly gross income, and the ratio of their total monthly debt to their
monthly gross income do not exceed certain maximum levels. Such maximum levels
vary, and under the "retention program" may not be applied, depending on a
number of factors including Loan-to-Value Ratio, a borrower's credit history, a
borrower's liquid net worth, the potential of a borrower for continued
employment advancement or income growth, the ability of the borrower to
accumulate assets or to devote a greater portion of income to basic needs such
as housing expense, a borrower's Credit Score and the type of loan for which the
borrower is applying. These calculations are based on the amortization schedule
and the interest rate of the related loan, with each ratio being computed on the
basis of the proposed monthly mortgage payment. In the case of adjustable-rate
mortgage loans, the interest rate used to determine a mortgagor's monthly
payment for purposes of such ratios may, in certain cases, be the initial
mortgage interest rate or another interest rate, which, in either case, is lower
than the sum of the index rate that would have been applicable at origination
plus the applicable margin. In evaluating applications for Subsidy Loans and
Buy-Down Loans, such ratios are determined by including in the applicant's total
monthly housing expense and total monthly debt the proposed monthly mortgage
payment reduced by the amount expected to be applied on a monthly basis under
the related subsidy agreement or buy-down agreement or, in certain cases, the
mortgage payment that would result from an interest rate lower than the Mortgage
Interest Rate but higher than the effective rate to the mortgagor as a result of
the subsidy agreement or the buy-down agreement. See "The Trust Estates --
Mortgage Loans." Secondary financing is permitted on mortgage loans under
certain circumstances. In those cases, the payment obligations under both
primary and secondary financing are included in the computation of the housing
debt-to-income ratios, and the combined amount of primary and secondary loans
will be used to calculate the combined loan-to-value ratio. Any secondary
financing permitted will generally mature prior to the maturity date of the
related mortgage loan. In evaluating an application with respect to a
"non-owner-occupied" property, which Norwest Mortgage defines as a property
leased to a third party by its owner (as distinct from a "second home," which
Norwest Mortgage defines as an owner-occupied, non-rental property that is not
the owner's principal residence), Norwest Mortgage will include projected rental
income net of
23
<PAGE>
certain mortgagor obligations and other assumed expenses or loss from such
property to be included in the applicant's monthly gross income or total monthly
debt in calculating the foregoing ratios. A mortgage loan secured by a two- to
four-family Mortgaged Property is considered to be an owner-occupied property if
the borrower occupies one of the units; rental income on the other units is
generally taken into account in evaluating the borrower's ability to repay the
mortgage loan.
Mortgage Loans will not generally have had at origination a Loan-to-Value
Ratio in excess of 95%. However, if so specified in the applicable Prospectus
Supplement, Mortgage Loans that had Loan-to-Value Ratios at origination in
excess of 95% may be included in the related Trust Estate. The Loan-to-Value
Ratio is the ratio, expressed as a percentage, of the principal amount of the
Mortgage Loan at origination to the lesser of (i) the appraised value of the
related Mortgaged Property, as established by an appraisal obtained by the
originator generally no more than four months prior to origination (or, with
respect to newly constructed properties, no more than twelve months prior to
origination), or (ii) the sale price for such property. In some instances, the
Loan-to-Value Ratio may be based on an appraisal that was obtained by the
originator more than four months prior to origination, provided that (i) a
recertification of the original appraisal is obtained and (ii) the original
appraisal was obtained no more than twelve months prior to origination. For the
purpose of calculating the Loan-to-Value Ratio of any Mortgage Loan that is the
result of the refinancing (including a refinancing for "equity take out"
purposes) of an existing mortgage loan, the appraised value of the related
Mortgaged Property is generally determined by reference to an appraisal obtained
in connection with the origination of the replacement loan. In connection with
certain of its mortgage originations, Norwest Mortgage currently obtains
appraisals through its affiliate, Value Information Technology, Inc. Appraisals
used in connection with the origination of the PHMC Mortgage Loans generally
were obtained by PHMC through its affiliate, Lender's Service, Inc.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of appraisal
(or, where applicable, recertification of value) of the related Mortgage Loans.
The appraisal of any Mortgaged Property reflects the individual appraiser's
judgment as to value, based on the market values of comparable homes sold within
the recent past in comparable nearby locations and on the estimated replacement
cost. The appraisal relates both to the land and to the structure; in fact, a
significant portion of the appraised value of a Mortgaged Property may be
attributable to the value of the land rather than to the residence. Because of
the unique locations and special features of certain Mortgaged Properties,
identifying comparable properties in nearby locations may be difficult. The
appraised values of such Mortgaged Properties will be based to a greater extent
on adjustments made by the appraisers to the appraised values of reasonably
similar properties rather than on objectively verifiable sales data. If
residential real estate values generally or in particular geographic areas
decline such that the outstanding balances of the Mortgage Loans and any
secondary financing on the Mortgaged Properties in a particular Trust Estate
become equal to or greater than the values of the related Mortgaged Properties,
the actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry and those now
experienced in Norwest Mortgage's servicing portfolios. In addition, adverse
economic conditions generally, in particular geographic areas or industries, or
affecting particular segments of the borrowing community (such as mortgagors
relying on commission income and self-employed mortgagors) and other factors
which may or may not affect real property values, including the purposes for
which the Mortgage Loans were made and the uses of the Mortgaged Properties, may
affect the timely payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to any Trust Estate. See
"Prepayment and Yield Considerations -- Weighted Average Life of Certificates"
herein. To the extent that such losses are not covered by the methods of credit
support or the insurance policies described herein, they will be borne by
holders of the Certificates of the Series evidencing interests in such Trust
Estate.
In general, Norwest Mortgage does not originate mortgage loans with
Loan-to-Value Ratios in excess of 80% unless primary mortgage insurance is
obtained. Loans with Loan-to-Value Ratios
24
<PAGE>
exceeding 80% may be approved if primary mortgage insurance is obtained from an
approved primary mortgage insurance company. In such cases, the excess over 75%
(or such lower percentage as Norwest Mortgage may require at origination) will
be covered by primary mortgage insurance until the unpaid principal balance of
the Mortgage Loan is reduced to an amount that will result in a Loan-to-Value
Ratio less than or equal to 80%. With respect to the PHMC Mortgage Loans,
however, PHMC in certain instances did not require primary mortgage insurance on
loans that had Loan-to-Value Ratios exceeding 80%. Primary residences and second
homes (excluding cooperatives) were eligible for this program. Each qualifying
loan was made at an interest rate that was higher than the rate would have been
if the Loan-to-Value Ratio was 80% or less or if primary mortgage insurance was
obtained.
Except as described below, Mortgage Loans will generally be covered by an
appropriate standard form American Land Title Association ("ALTA") title
insurance policy, or a substantially similar policy or form of insurance
acceptable to the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation ("FHLMC"). Certain Mortgage Loans ("T.O.P.
Loans") originated by Norwest Mortgage or Norwest Funding in connection with the
"Title Option Plus" program are not covered by title insurance policies,
although title searches are performed in connection with the origination of
T.O.P. Loans by American Land Title Company, Inc., an affiliate of Norwest
Mortgage. The Seller will represent and warrant to the Trustee of any Trust
Estate that the Mortgaged Property related to each Mortgage Loan (including each
T.O.P. Loan) is free and clear of all encumbrances and liens having priority
over the first lien of the related Mortgage, subject to certain limited
exceptions as set forth below under "-- Representations and Warranties." However
in the event that a lien senior to the lien of the Mortgage related to a T.O.P.
Loan that is contained in the Trust Estate for any Series is found to exist, the
sole recourse of the Trustee will be against the Seller for breach of its
representation and warranty. The Trustee will not have recourse against any
title insurance company or other party.
Where permitted by law, Norwest Mortgage generally requires that a borrower
include in each monthly payment a portion of the real estate taxes, assessments,
primary mortgage insurance (if applicable), and hazard insurance premiums and
other similar items with respect to the related mortgage loan. Norwest Mortgage
may, however, on a case-by-case basis, in its discretion not require such
advance payments for certain Mortgage Loans, based on an evaluation of the
borrowers' ability to pay such taxes and charges as they become due.
POOL CERTIFICATION UNDERWRITING. If specified in the applicable Prospectus
Supplement, certain of the Mortgage Loans will have been reviewed by General
Electric Mortgage Insurance Corporation ("GEMICO"), United Guaranty Residential
Insurance Company ("UGRIC") or a similar entity (collectively, the "Pool
Insurers") to determine conformity, in the aggregate, with such company's
respective credit, appraisal and underwriting guidelines. Norwest Mortgage will
not have underwritten such Mortgage Loans. Neither GEMICO nor UGRIC have
underwritten any of the Mortgage Loans for compliance with any investor
guidelines.
Based on information provided by the relevant company, as a condition to
eligibility of a Mortgage Loan for inclusion in a mortgage pool to be insured by
GEMICO or UGRIC, the loan originator generally will be required to comply with
the following procedures, although exceptions may be made if permitted by such
company.
Initially, a prospective borrower must fill out a detailed application
providing pertinent credit information. The loan originator obtains a credit
report, which summarizes the prospective borrower's credit history with
merchants and lenders and any record of bankruptcy, or other pertinent legal
history. In addition, a verification of employment for the last two years is
made from either the applicant's employer or a Form W-2 for the most recent two
years and the applicant's most recent pay stub. If an applicant is
self-employed, such applicant submits copies of signed tax returns with all
schedules for the prior two years together with a current year-to-date profit
and loss statement and any other documentation deemed necessary. Rental income
used to qualify the applicant is verified either by lease agreements or by the
borrower's tax returns. In the case of refinancings, the loan
25
<PAGE>
originator must require, among other things, that there has not been more than
one delinquency in the prior 12 months nor, in the case of mortgage loans
reviewed by GEMICO, any delinquency in the past 90 days on the prior mortgage
loan.
In determining the adequacy of the Mortgaged Property as collateral, an
independent appraisal must be made of each property considered for financing.
Each appraiser must be selected in accordance with predetermined guidelines
established for appraisers. The appraiser is required to inspect the property
and verify that it is in good condition and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes. No
appraisal more than six months old will be accepted by GEMICO and no appraisal
more than 120 days old will be accepted by UGRIC.
Once all applicable employment, credit and property information is received,
a determination must be made by the loan originator (and confirmed on review by
GEMICO or UGRIC) as to whether the prospective borrower has sufficient monthly
income to meet (i) the monthly payment obligations on the proposed mortgage loan
(including principal and interest payments, real estate taxes, insurance on the
subject property, and homeowners' association dues and secondary financing, if
any), and (ii) the aggregate of the foregoing and all other financial
obligations not expected to be fully repaid within the next 10 months. As a
general rule, GEMICO and UGRIC require the ratio of a prospective borrower's
debt, as described in clauses (i) and (ii) above, to such borrower's income to
be 33% and 38%, respectively for fixed rate, fixed payment loans. The ratios
required for adjustable rate loans are slightly lower. The general rule may be
varied, and higher debt-to-income ratios may be permitted, in appropriate cases
characterized by lower Loan-to-Value Ratios or other favorable factors.
In some special cases, GEMICO and UGRIC may underwrite loans under a
"limited documentation" program. With respect to such loans, limited
investigation into the borrower's 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 the percentage
required under standard guidelines, the originator may forego certain aspects of
the review relating to monthly income, and, in the case of mortgage loans
reviewed by GEMICO, traditional ratios of monthly or total expenses to gross
income may not be applied. At a minimum, a limited documentation program must
require a loan application, a credit report, an appraisal acceptable to
FNMA/FHLMC performed by an independent appraiser, and a verification of
downpayment or three months of bank statements. The maximum Loan-to-Value Ratio
allowed under any limited documentation program underwritten by GEMICO and UGRIC
is 70%. UGRIC's "limited documentation" program is limited exclusively to
self-employed borrowers.
For any rate or term refinance of a mortgage loan, or conversion of an
adjustable rate mortgage loan, where GEMICO or UGRIC has already insured the
prior loan, GEMICO or UGRIC may have determined a loan's insurability without
reviewing updated credit or collateral information. In the case of seasoned
loans, GEMICO or UGRIC may have determined a loan's insurability by performing a
more limited credit and collateral review.
The foregoing should not be taken as a full and complete discussion of all
of the procedures undertaken in connection with a particular underwriting. Both
GEMICO and UGRIC consider various other factors including, but not limited to,
reviewing sales contracts, verifying deposits and other assets and examining
additional supporting documentation in certain instances such as divorce decrees
and separation agreements. Investors should consult the particular Pool
Insurer's underwriting guidelines for more specific and complete requirements
regarding underwriting standards. Furthermore, the underwriting process often
results in certain compensating factors being considered to offset the existence
of other negative factors in a loan file.
The use of pool certification underwriting by a Pool Insurer in no way
indicates that the related Certificates or Mortgage Loans are insured or
guaranteed under a mortgage pool insurance policy unless the applicable
Prospectus Supplement so specifies.
26
<PAGE>
REPRESENTATIONS AND WARRANTIES
In connection with the transfer of the Mortgage Loans related to any Series
by the Seller to the Trust Estate, the Seller will generally make certain
representations and warranties regarding the Mortgage Loans. In certain cases
where the Seller acquired some or all of the Mortgage Loans related to a Series
from a Correspondent, if so indicated in the applicable Prospectus Supplement,
the Seller may, rather than itself making representations and warranties, cause
the representations and warranties made by the Correspondent in connection with
its sale of Mortgage Loans to Norwest Mortgage or Norwest Funding to be assigned
to the Trust Estate. In such cases, the Correspondent's representations and
warranties may have been made as of a date prior to the date of execution of the
Pooling and Servicing Agreement. Unless otherwise provided in the applicable
Prospectus Supplement, such representations and warranties (whether made by the
Seller or another party) will generally include the following with respect to
the Mortgage Loans, or each Mortgage Loan, as the case may be:
(i)
the information set forth in the schedule of Mortgage Loans appearing
as an exhibit to such Pooling and Servicing Agreement is correct in
all material respects at the date or dates respecting which such information
is furnished as specified therein;
(ii)
immediately prior to the transfer and assignment contemplated by the
Pooling and Servicing Agreement, the Seller is the sole owner and
holder of the Mortgage Loan, free and clear of any and all liens, pledges,
charges or security interests of any nature and has full right and authority
to sell and assign the same;
(iii)
the Mortgage is a valid, subsisting and enforceable first lien on the
related Mortgaged Property, and the Mortgaged Property is free and
clear of all encumbrances and liens having priority over the first lien of
the Mortgage except for liens for real estate taxes and special assessments
not yet due and payable and liens or interests arising under or as a result
of any federal, state or local law, regulation or ordinance relating to
hazardous wastes or hazardous substances; and, if the Mortgaged Property is
a condominium unit, any lien for common charges permitted by statute or home
owners association fees; and, if the Mortgaged Property consists of shares
of a cooperative housing corporation, any lien for amounts due to the
cooperative housing corporation for unpaid assessments or charges or any
lien of any assignment of rents or maintenance expenses secured by the real
property owned by the cooperative housing corporation; and any security
agreement, chattel mortgage or equivalent document related to, and delivered
to the Trustee or a custodian with, any Mortgage establishes in the Seller a
valid first lien on the property described therein and the Seller has full
right to sell and assign the same to the Trustee;
(iv)
neither the Seller nor any prior holder of the Mortgage or the
related Mortgage Note has modified the Mortgage in any material
respect; satisfied, cancelled or subordinated the Mortgage or the related
Mortgage Note in whole or in part; or released the Mortgaged Property in
whole or in part from the lien of the Mortgage; or executed any instrument
of release, cancellation, modification or satisfaction, except in each case
as reflected in a document delivered by the Seller to the Trustee or a
custodian together with the related Mortgage;
(v)
all taxes, governmental assessments, insurance premiums, and water,
sewer and municipal charges previously due and owing have been paid,
or an escrow of funds in an amount sufficient to pay for every such item
which remains unpaid has been established to the extent permitted by law;
and the Seller has not advanced funds or received any advance of funds by a
party other than the mortgagor, directly or indirectly (except pursuant to
any Buy-Down Loan or Subsidy Loan arrangement), for the payment of any
amount required by the Mortgage, except for interest accruing from the date
of the related Mortgage Note or date of disbursement of the Mortgage Loan
proceeds, whichever is later, to the date which precedes by 30 days the
first Due Date under the related Mortgage Note;
27
<PAGE>
(vi)
the Mortgaged Property is undamaged by water, fire, earthquake or
earth movement, windstorm, flood, tornado or similar casualty
(excluding casualty from the presence of hazardous wastes or hazardous
substances, as to which the Seller makes no representation), so as to affect
adversely the value of the Mortgaged Property as security for the Mortgage
Loan or the use for which the premises were intended and to the best of the
Seller's knowledge, there is no proceeding pending or threatened for the
total or partial condemnation of the Mortgaged Property;
(vii)
the Mortgaged Property is free and clear of all mechanics' and
materialmen's liens or liens in the nature thereof; provided,
however, that this warranty shall be deemed not to have been made at the
time of the initial issuance of the Certificates if a title policy
affording, in substance, the same protection afforded by this warranty is
furnished to the Trustee by the Seller;
(viii)
except for Mortgage Loans secured by shares in cooperatives, the
Mortgaged Property consists of a fee simple or leasehold estate in
real property, all of the improvements which are 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 and no
improvements on adjoining properties encroach upon the Mortgaged Property
(unless insured against under an applicable title insurance policy) and, to
the best of the Seller's knowledge, the Mortgaged Property and all
improvements thereon comply with all requirements of any applicable zoning
and subdivision laws and ordinances;
(ix)
the Mortgage Loan meets, or is exempt from, applicable state or
federal laws, regulations and other requirements pertaining to usury,
and the Mortgage Loan is not usurious;
(x)
to the best of the Seller's knowledge, 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;
(xi)
all payments required to be made up to the Due Date immediately
preceding the Cut-Off Date for such Mortgage Loan under the terms of
the related Mortgage Note have been made and no Mortgage Loan had more than
one delinquency in the 12 months preceding the Cut-Off Date;
(xii)
the Mortgage Note, the related Mortgage and other agreements executed
in connection therewith are genuine, and each is the legal, valid and
binding obligation of the maker thereof, enforceable in accordance with its
terms except as such enforcement may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally and by general equity principles (regardless of whether
such enforcement is considered in a proceeding in equity or at law); and, to
the best of the Seller'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 has been duly and properly executed by
the mortgagor;
(xiii)
any and all requirements of any federal, state or local law with
respect to the origination of the Mortgage Loans including, without
limitation, truth-in-lending, real estate settlement procedures, consumer
credit protection, equal credit opportunity or disclosure laws applicable to
the Mortgage Loans have been complied with;
(xiv)
the proceeds of the Mortgage Loans 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 with,
except for escrow funds for exterior items which could not be completed due
to weather; and all costs, fees and expenses incurred in making, closing or
recording the Mortgage Loan have been paid, except recording fees with
respect to Mortgages not recorded as of the date of the Pooling and
Servicing Agreement;
28
<PAGE>
(xv)
the Mortgage Loan (except a T.O.P. Loan as described above under "--
Mortgage Loan Underwriting" and any Mortgage Loan secured by
Mortgaged Property located in Iowa, as to which an opinion of counsel of the
type customarily rendered in such State in lieu of title insurance is
instead received) is covered by an ALTA mortgagee title insurance policy or
other generally acceptable form of policy or insurance acceptable to FNMA or
FHLMC, issued by a title insurer acceptable to FNMA or FHLMC insuring the
originator, its successors and assigns, as to the first priority lien of the
Mortgage in the original principal amount of the Mortgage Loan and subject
only to (A) the lien of current real property taxes and assessments not yet
due and payable, (B) covenants, conditions and restrictions, rights-of-way,
easements and other matters of public record as of the date of recording of
such Mortgage acceptable to mortgage lending institutions in the area in
which the Mortgaged Property is located or specifically referred to in the
appraisal performed in connection with the origination of the related
Mortgage Loan, (C) liens created pursuant to any federal, state or local
law, regulation or ordinance affording liens for the costs of clean-up of
hazardous substances or hazardous wastes or for other environmental
protection purposes and (D) such other matters to which like properties are
commonly subject which do not individually, or in the aggregate, materially
interfere with the benefits of the security intended to be provided by the
Mortgage; the Seller is the sole insured of such mortgagee title insurance
policy, the assignment to the Trustee of the Seller's interest in such
mortgagee title insurance policy does not require any consent of or
notification to the insurer which has not been obtained or made, such
mortgagee title insurance policy is in full force and effect and will be in
full force and effect and inure to the benefit of the Trustee and no claims
have been made under such mortgagee title insurance policy, and no prior
holder of the related Mortgage, including the Seller, has done, by act or
omission, anything which would impair the coverage of such mortgagee title
insurance policy;
(xvi)
the Mortgaged Property securing each Mortgage Loan is insured by an
insurer acceptable to FNMA or FHLMC against loss by fire and such
hazards as are covered under a standard extended coverage endorsement, in an
amount which is not less than the lesser of 100% of the insurable value of
the Mortgaged Property and the outstanding principal balance of the Mortgage
Loan, but in no event less than the minimum amount necessary to fully
compensate for any damage or loss on a replacement cost basis; if the
Mortgaged Property is a condominium unit, it is included under the coverage
afforded by a blanket policy for the project; if upon origination of the
Mortgage Loan, the improvements on the Mortgaged Property were in an area
identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards, a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance
Administration is in effect with a generally acceptable insurance carrier,
in an amount representing coverage not less than the least of (A) the
outstanding principal balance of the Mortgage Loan, (B) the full insurable
value of the Mortgaged Property and (C) the maximum amount of insurance
which was available under the Flood Disaster Protection Act of 1973; and
each Mortgage obligates the mortgagor thereunder to maintain all such
insurance at the mortgagor's cost and expense;
(xvii)
to the best of the Seller's knowledge, there is no default, breach,
violation or event of acceleration existing under any 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 a
default, breach, violation or event of acceleration; and the Seller has not
waived any default, breach, violation or event of acceleration; no
foreclosure action is threatened or has been commenced with respect to the
Mortgage Loan;
(xviii)
no Mortgage Note or Mortgage is 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 Mortgage, or
the exercise of any right thereunder, render such Mortgage
29
<PAGE>
unenforceable, in whole or in part, or subject it to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, and no such right of rescission, set-off, counterclaim or defense has
been asserted with respect thereto;
(xix)
each Mortgage Note is payable in monthly payments, resulting in
complete amortization of the Mortgage Loan over a term of not more
than 360 months;
(xx)
each Mortgage contains customary and enforceable provisions such as
to render the rights and remedies of the holder thereof adequate for
the realization against the Mortgaged Property of the benefits of the
security, including realization by judicial foreclosure (subject to any
limitation arising from any bankruptcy, insolvency or other law for the
relief of debtors), and there is no homestead or other exemption available
to the mortgagor which would interfere with such right of foreclosure;
(xxi)
to the best of the Seller's knowledge, no mortgagor is a debtor in
any state or federal bankruptcy or insolvency proceeding;
(xxii)
each Mortgaged Property is located in the United States and consists
of a one- to four-unit single family residential property which may
include a detached home, townhouse, condominium unit, unit in a planned unit
development or a leasehold interest with respect to any of the foregoing or,
in the case of Mortgage Loans secured by shares of cooperatives, leases or
occupancy agreements;
(xxiii)
with respect to each Buy-Down Loan, the funds deposited in the
Buy-Down Fund, if any, will be sufficient, together with interest
thereon at the rate customarily received by the Seller on such funds,
compounded monthly, and adding the amounts required to be paid by the
mortgagor, to make the scheduled payments stated in the Mortgage Note for
the term of the buy-down agreement; and
(xxiv)
each Mortgage Loan is a "Qualified Mortgage" within the meaning of
Section 860G of the Code.
No representations or warranties are made by the Seller or any other party
as to the absence or effect of hazardous wastes or hazardous substances on any
of the Mortgaged Properties or on the lien of any Mortgage or with respect to
the absence or effect of fraud in the origination of any Mortgage Loan, and any
loss or liability resulting from the presence or effect of such hazardous
wastes, hazardous substances or fraud will be borne solely by
Certificateholders. See "Certain Legal Aspects of the Mortgage Loans --
Environmental Considerations" below.
See "The Pooling and Servicing Agreement -- Assignment of Mortgage Loans to
the Trustee" for a description of the limited remedies available in connection
with breaches of the foregoing representations and warranties.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Series of Certificates will include one or more Classes, each of which
may be divided into two or more Subclasses. Any references herein to the
characteristics of a Class of Certificates may also describe the characteristics
of a Subclass of Certificates. In addition, any Class or Subclass of
Certificates may consist of two or more non-severable components, each of which
may exhibit any of the principal or interest payment characteristics described
herein with respect to a Class of Certificates. A Series may include one or more
Classes of Certificates entitled, to the extent of funds available, to (i)
principal and interest distributions in respect of the related Mortgage Loans,
(ii) principal distributions, with no interest distributions, (iii) interest
distributions, with no principal distributions or (iv) such other distributions
as are described in the applicable Prospectus Supplement.
30
<PAGE>
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") among the Seller,
Norwest Bank, as the Master Servicer, and the Trustee named in the applicable
Prospectus Supplement. An illustrative form of Pooling and Servicing Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions common
to the Certificates and to each Pooling and Servicing Agreement. The summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Pooling and Servicing
Agreement for each Series of Certificates and the applicable Prospectus
Supplement. Wherever particular sections or defined terms of the Pooling and
Servicing Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference from the form of Pooling and Servicing
Agreement filed as an exhibit to the Registration Statement.
Unless otherwise specified in the applicable Prospectus Supplement,
distributions to Certificateholders of all Series (other than the final
distribution in retirement of the Certificates) will be made by check mailed to
the address of the person entitled thereto (which in the case of Book-Entry
Certificates will be DTC) as it appears on the certificate register, except
that, with respect to any holder of a Certificate evidencing not less than a
certain minimum denomination set forth in the applicable Prospectus Supplement,
distributions will be made by wire transfer in immediately available funds,
provided that the Master Servicer or the Paying Agent acting on behalf of the
Master Servicer shall have been furnished with appropriate wiring instructions
not less than seven business days prior to the related Distribution Date. The
final distribution in retirement of Certificates will be made only upon
presentation and surrender of the Certificates at the office or agency
maintained by the Trustee or other entity for such purpose, as specified in the
final distribution notice to Certificateholders.
Each Series of Certificates will represent ownership interests in the
related Trust Estate. An election may be made to treat the Trust Estate (or one
or more segregated pools of assets therein) with respect to a Series of
Certificates as a REMIC. If such an election is made, such Series will consist
of one or more Classes of Certificates that will represent "regular interests"
within the meaning of Code Section 860G(a)(1) (such Class or Classes
collectively referred to as the "Regular Certificates") and one Class or
Subclass of Certificates with respect to each REMIC that will be designated as
the "residual interest" within the meaning of Code Section 860G(a)(2) (the
"Residual Certificates") representing the right to receive distributions as
specified in the Prospectus Supplement for such Series. See "Certain Federal
Income Tax Consequences" herein.
The Seller may sell certain Classes or Subclasses of the Certificates of a
Series, including one or more Classes of Subordinated Certificates, in privately
negotiated transactions exempt from registration under the Securities Act.
Alternatively, if so specified in a Prospectus Supplement relating to such
Subordinated Certificates, the Seller may offer one or more Classes of the
Subordinated Certificates of a Series by means of this Prospectus and such
Prospectus Supplement.
DEFINITIVE FORM
Certificates of a Series that are issued in fully registered, certificated
form are referred to herein as "Definitive Certificates." Distributions of
principal of, and interest on, the Definitive Certificates will be made directly
to holders of Definitive Certificates in accordance with the procedures set
forth in the Pooling and Servicing Agreement. The Definitive Certificates of a
Series offered hereby and by means of the applicable Prospectus Supplements will
be transferable and exchangeable at the office or agency maintained by the
Trustee or such other entity for such purpose set forth in the applicable
Prospectus Supplement. No service charge will be made for any transfer or
exchange of Definitive Certificates, but the Trustee or such other entity may
require payment of a sum sufficient to cover any tax or other governmental
charge in connection with such transfer or exchange.
In the event that an election is made to treat the Trust Estate (or one or
more segregated pools of assets therein) as a REMIC, the "residual interest"
thereof will be issued as a Definitive Certificate. No legal or beneficial
interest in all or any portion of any "residual interest" may be transferred
without the receipt by the transferor and the Trustee of an affidavit signed by
the transferee stating,
31
<PAGE>
among other things, that the transferee (i) is not a disqualified organization
within the meaning of Code Section 860E(e) or an agent (including a broker,
nominee, or middleman) thereof and (ii) understands that it may incur tax
liabilities in excess of any cash flows generated by the residual interest.
Further, the transferee must state in the affidavit that it (x) historically has
paid its debts as they have come due, (y) intends to pay its debts as they come
due in the future and (z) intends to pay taxes associated with holding the
residual interest as they become due. The transferor must certify to the Trustee
that, as of the time of the transfer, it has no actual knowledge that any of the
statements made in the transferee affidavit are false and no reason to know that
the statements made by the transferee pursuant to clauses (x), (y) and (z) of
the preceding sentence are false. See "Certain Federal Income Tax Consequences
- -- Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Residual Certificates -- Tax-Related Restrictions on Transfer of Residual
Certificates."
BOOK-ENTRY FORM
Each Class or Subclass of the Book-Entry Certificates of a Series initially
will be represented by one or more physical certificates registered in the name
of Cede & Co. ("Cede"), as nominee of DTC, which will be the "holder" or
"Certificateholder" of such Certificates, as such terms are used herein. No
person acquiring an interest in a Book-Entry Certificate (a "Beneficial Owner")
will be entitled to receive a Definitive Certificate representing such person's
interest in the Book-Entry Certificate, except as set forth below. Unless and
until Definitive Certificates are issued under the limited circumstances
described herein, all references to actions taken by Certificateholders or
holders shall, in the case of the Book-Entry Certificates, refer to actions
taken by DTC upon instructions from its DTC Participants, and all references
herein to distributions, notices, reports and statements to Certificateholders
or holders shall, in the case of the Book-Entry Certificates, refer to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of the Book-Entry Certificates, as the case may be, for distribution to
Beneficial Owners in accordance with DTC procedures.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to Section 17A of the Securities Exchange Act of
1934, as amended. DTC was created to hold securities for its participating
organizations ("DTC Participants") and to facilitate the clearance and
settlement of securities transactions among DTC Participants through electronic
book-entries, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers (which may
include any underwriter identified in the Prospectus Supplement applicable to
any Series), banks, trust companies and clearing corporations. Indirect access
to the DTC system also is available to banks, brokers, dealers, trust companies
and other institutions that clear through or maintain a custodial relationship
with a DTC Participant, either directly or indirectly ("Indirect DTC
Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and to receive and transmit distributions
of principal of and interest on the Book-Entry Certificates. DTC Participants
and Indirect DTC Participants with which Beneficial Owners have accounts with
respect to the Book-Entry Certificates similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Beneficial Owners.
Beneficial Owners that are not DTC Participants or Indirect DTC Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through DTC Participants
and Indirect DTC Participants. In addition, Beneficial Owners will receive all
distributions of principal and interest from the Master Servicer, or a Paying
Agent on behalf of the Master Servicer, through DTC Participants. DTC will
forward such distributions to its DTC Participants, which thereafter will
forward them to Indirect DTC Participants or Beneficial Owners. Beneficial
Owners will not be recognized by the Trustee or the Master Servicer or any
paying
32
<PAGE>
agent as Certificateholders, as such term is used in the Pooling and Servicing
Agreement, and Beneficial Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its DTC Participants.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Master Servicer, or a paying agent on
behalf of the Master Servicer, to Cede, as nominee for DTC.
DTC has advised the Seller that it 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 DTC Participants to whose accounts with DTC the
Book-Entry Certificates are credited. Additionally, DTC has advised the Seller
that it will take such actions with respect to specified Voting Interests only
at the direction of and on behalf of DTC Participants whose holdings of
Book-Entry Certificates evidence such specified Voting Interests. DTC may take
conflicting actions with respect to Voting Interests to the extent that DTC
Participants whose holdings of Book-Entry Certificates evidence such Voting
Interests authorize divergent action.
Neither the Seller, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of DTC, a DTC Participant or an Indirect DTC Participant in whose
name Book-Entry Certificates are registered, the ability of the Beneficial
Owners of such Book-Entry Certificates to obtain timely payment and, if the
limits of applicable insurance coverage by the Securities Investor Protection
Corporation are exceeded or if such coverage is otherwise unavailable, ultimate
payment, of amounts distributable with respect to such Book-Entry Certificates
may be impaired.
The Book-Entry Certificates will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i) the Trustee is advised in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Book-Entry Certificates and the Trustee is unable to locate a
qualified successor, (ii) the Master Servicer, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of a
dismissal or resignation of the Master Servicer under the Pooling and Servicing
Agreement, Beneficial Owners representing not less than 51% of the Voting
Interests of the outstanding Book-Entry Certificates advise the Trustee through
DTC, in writing, that the continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the Beneficial Owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Beneficial Owners through
DTC Participants of the availability of Definitive Certificates. Upon surrender
by DTC of the physical certificates representing the Book-Entry Certificates and
receipt of instructions for re-registration, the Trustee will reissue the Book-
Entry Certificates as Definitive Certificates to Beneficial Owners. The
procedures relating to payment on and transfer of Certificates initially issued
as Definitive Certificates will thereafter apply to those Book-Entry
Certificates that have been reissued as Definitive Certificates.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
GENERAL. On each Distribution Date, each holder of a Certificate of a Class
will be entitled to receive its Certificate's Percentage Interest of the portion
of the Pool Distribution Amount (as defined below) allocated to such Class. The
undivided percentage interest (the "Percentage Interest") represented by any
Certificate of a Subclass or any Class in distributions to such Subclass or
Class will be
33
<PAGE>
equal to the percentage obtained by dividing the initial principal balance (or
notional amount) of such Certificate by the aggregate initial principal balance
(or notional amount) of all Certificates of such Subclass or Class, as the case
may be.
In general, the funds available for distribution to Certificateholders of a
Series of Certificates with respect to each Distribution Date for such Series
(the "Pool Distribution Amount") will be the sum of all previously undistributed
payments or other receipts on account of principal (including principal
prepayments and Liquidation Proceeds, if any) and interest on or in respect of
the related Mortgage Loans received by the related Servicer after the Cut-Off
Date (except for amounts due on or prior to the Cut-Off Date), or received by
the related Servicer on or prior to the Cut-Off Date but due after the Cut-Off
Date, in either case received on or prior to the business day preceding the
Determination Date in the month in which such Distribution Date occurs, plus all
Periodic Advances with respect to payments due to be received on the Mortgage
Loans on the Due Date preceding such Distribution Date, but excluding the
following:
(a)
amounts received as late payments of principal or interest respecting
which one or more unreimbursed Periodic Advances has been made;
(b)
that portion of Liquidation Proceeds with respect to a Mortgage Loan
which represents any unreimbursed Periodic Advances;
(c)
those portions of each payment of interest on a particular Mortgage
Loan which represent (i) the Fixed Retained Yield, if any, (ii) the
applicable Servicing Fee, (iii) the applicable Master Servicing Fee, (iv)
the Trustee's fee and (v) any other amounts described in the applicable
Prospectus Supplement;
(d)
all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e)
all proceeds (including Liquidation Proceeds other than, in certain
cases as specified in the applicable Prospectus Supplement,
Liquidation Proceeds which were received prior to the related Servicer's
determination that no further recoveries on a defaulted Mortgage Loan will
be forthcoming ("Partial Liquidation Proceeds")) of any Mortgage Loans, or
property acquired in respect thereof, that were liquidated, foreclosed,
purchased or repurchased pursuant to the applicable Pooling and Servicing
Agreement, which proceeds were received on or after the Due Date occurring
in the month in which such Distribution Date occurs and all principal
prepayments in full, partial principal prepayments and Partial Liquidation
Proceeds received by the related Servicer on or after the Determination Date
(or, in certain cases as specified in the applicable Prospectus Supplement,
the Due Date) occurring in the month in which such Distribution Date occurs,
and all related payments of interest on such amounts;
(f)
that portion of Liquidation Proceeds which represents any unpaid
Servicing Fees, Master Servicing Fee or any Trustee Fee to which the
related Servicer, the Trustee or the Master Servicer, respectively, is
entitled and any unpaid Fixed Retained Yield;
(g)
if an election has been made to treat the applicable Trust Estate as
a REMIC, any Net Foreclosure Profits with respect to such
Distribution Date;
(h)
all amounts representing certain expenses reimbursable to the Master
Servicer or any Servicer and other amounts permitted to be withdrawn
by the Master Servicer from the Certificate Account, in each case pursuant
to the applicable Pooling and Servicing Agreement;
(i)
all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees and payments of interest related to principal
prepayments received on or after the first day of the month in which a
Distribution Date occurs and prior to the Determination Date in the month of
such Distribution Date which the related Servicer is entitled to retain
pursuant to the applicable Underlying Servicing Agreement;
34
<PAGE>
(j)
reinvestment earnings on payments received in respect of the Mortgage
Loans; and
(k)
any recovery of an amount in respect of principal which had
previously been allocated as a realized loss to such Series of
Certificates.
The applicable Prospectus Supplement for a Series will describe any
variation in the calculation of the Pool Distribution Amount for such Series.
"Net Foreclosure Profits" with respect to a Distribution Date will be the
excess of (i) the portion of aggregate net Liquidation Proceeds which represents
the amount by which aggregate profits on Liquidated Loans with respect to which
net Liquidation Proceeds exceed the unpaid principal balance thereof plus
accrued interest thereon at the Mortgage Interest Rate over (ii) aggregate
realized losses on Liquidated Loans with respect to which net Liquidation
Proceeds are less than the unpaid principal balance thereof plus accrued
interest thereon at the Mortgage Interest Rate.
DISTRIBUTIONS OF INTEREST. With respect to each Series of Certificates,
interest on the related Mortgage Loans at the weighted average of the applicable
Net Mortgage Interest Rates thereof, will be passed through monthly to holders
of the related Classes of Certificates in the aggregate, in accordance with the
particular terms of each such Class of Certificates. The "Net Mortgage Interest
Rate" for each Mortgage Loan in a given period will equal the mortgage interest
rate for such Mortgage Loan in such period, as specified in the related mortgage
note (the "Mortgage Interest Rate"), less the portion thereof, if any, not
contained in the Trust Estate (the "Fixed Retained Yield"), and less amounts
payable to the Servicers for servicing the Mortgage Loan (the "Servicing Fee"),
the fee payable to the Master Servicer (the "Master Servicing Fee"), the fee
payable to the Trustee (the "Trustee Fee") and any related expenses specified in
the applicable Prospectus.
Interest will accrue on the principal balance (or notional amount, as
described below) of each Class of Certificates entitled to interest at the
Pass-Through Rate for such Class indicated in the applicable Prospectus
Supplement (which may be a fixed rate or an adjustable rate) from the date and
for the periods specified in such Prospectus Supplement. To the extent the Pool
Distribution Amount is available therefor, interest accrued during each such
specified period on each Class of Certificates entitled to interest (other than
a Class that provides for interest that accrues, but is not currently payable,
referred to hereafter as "Accrual Certificates") will be distributable on the
Distribution Dates specified in the applicable Prospectus Supplement until the
principal balance (or notional amount) of such Class has been reduced to zero.
Distributions allocable to interest on each Certificate that is not entitled to
distributions allocable to principal will generally be calculated based on the
notional amount of such Certificate. The notional amount of a Certificate will
not evidence an interest in or entitlement to distributions allocable to
principal but will be solely for convenience in expressing the calculation of
interest and for certain other purposes.
With respect to any Class of Accrual Certificates, any interest that has
accrued but is not paid on a given Distribution Date will be added to the
principal balance of such Class of Certificates on that Distribution Date.
Distributions of interest on each Class of Accrual Certificates will commence
only after the occurrence of the events or the existence of the circumstance
specified in such Prospectus Supplement and, prior to such time, or in the
absence of such circumstances, the principal balance of such Class will increase
on each Distribution Date by the amount of interest that accrued on such Class
during the preceding interest accrual period but that was not required to be
distributed to such Class on such Distribution Date. Any such Class of Accrual
Certificates will thereafter accrue interest on its outstanding principal
balance as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. The principal balance of any Class of
Certificates entitled to distributions of principal will generally be the
original principal balance of such Class specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Certificates as allocable to principal and any losses on the related Mortgage
Loans allocated to such Class of Certificates and (i) in the case of Accrual
Certificates, increased by all interest accrued but not then distributable on
such Accrual Certificates and (ii) in the case of a Series of Certificates
representing
35
<PAGE>
interests in a Trust Estate containing adjustable rate Mortgage Loans, increased
by any Deferred Interest allocable to such Class. The principal balance of a
Class or Subclass of Certificates generally represents the maximum specified
dollar amount (exclusive of (i) any interest that may accrue on such Class or
Subclass to which the holder thereof is entitled from the cash flow on the
related Mortgage Loans at such time) and will decline to the extent of
distributions in reduction of the principal balance of, and allocations of
losses to such Class or Subclass. Certificates with no principal balance will
not receive distributions in respect of principal. The applicable Prospectus
Supplement will specify the method by which the amount of principal to be
distributed on the Certificates on each Distribution Date will be calculated and
the manner in which such amount will be allocated among the Classes of
Certificates entitled to distributions of principal.
If so provided in the applicable Prospectus Supplement, one or more Classes
of Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal that are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the months of such payments or of
other unscheduled principal receipts or recoveries in the percentages and under
the circumstances or for the periods specified in such Prospectus Supplement.
Any such allocation of principal prepayments or other unscheduled receipts or
recoveries in respect of principal to such Class or Classes of Senior
Certificates will have the effect of accelerating the amortization of such
Senior Certificates while increasing the interests evidenced by the Subordinated
Certificates in the Trust Estate. Increasing the interests of the Subordinated
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the subordination provided by the Subordinated Certificates.
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Certificates for which
credit enhancement is provided through subordination to receive distributions
with respect to the Mortgage Loans in the related Trust Estate will be
subordinated to such rights of the holders of the Senior Certificates of the
same Series to the extent described below, except as otherwise set forth in such
Prospectus Supplement. This subordination is intended to enhance the likelihood
of regular receipt by holders of Senior Certificates of the full amount of
scheduled monthly payments of principal and interest due them and to provide
limited protection to the holders of the Senior Certificates against losses due
to mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a Series of
Certificates for which credit enhancement is provided through subordination by
the subordination feature described above will be effected by (i) the
preferential right of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates on each Distribution
Date, current distributions on the related Mortgage Loans of principal and
interest due them on each Distribution Date out of the funds available for
distribution on such date in the related Certificate Account, (ii) by the right
of such holders to receive future distributions on the Mortgage Loans that would
otherwise have been payable to the holders of Subordinated Certificates and/or
(iii) by the prior allocation to the Subordinated Certificates of all or a
portion of losses realized on the related Mortgage Loans.
Losses realized on liquidated Mortgage Loans (other than Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses as described
below) will be allocated to the holders of Subordinated Certificates through a
reduction of the amount of principal payments on the Mortgage Loans to which
such holders are entitled before any corresponding reduction is made in respect
of the Senior Certificate.
A "Special Hazard Loss" is a loss on a liquidated Mortgage Loan occurring as
a result of a hazard not insured against under a standard hazard insurance
policy of the type described herein under "The Trust Estates -- Mortgage Loans
- -- Insurance Policies." A "Fraud Loss" is a loss on a liquidated Mortgage Loan
as to which there was fraud in the origination of such Mortgage Loan. A
"Bankruptcy Loss" is a loss on a liquidated Mortgage Loan 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 of or the interest rate on a Mortgage Loan or an extension of its
maturity. Special
36
<PAGE>
Hazard Losses in excess of the amount specified in the applicable Prospectus
Supplement (the "Special Hazard Loss Amount") are "Excess Special Hazard
Losses." Fraud Losses in excess of the amount specified in the applicable
Prospectus Supplement (the "Fraud Loss Amount") are "Excess Fraud Losses."
Bankruptcy losses in excess of the amount specified in the applicable Prospectus
Supplement (the "Bankruptcy Loss Amount") are "Excess Bankruptcy Losses." Any
Excess Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses
with respect to a Series will be allocated on a pro rata basis among the related
Classes of Senior and Subordinated Certificates. An allocation of a loss on a
"pro rata basis" among two or more Classes of Certificates means an allocation
on a pro rata basis to each such Class of Certificates on the basis of their
then-outstanding principal balances in the case of the principal portion of a
loss or based on the accrued interest thereon in the case of an interest portion
of a loss.
Since the amounts of the Special Hazard Loss Amount, Fraud Loss Amount and
Bankruptcy Loss Amount for a Series of Certificates are each expected to be less
than the amount of principal payments on the Mortgage Loans to which the holders
of the Subordinated Certificates of such Series are initially entitled (such
amount being subject to reduction, as described above, as a result of allocation
of losses on liquidated Mortgage Loans that are not Special Hazard Losses, Fraud
Losses or Bankruptcy Losses), the holders of Subordinated Certificates of such
Series will bear the risk of Special Hazard Losses, Fraud Losses and Bankruptcy
Losses to a lesser extent than they will bear other losses on liquidated
Mortgage Loans.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans in a
Trust Estate were exceptionally high and were concentrated in a particular
month.
The holders of Subordinated Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there are
sufficient funds on a subsequent Distribution Date to make a full distribution
to holders of each Class of Senior Certificates of the same Series.
OTHER CREDIT ENHANCEMENT
In addition to, or in substitution for, the subordination discussed above,
credit enhancement may be provided with respect to any Series of Certificates in
any other manner which may be described in the applicable Prospectus Supplement,
including, but not limited to, credit enhancement through an alternative form of
subordination and/or one or more of the methods described below.
LIMITED GUARANTEE
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
If so specified in the Prospectus Supplement with respect to a Series of
Certificates credit enhancement may be provided in the form of a financial
guaranty insurance policy or a surety bond issued by an insurer named therein.
LETTER OF CREDIT
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued with respect to a Series of Certificates will be set forth in the
Prospectus Supplement relating to such Series.
37
<PAGE>
POOL INSURANCE POLICIES
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Seller will obtain a pool insurance policy for the Mortgage
Loans in the related Trust Estate. The pool insurance policy will cover any loss
(subject to the limitations described in the applicable Prospectus Supplement)
by reason of default to the extent a related Mortgage Loan is not covered by any
primary mortgage insurance policy. The amount and principal terms of any such
coverage will be set forth in the Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the applicable Prospectus Supplement, for each Series of
Certificates as to which a pool insurance policy is provided, the Seller will
also obtain a special hazard insurance policy for the related Trust Estate in
the amount set forth in such Prospectus Supplement. The special hazard insurance
policy will, subject to the limitations described in the applicable Prospectus
Supplement, protect against loss by reason of damage to Mortgaged Properties
caused by certain hazards not insured against under the standard form of hazard
insurance policy for the respective states in which the Mortgaged Properties are
located. The amount and principal terms of any such coverage will be set forth
in the Prospectus Supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the applicable Prospectus Supplement, losses resulting
from a bankruptcy proceeding relating to a mortgagor affecting the Mortgage
Loans in a Trust Estate with respect to a Series of Certificates will be covered
under a mortgagor bankruptcy bond (or any other instrument that will not result
in a downgrading of the rating of the Certificates of a Series by the Rating
Agency or Rating Agencies that rated such Series). Any mortgagor bankruptcy bond
or such other instrument will provide for coverage in an amount meeting the
criteria of the Rating Agency or Rating Agencies rating the Certificates of the
related Series, which amount will be set forth in the applicable Prospectus
Supplement. The amount and principal terms of any such coverage will be set
forth in the Prospectus Supplement.
RESERVE FUND
If so specified in the applicable Prospectus Supplement, credit enhancement
with respect to a Series of Certificates may be provided by the establishment of
one or more reserve funds (each, a "Reserve Fund") for such Series.
The Reserve Fund for a Series may be funded (i) by the deposit therein of
cash, U.S. Treasury securities or instruments evidencing ownership of principal
or interest payments thereon, letters of credit, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
applicable Prospectus Supplement, (ii) by the deposit therein from time to time
of certain amounts, as specified in the applicable Prospectus Supplement, to
which the certain Classes of Certificates would otherwise be entitled or (iii)
in such other manner as may be specified in the applicable Prospectus
Supplement.
CROSS SUPPORT
If specified in the applicable Prospectus Supplement, the beneficial
ownership of separate groups of Mortgage Loans included in a Trust Estate may be
evidenced by separate Classes of Certificates. In such case, credit support may
be provided by a cross support feature which requires that distributions be made
with respect to certain Classes from mortgage loan payments that would otherwise
be distributed to Subordinated Certificates evidencing a beneficial ownership
interest in other loan groups within the same Trust Estate. The applicable
Prospectus Supplement for a Series that includes a cross support feature will
describe the specific operation of any such cross support feature.
38
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
PASS-THROUGH RATES
Any Class of Certificates of a Series may have a fixed Pass-Through Rate, or
a Pass-Through Rate which varies based on changes in an index or based on
changes with respect to the underlying Mortgage Loans (such as, for example,
varying on the basis of changes in the weighted average Net Mortgage Interest
Rate of the underlying Mortgage Loans).
The Prospectus Supplement for each Series will specify the range and the
weighted average of the Mortgage Interest Rates and, if applicable, Net Mortgage
Interest Rates for the Mortgage Loans underlying such Series as of the Cut-Off
Date. If the Trust Estate includes adjustable-rate Mortgage Loans or includes
Mortgage Loans with different Net Mortgage Interest Rates, the weighted average
Net Mortgage Interest Rate may vary from time to time as set forth below. See
"The Trust Estates." The Prospectus Supplement for a Series will also specify
the initial weighted average Pass-Through Rate for each Class of Certificates of
such Series and will specify whether each such Pass-Through Rate is fixed or is
variable.
The Net Mortgage Interest Rate for any adjustable-rate Mortgage Loan will
change with any changes in the index specified in the applicable Prospectus
Supplement on which such Mortgage Interest Rate adjustments are based, subject
to any applicable periodic or aggregate caps or floors on the related Mortgage
Interest Rate. The weighted average Net Mortgage Interest Rate with respect to
any Series may vary due to changes in the Net Mortgage Interest Rates of
adjustable-rate Mortgage Loans, to the timing of the Mortgage Interest Rate
readjustments of such Mortgage Loans and to different rates of payment of
principal of fixed or adjustable-rate Mortgage Loans bearing different Mortgage
Interest Rates.
SCHEDULED DELAYS IN DISTRIBUTIONS
At the date of initial issuance of the Certificates of each Series offered
hereby, the initial purchasers of a Class of Certificates may be required to pay
accrued interest at the applicable Pass-Through Rate for such Class from the
Cut-Off Date for such Series to, but not including, the date of issuance. The
effective yield to Certificateholders will be below the yield otherwise produced
by the applicable Pass-Through Rate because the distribution of principal and
interest which is due on each Due Date will not be made until the 25th day (or
if such 25th day is not a business day, the business day immediately following
such 25th day) of the month in which such Due Date occurs (or until such other
Distribution Date specified in the applicable Prospectus Supplement).
EFFECT OF PRINCIPAL PREPAYMENTS
When a Mortgage Loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment and not thereafter. Liquidation
Proceeds (as defined herein) and amounts received in settlement of insurance
claims are also likely to include interest only to the time of payment or
settlement. When a Mortgage Loan is prepaid in full or in part, an interest
shortfall may result depending on the timing of the receipt of the prepayment
and the timing of when those prepayments are passed through to
Certificateholders. To partially mitigate this reduction in yield, the
Underlying Servicing Agreements relating to a Series may provide, to the extent
specified in the applicable Prospectus Supplement, that with respect to certain
principal prepayments received on or, the Master Servicer will be obligated, on
or before each Distribution Date, to pay an amount equal to the lesser of (i)
the aggregate interest shortfall with respect to such Distribution Date
resulting from principal prepayments in full by mortgagors and (ii) the portion
of the Master Servicer's master servicing compensation for such Distribution
Date specified in the applicable Prospectus Supplement. No comparable interest
shortfall coverage will be provided by the Master Servicer with respect to
liquidations of any Mortgage Loans or partial principal payments. Any interest
shortfall arising from prepayments not so covered or from liquidations will be
covered by means of the subordination of the rights of Subordinated
Certificateholders or any other credit support arrangements.
39
<PAGE>
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount and a higher rate of principal
prepayments than anticipated would negatively affect the total return to
investors in the Certificates of a Series that are offered at a premium to their
principal amount. The yield on Certificates that are entitled solely or
disproportionately to distributions of principal or interest may be particularly
sensitive to prepayment rates, and further information with respect to yield on
such Certificates will be included in the applicable Prospectus Supplement.
WEIGHTED AVERAGE LIFE OF CERTIFICATES
The Mortgage Loans may be prepaid in full or in part at any time. Mortgage
Loan generally will not provide for a prepayment penalty but may so provide if
indicated in the related Prospectus Supplement. Fixed rate Mortgage Loans
generally will contain due-on-sale clauses permitting the mortgagee to
accelerate the maturities of the Mortgage Loans upon conveyance of the related
Mortgaged Properties, and adjustable-rate Mortgage Loans generally will permit
creditworthy borrowers to assume the then-outstanding indebtedness on the
Mortgage Loans.
Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The Prospectus Supplement for each Series of Certificates may
describe one or more such prepayment standards or models and contain tables
setting forth the weighted average life of each Class and the percentage of the
original aggregate principal balance of each Class that would be outstanding on
specified Distribution Dates for such Series and the projected yields to
maturity on certain Classes thereof, in each case based on the assumptions
stated in such Prospectus Supplement, including assumptions that prepayments on
the Mortgage Loans are made at rates corresponding to various percentages of the
prepayment standard or model specified in such Prospectus Supplement.
There is no assurance that prepayment of the Mortgage Loans underlying a
Series of Certificates will conform to any level of the prepayment standard or
model specified in the applicable Prospectus Supplement. A number of factors,
including but not limited to homeowner mobility, economic conditions, natural
disasters, changes in mortgagors' housing needs, job transfers, unemployment or,
in the case of borrowers relying on commission income and self-employed
borrowers, significant fluctuations in income or adverse economic conditions,
mortgagors' net equity in the properties securing the mortgages, including the
use of second or "home equity" mortgage loans by mortgagors or the use of the
properties as second or vacation homes, servicing decisions, enforceability of
due-on-sale clauses, mortgage market interest rates, mortgage recording taxes,
competition among mortgage loan originators resulting in reduced refinancing
costs, reduction in documentation requirements and willingness to accept higher
loan-to-value ratios, and the availability of mortgage funds, may affect
prepayment experience. In general, however, if prevailing interest rates fall
below the Mortgage Interest Rates borne by the Mortgage Loans underlying a
Series of Certificates, the prepayment rates of such Mortgage Loans are likely
to be higher than if prevailing rates remain at or above the rates borne by such
Mortgage Loans. Conversely, if prevailing interest rates rise above the Mortgage
Interest Rates borne by the Mortgage Loans, the Mortgage Loans are likely to
experience a lower prepayment rate than if prevailing rates remain at or below
such Mortgage Interest Rates. However, there can be no assurance that
prepayments will rise or fall according to such changes in interest rates. It
should be noted that Certificates of a Series may evidence an interest in a
Trust Estate with different Mortgage Interest Rates. Accordingly, the prepayment
experience of such Certificates will to some extent be a function of the mix of
interest rates of the Mortgage Loans. In addition, the terms of the Underlying
Servicing Agreements will require the related Servicer to enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or the
proposed conveyance of the underlying Mortgaged Property; provided, however,
that any enforcement action that the Servicer determines would jeopardize any
recovery under any related primary mortgage insurance policy will not be
required and provided, further, that the Servicer may permit the assumption of
defaulted Mortgage Loans. See "Servicing of the Mortgage Loans -- Enforcement of
Due-on-Sale Clauses; Realization Upon Defaulted Mortgage
40
<PAGE>
Loans" and "Certain Legal Aspects of the Mortgage Loans -- Due-On-Sale Clauses"
for a description of certain provisions of each Pooling and Servicing Agreement
and certain legal developments that may affect the prepayment experience on the
Mortgage Loans.
At the request of the mortgagor, a Servicer, including Norwest Mortgage, may
allow the refinancing of a Mortgage Loan in any Trust Estate serviced by such
Servicer by accepting prepayments thereon and permitting a new loan secured by a
Mortgage on the same property. Upon such refinancing, the new loan will not be
included in the Trust Estate. A mortgagor may be legally entitled to require the
Servicer to allow such a refinancing. Any such refinancing will have the same
effect as a prepayment in full of the related Mortgage Loan. In this regard a
Servicer may, from time to time, implement programs designed to encourage
refinancing through such Servicer, including but not limited to general or
targeted solicitations, or the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. A Servicer may
also encourage refinancing of defaulted Mortgage Loans, including Mortgage Loans
that would permit creditworthy borrowers to assume the outstanding indebtedness.
The Seller will be obligated, under certain circumstances, to repurchase
certain of the Mortgage Loans. In addition, if specified in the applicable
Prospectus Supplement, the Pooling and Servicing Agreement will permit, but not
require, the Seller or Master Servicer, and the terms of certain insurance
policies relating to the Mortgage Loans may permit the applicable insurer, to
purchase any Mortgage Loan which is in default or as to which default is
reasonably foreseeable. The proceeds of any such purchase or repurchase will be
deposited in the related Certificate Account and such purchase or repurchase
will have the same effect as a prepayment in full of the related Mortgage Loan.
See "The Pooling and Servicing Agreement -- Assignment of Mortgage Loans to the
Trustee" and " -- Optional Purchases." In addition, if so specified in the
applicable Prospectus Supplement, the Master Servicer or another person
identified therein will have the option to purchase all, but not less than all,
of the Mortgage Loans in any Trust Estate under the limited conditions specified
in such Prospectus Supplement. For any Series of Certificates for which an
election has been made to treat the Trust Estate (or one or more segregated
pools of assets therein) as a REMIC, any such purchase or repurchase may be
effected only pursuant to a "qualified liquidation," as defined in Code Section
860F(a)(4)(A). See "The Pooling and Servicing Agreement -- Termination; Optional
Purchase of Mortgage Loans."
SERVICING OF THE MORTGAGE LOANS
The following is a summary of certain provisions of the forms of the
Underlying Servicing Agreement and the Pooling and Servicing Agreement that have
been filed as exhibits to the Registration Statement of which this Prospectus
forms a part. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Pooling and Servicing Agreement and Underlying Servicing Agreements for each
Series of Certificates and the applicable Prospectus Supplement.
THE MASTER SERVICER
The Master Servicer with respect to each Series of Certificates will be
Norwest Bank. See "Norwest Bank" above. The Master Servicer generally will (a)
be responsible under each Pooling and Servicing Agreement for providing general
administrative services for the Trust Estate for any such Series, including,
among other things, (i) for administering and supervising the performance by the
Servicers of their duties and responsibilities under the Underlying Servicing
Agreements, (ii) oversight of payments received on Mortgage Loans, (iii)
monitoring the amounts on deposit in various trust accounts, (iv) calculation of
the amounts payable to Certificateholders on each Distribution Date, (v)
preparation of periodic reports to the Trustee or the Certificateholders with
respect to the foregoing matters, (vi) preparation of federal and applicable
state and local tax and information returns; (vii) preparation of reports, if
any, required under the Securities and Exchange Act of 1934, as
41
<PAGE>
amended and (viii) performing certain of the servicing obligations of a
terminated Servicer as described below under "-- The Servicers"; (b) maintain
any mortgage pool insurance policy, mortgagor bankruptcy bond, special hazard
insurance policy or other form of credit support that may be required with
respect to any Series and (c) make advances of delinquent payments of principal
and interest on the Mortgage Loans to the limited extent described herein under
the heading "Servicing of Mortgage Loans -- Periodic Advances and Limitations
Thereon," if such amounts are not advanced by a Servicer (other than Norwest
Mortgage). The Master Servicer will also perform additional duties as described
in the applicable Pooling and Servicing Agreement. The Master Servicer will be
entitled to receive a portion of the interest payments on the Mortgage Loans
included in the Trust Estate for such a Series to cover its fees as Master
Servicer. The Master Servicer may subcontract with Norwest Mortgage or any other
entity the obligations of the Master Servicer under any Pooling and Servicing
Agreement. The Master Servicer will remain primarily liable for any such
contractor's performance in accordance with the applicable Pooling and Servicing
Agreement. The Master Servicer may be released from its obligations in certain
circumstances. See "Certain Matters Regarding the Master Servicer."
The Master Servicer will generally be required to pay all expenses incurred
in connection with the administration of the Trust Estate, including, without
limitation, fees or other amounts payable pursuant to any applicable agreement
for the provision of credit enhancement for such Series, the fees and
disbursements of the Trustee and any custodian, fees due to the independent
accountants and expenses incurred in connection with distributions and reports
to Certificateholders. Certain of these expenses may be reimbursable to the
Master Servicer pursuant to the terms of the applicable Pooling and Servicing
Agreement.
Each Prospectus Supplement relating to such a Series of Certificates will
contain information concerning recent delinquency, foreclosure and loan loss
experience on the mortgage loans included in Norwest Mortgage's servicing
portfolio which were originated or acquired by Norwest Mortgage for its own
account or for the account of its affiliates ("Program Loans"), and, if
available, on those Program Loans having payment terms generally similar to
those of the Mortgage Loans in the related Trust Estate. If the related Trust
Estate contains PHMC Mortgage Loans, the related Prospectus Supplement may
contain information concerning PHMC's delinquency, foreclosure and loans loss
experience prior to the PHMC Acquisition. Norwest Mortgage's total servicing
portfolio of Program Loans as of any date may include (and PHMC's servicing
portfolio included) loans having a variety of payment characteristics, including
adjustable rate mortgage loans and loans subject to subsidy agreements, and the
overall delinquency, foreclosure and loan loss experience of the Program Loans
(or PHMC-serviced mortgage loans) taken as a whole may differ from that of the
Mortgage Loans contained in any given Trust Estate and from that of mortgage
servicers generally.
THE SERVICERS
For each Series, Norwest Mortgage and, if specified in the applicable
Prospectus Supplement, one or more other Servicers will provide certain
customary servicing functions with respect to Mortgage Loans pursuant to
separate servicing agreements ("Underlying Servicing Agreements") with the
Seller or an affiliate thereof. The rights of the Seller or such affiliate under
the applicable Underlying Servicing Agreements in respect of the Mortgage Loans
included in the Trust Estate for any such Series will be assigned (directly or
indirectly) to the Trustee for such Series. The Servicers may be entitled to
withhold their Servicing Fees and certain other fees and charges from
remittances of payments received on Mortgage Loans serviced by them.
Each Servicer generally will be approved by FNMA or FHLMC as a servicer of
mortgage loans and must be approved by the Master Servicer. In determining
whether to approve a Servicer, the Master Servicer will review the credit of the
Servicer, including capitalization ratios, liquidity, profitability and other
similar items that indicate financial ability to perform its obligations. In
addition, the
42
<PAGE>
Master Servicer's mortgage servicing personnel will review the Servicer's
servicing record and evaluate the ability of the Servicer to conform with
required servicing procedures. Once a Servicer is approved, the Master Servicer
will continue to monitor on an annual basis the financial position and servicing
performance of the Servicer.
The duties to be performed by each Servicer include collection and
remittance of principal and interest payments on the Mortgage Loans,
administration of mortgage escrow accounts, collection of insurance claims,
foreclosure procedures, and, if necessary, the advance of funds to the extent
certain payments are not made by the mortgagor and have not been determined by
the Servicer to be not recoverable under the applicable insurance policies with
respect to such Series, from proceeds of liquidation of such Mortgage Loans or
otherwise. Each Servicer also will provide such accounting and reporting
services as are necessary to enable the Master Servicer to provide required
information to the Trustee with respect to the Mortgage Loans included in the
Trust Estate for such Series. Each Servicer is entitled to a periodic Servicing
Fee equal to a specified percentage of the outstanding principal balance of each
Mortgage Loan serviced by such Servicer. With the consent of the Master
Servicer, any of the servicing obligations of a Servicer may be delegated to
another person approved by the Master Servicer. In addition, certain limited
duties of a Servicer may be delegated without consent.
The Trustee, or if so provided in the applicable Servicing Agreement, the
Master Servicer, may terminate a Servicer who has failed to comply with its
covenants or breached one of its representations contained in the Underlying
Servicing Agreement or in certain other circumstances. Upon termination of a
Servicer by the Master Servicer, the Master Servicer will assume certain
servicing obligations of the terminated Servicer, or, at its option, may appoint
a substitute Servicer acceptable to the Trustee (which substitute Servicer may
be Norwest Mortgage) to assume the servicing obligations of the terminated
Servicer. The Master Servicer's obligations to act as a servicer following the
termination of an Underlying Servicing Agreement will not, however, require the
Master Servicer to (i) purchase a Mortgage Loan from the Trust Estate due to a
breach by such Servicer of a representation or warranty in respect of such
Mortgage Loan or (ii) with respect to a default by Norwest Mortgage as Servicer,
advance payments of principal and interest on a delinquent Mortgage Loan.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, as to each Series of Certificates, establish and
maintain a separate trust account in the name of the Trustee (the "Certificate
Account"). Such account may be established at Norwest Bank or an affiliate
thereof. Each such account must be maintained with a depository institution
("Depository") either (i) whose long-term debt obligations (or, in the case of a
depository institution which is part of a holding company structure, the
long-term debt obligations of such parent holding company) are, at the time of
any deposit therein rated in at least one of the two highest rating categories
by each nationally recognized statistical rating organization that rated the
related Series of Certificates, or (ii) that is otherwise acceptable to the
Rating Agency or Rating Agencies rating the Certificates of such Series and, if
a REMIC election has been made, that would not cause the related Trust Estate
(or one or more segregated pools of assets therein) to fail to qualify as a
REMIC. To the extent that the portion of funds deposited in the Certificate
Account at any time exceeds the limit of insurance coverage established by the
Federal Deposit Insurance Corporation (the "FDIC"), such excess will be subject
to loss in the event of the failure of the Depository. Such insurance coverage
will be based on the number of holders of Certificates, rather than the number
of underlying mortgagors. Holders of the Subordinated Certificates of a Series
will bear any such loss up to the amount of principal payments on the related
Mortgage Loans to which such holders are entitled.
Pursuant to the applicable Underlying Servicing Agreements with respect to a
Series, each Servicer will be required to establish and maintain one or more
accounts (collectively, the "Servicer Custodial Account") into which the
Servicer will be required to deposit on a daily basis amounts received with
respect to Mortgage Loans serviced by such Servicer included in the Trust Estate
for such Series, as more fully described below. Each Servicer Custodial Account
must be a separate custodial account insured to the available limits by the FDIC
and limited to funds held with respect to a particular Series, unless the
Underlying Servicing Agreement specifies that a Servicer may establish
43
<PAGE>
an account which is an eligible account meeting the requirements of the
applicable Rating Agencies (an "Eligible Custodial Account") to serve as a
unitary Servicer Custodial Account both for such Series and for other Series of
Certificates for which Norwest Bank is the Master Servicer and having the same
financial institution acting as Trustee and to be maintained in the name of such
financial institution, in its respective capacities as Trustee for each such
Series.
Each Servicer will be required to deposit in the Certificate Account for
each Series of Certificates on the date the Certificates are issued any amounts
representing scheduled payments of principal and interest on the Mortgage Loans
serviced by such Servicer due after the applicable Cut-Off Date but received on
or prior thereto, and except as specified in the applicable Pooling and
Servicing Agreement or Underlying Servicing Agreement, will deposit in the
Servicer Custodial Account on receipt and, thereafter, not later than the 24th
calendar day of each month or such earlier day as may be specified in the
Underlying Servicing Agreement (the "Remittance Date"), will remit to the Master
Servicer for deposit in the Certificate Account, the following payments and
collections received or made by such Servicer with respect to the Mortgage Loans
serviced by such Servicer subsequent to the applicable Cut-Off Date (other than
(x) payments due on or before the Cut-Off Date and (y) amounts held for future
distribution):
(i)
all payments on account of principal, including prepayments, and
interest;
(ii)
all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or property acquired in
respect thereof, whether through foreclosure sale or otherwise, including
payments in connection with defaulted Mortgage Loans received from the
mortgagor other than amounts required to be paid to the mortgagor pursuant
to the terms of the applicable Mortgage Loan or otherwise pursuant to law
("Liquidation Proceeds") less, to the extent permitted under the applicable
Underlying Servicing Agreement, the amount of any expenses incurred in
connection with the liquidation of such Mortgage Loans;
(iii)
all proceeds received by the Servicer under any title, hazard or
other insurance policy covering any such Mortgage Loan, other than
proceeds to be applied to the restoration or repair of the property subject
to the related Mortgage or released to the mortgagor in accordance with the
Underlying Servicing Agreement;
(iv)
all Periodic Advances made by the Servicer;
(v)
all amounts withdrawn from Buy-Down Funds or Subsidy Funds, if any,
with respect to such Mortgage Loans, in accordance with the terms of
the respective agreements applicable thereto;
(vi)
all proceeds of any such Mortgage Loans or property acquired in
respect thereof purchased or repurchased pursuant to the Pooling and
Servicing Agreement or the Underlying Servicing Agreement; and
(vii)
all other amounts required to be deposited therein pursuant to the
applicable Pooling and Servicing Agreement or the Underlying
Servicing Agreement.
Notwithstanding the foregoing, if at any time the sums in (x) any Servicer
Custodial Account, other than any Eligible Custodial Account, exceed $100,000 or
(y) any such Servicer Custodial Account, in certain circumstances, exceed such
amount less than $100,000 as shall have been specified by the Master Servicer,
the Servicer will be required within one business day to withdraw such excess
funds from such account and remit such amounts to the Certificate Account.
Notwithstanding the foregoing, each Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
from any payment or other recovery on account of interest as received and prior
to deposit in the Servicer Custodial Account or (b) to withdraw from the
Servicer Custodial Account the applicable Servicing Fee after the entire payment
or recovery has been deposited in such account.
44
<PAGE>
The Master Servicer or Trustee will deposit in the Certificate Account any
Periodic Advances made by the Master Servicer or Trustee in the event of a
Servicer default not later than the Distribution Date on which such amounts are
required to be distributed. All other amounts will be deposited in the
Certificate Account not later than the business day next following the day of
receipt and posting by the Master Servicer. On or before each Distribution Date,
the Master Servicer will withdraw from the Certificate Account and remit to the
Trustee for distribution to Certificateholders all amounts allocable to the Pool
Distribution Amount for such Distribution Date.
If a Servicer, the Master Servicer or the Trustee deposits in the
Certificate Account for a Series any amount not required to be deposited
therein, the Master Servicer may at any time withdraw such amount from such
account for itself or for remittance to such Servicer or the Trustee, as
applicable. Funds on deposit in the Certificate Account may be invested in
certain investments acceptable to the Rating Agencies ("Eligible Investments")
maturing in general not later than the business day preceding the next
Distribution Date. In the event that an election has been made to treat the
Trust Estate (or one or more segregated pools of assets therein) with respect to
a Series as a REMIC, no such Eligible Investments will be sold or disposed of at
a gain prior to maturity unless the Master Servicer has received an opinion of
counsel or other evidence satisfactory to it that such sale or disposition will
not cause the Trust Estate (or segregated pool of assets) to be subject to the
tax on "prohibited transactions" imposed by Code Section 860F(a)(1), otherwise
subject the Trust Estate (or segregated pool of assets) to tax, or cause the
Trust Estate (or any segregated pool of assets) to fail to qualify as a REMIC
while any Certificates of the Series are outstanding. Except as otherwise
specified in the applicable Prospectus Supplement, all income and gain realized
from any such investment will be for the account of the Master Servicer as
additional compensation and all losses from any such investment will be
deposited by the Master Servicer out of its own funds to the Certificate Account
immediately as realized.
The Master Servicer is permitted, from time to time, to make withdrawals
from the Certificate Account for the following purposes, to the extent permitted
in the applicable Pooling and Servicing Agreement (and, in the case of Servicer
reimbursements by the Master Servicer, only to the extent funds in the
respective Servicer Custodial Account are not sufficient therefor):
(i)
to reimburse the Master Servicer, the Trustee or any Servicer for
Advances;
(ii)
to reimburse any Servicer for liquidation expenses and for amounts
expended by itself or any Servicer, as applicable, in connection with
the restoration of damaged property;
(iii)
to pay to itself the applicable Master Servicing Fee and any other
amounts constituting additional master servicing compensation, to pay
the Trustee the applicable Trustee Fee, to pay any other fees described in
the applicable Prospectus Supplement; and to pay to the owner thereof any
Fixed Retained Yield;
(iv)
to reimburse itself or any Servicer for certain expenses (including
taxes paid on behalf of the Trust Estate) incurred by and recoverable
by or reimbursable to itself or the Servicer, as applicable;
(v)
to pay to the Seller, a Servicer or itself with respect to each
Mortgage Loan or property acquired in respect thereof that has been
repurchased by the Seller or purchased by a Servicer or the Master Servicer
all amounts received thereon and not distributed as of the date as of which
the purchase price of such Mortgage Loan was determined;
(vi)
to pay to itself any interest earned on or investment income earned
with respect to funds in the Certificate Account (all such interest
or income to be withdrawn not later than the next Distribution Date);
45
<PAGE>
(vii)
to pay to itself, the Servicer and the Trustee from net Liquidation
Proceeds allocable to interest, the amount of any unpaid Master
Servicing Fee, Servicing Fees or Trustee Fees and any unpaid assumption
fees, late payment charges or other mortgagor charges on the related
Mortgage Loan;
(viii)
to withdraw from the Certificate Account any amount deposited in such
account that was not required to be deposited therein; and
(ix)
to clear and terminate the Certificate Account.
The Master Servicer will be authorized to appoint a paying agent (the
"Paying Agent") to make distributions, as agent for the Master Servicer, to
Certificateholders of a Series. If the Paying Agent for a Series is the Trustee
of such Series, such Paying Agent will be authorized to make withdrawals from
the Certificate Account in order to make distributions to Certificateholders. If
the Paying Agent for a Series is not the Trustee for such Series, the Master
Servicer will, on each Distribution Date, deposit in immediately available funds
in an account designated by any such Paying Agent the amount required to be
distributed to the Certificateholders on such Distribution Date.
The Master Servicer will cause any Paying Agent that is not the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
agrees with the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Master Servicer for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to Certificateholders
or otherwise disposed of as provided in the applicable Pooling and Servicing
Agreement;
(2) give the Trustee notice of any default by the Master Servicer in the
making of such deposit; and
(3) at any time during the continuance of any such default, upon written
request to the Trustee, forthwith pay to the Trustee all amounts held
in trust by such Paying Agent.
PERIODIC ADVANCES AND LIMITATIONS THEREON
Generally each Servicer will be required to make (i) Periodic Advances to
cover delinquent payments of principal and interest on such Mortgage Loan and
(ii) other advances of cash ("Other Advances" and, collectively with Periodic
Advances, "Advances") to cover (x) delinquent payments of taxes, insurance
premiums, and other escrowed items and (y) rehabilitation expenses and
foreclosure costs, including reasonable attorneys' fees, in either case unless
such Servicer has determined that any subsequent payments on that Mortgage Loan
or from the borrower will ultimately not be available to reimburse such Servicer
for such amounts. The failure of the Servicer to make any required Periodic
Advances or Other Advances under an Underlying Servicing Agreement constitutes a
default under such agreement for which the Servicer will be terminated. Upon
default by a Servicer, other than Norwest Mortgage, the Master Servicer may, and
upon default by Norwest Mortgage the Trustee may, in each case if so provided in
the Pooling and Servicing Agreement, be required to make Periodic Advances to
the extent necessary to make required distributions on certain Certificates or
certain Other Advances, provided that the Master Servicer or Trustee, as
applicable, determines that funds will ultimately be available to reimburse it.
In the case of Certificates of any Series for which credit enhancement is
provided in the form of a mortgage pool insurance policy, the Seller may obtain
an endorsement to the mortgage pool insurance policy which obligates the Pool
Insurer to advance delinquent payments of principal and interest. The Pool
Insurer would only be obligated under such endorsement to the extent the
mortgagor fails to make such payment and the Master Servicer or Trustee fails to
make a required advance.
The advance obligation of the Master Servicer and Trustee may be further
limited to an amount specified by the Rating Agency rating the Certificates. Any
such Periodic Advances by the Servicers or the Master Servicer or Trustee, as
the case may be, must be deposited into the applicable Servicer
46
<PAGE>
Custodial Account or the Certificate Account and will be due no later than the
business day before the Distribution Date to which such delinquent payment
relates. Advances by the Servicers or the Master Servicer or Trustee, as the
case may be, will be reimbursable out of insurance proceeds or Liquidation
Proceeds of, or, except for Other Advances, future payments on, the Mortgage
Loans for which such amounts were advanced. If an Advance made by a Servicer,
the Master Servicer or the Trustee later proves, or is deemed by the Master
Servicer or the Trustee, to be unrecoverable, such Servicer, the Master Servicer
or the Trustee, as the case may be, will be entitled to reimbursement from funds
in the Certificate Account prior to the distribution of payments to the
Certificateholders to the extent provided in the Pooling and Servicing
Agreement.
Any Periodic Advances made by a Servicer, the Master Servicer or the Trustee
with respect to Mortgage Loans included in the Trust Estate for any Series are
intended to enable the Trustee to make timely payment of the scheduled
distributions of principal and interest on the Certificates of such Series.
However, neither the Master Servicer, the Trustee, any Servicer nor any other
person will, except as otherwise specified in the applicable Prospectus
Supplement, insure or guarantee the Certificates of any Series or the Mortgage
Loans included in the Trust Estate for any Certificates.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will be required by the related Underlying Servicing Agreement
to make reasonable efforts to collect all payments called for under the Mortgage
Loans and, consistent with the applicable Underlying Servicing Agreement and any
applicable agreement governing any form of credit enhancement, to follow such
collection procedures as it follows with respect to mortgage loans serviced by
it that are comparable to the Mortgage Loans. Consistent with the above, the
Servicer may, in its discretion, (i) waive any prepayment charge, assumption
fee, late payment charge or any other charge in connection with the prepayment
of a Mortgage Loan and (ii) arrange with a mortgagor a schedule for the
liquidation of deficiencies running for not more than 180 days (or such longer
period to which the Master Servicer and any applicable Pool Insurer or primary
mortgage insurer have consented) after the applicable Due Date.
Under each Underlying Servicing Agreement, each Servicer, to the extent
permitted by law, will establish and maintain one or more escrow accounts (each
such account, a "Servicing Account") in which each such Servicer will be
required to deposit any payments made by mortgagors in advance for taxes,
assessments, primary mortgage (if applicable) and hazard insurance premiums and
other similar items. Withdrawals from the Servicing Account may be made to
effect timely payment of taxes, assessments, mortgage and hazard insurance, to
refund to mortgagors amounts determined to be overages, to pay interest to
mortgagors on balances in the Servicing Account, if required, and to clear and
terminate such account. Each Servicer will be responsible for the administration
of its Servicing Account. A Servicer will be obligated to advance certain
amounts which are not timely paid by the mortgagors, to the extent that it
determines, in good faith, that they will be recoverable out of insurance
proceeds, liquidation proceeds, or otherwise. Alternatively, in lieu of
establishing a Servicing Account, a Servicer may procure a performance bond or
other form of insurance coverage, in an amount acceptable to the Master Servicer
and each Rating Agency rating the related Series of Certificates, covering loss
occasioned by the failure to escrow such amounts.
ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to each Mortgage Loan having a fixed interest rate, the
applicable Underlying Servicing Agreement will generally provide that, when any
Mortgaged Property is about to be conveyed by the mortgagor, the Servicer will,
to the extent it has knowledge of such prospective conveyance, exercise its
rights to accelerate the maturity of such Mortgage Loan under the "due-on-sale"
clause applicable thereto, if any, unless it is not exercisable under applicable
law or if such exercise would result in loss of insurance coverage with respect
to such Mortgage Loan or would, in the Servicer's judgment, be reasonably likely
to result in litigation by the mortgagor and such Servicer has not obtained the
Master Servicer's consent to such exercise. In either case, the Servicer is
authorized to take or enter into an assumption and modification agreement from
or with the person to whom such
47
<PAGE>
Mortgaged Property has been or is about to be conveyed, pursuant to which such
person becomes liable under the Mortgage Note and, unless prohibited by
applicable state law, the mortgagor remains liable thereon, provided that the
Mortgage Loan will continue to be covered by any pool insurance policy and any
related primary mortgage insurance policy and the Mortgage Interest Rate with
respect to such Mortgage Loan and the payment terms shall remain unchanged. The
Servicer will also be authorized, with the prior approval of the pool insurer
and the primary mortgage insurer, if any, to enter into a substitution of
liability agreement with such person, pursuant to which the original mortgagor
is released from liability and such person is substituted as mortgagor and
becomes liable under the Mortgage Note.
Each Underlying Servicing Agreement and Pooling and Servicing Agreement with
respect to a Series will require the Servicer or the Master Servicer, as the
case may be, to present claims to the insurer under any insurance policy
applicable to the Mortgage Loans included in the Trust Estate for such Series
and to take such reasonable steps as are necessary to permit recovery under such
insurance policies with respect to defaulted Mortgage Loans, or losses on the
Mortgaged Property securing the Mortgage Loans.
Each Servicer is obligated under the applicable Underlying Servicing
Agreement for each Series to realize upon defaulted Mortgage Loans in accordance
with its normal servicing practices, which will conform generally to those of
prudent mortgage lending institutions which service mortgage loans of the same
type in the same jurisdictions. Notwithstanding the foregoing, the Servicer is
authorized under the applicable Underlying Servicing Agreement to permit the
assumption of a defaulted Mortgage Loan rather than to foreclose or accept a
deed-in-lieu of foreclosure if, in the Servicer's judgment, the default is
unlikely to be cured and the assuming borrower meets Norwest Mortgage's
applicable underwriting guidelines. In connection with any such assumption, the
Mortgage Interest Rate and the payment terms of the related Mortgage Note will
not be changed. Each Servicer may also, with the consent of the Master Servicer,
modify the payment terms of Mortgage Loans that are in default, or as to which
default is reasonably foreseeable, that remain in the Trust Estate rather than
foreclose on such Mortgage Loans; provided that no such modification shall
forgive principal owing under such Mortgage Loan or permanently reduce the
interest rate on such Mortgage Loan. Any such modification will be made only
upon the determination by the Servicer and the Master Servicer that such
modification is likely to increase the proceeds of such Mortgage Loan over the
amount expected to be collected pursuant to foreclosure. See also "The Pooling
and Servicing Agreement -- Optional Purchases," above, with respect to the
Seller's right to repurchase Mortgage Loans that are in default, or as to which
default is reasonably foreseeable. Further, a Servicer may encourage the
refinancing of such defaulted Mortgage Loans, including Mortgage Loans that
would permit creditworthy borrowers to assume the outstanding indebtedness.
In the case of foreclosure or of damage to a Mortgaged Property from an
uninsured cause, the Servicer will not be required to expend its own funds to
foreclose or restore any damaged property, unless it reasonably determines (i)
that such foreclosure or restoration will increase the proceeds to
Certificateholders of such Series of liquidation of the Mortgage Loan after
reimbursement to the related Servicer for its expenses and (ii) that such
expenses will be recoverable to it through Liquidation Proceeds or any
applicable insurance policy in respect of such Mortgage Loan. In the event that
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to be reimbursed from the Certificate Account for
such Series an amount equal to all costs and expenses incurred by it.
Norwest Mortgage will not be obligated to, and any other Servicer will not
(except with the express written approval of the Master Servicer), foreclose on
any Mortgaged Property which it believes may be contaminated with or affected by
hazardous wastes or hazardous substances. See "Certain Legal Aspects of the
Mortgage Loans -- Environmental Considerations." If a Servicer does not
foreclose on a Mortgaged Property, the Certificateholders of the related Series
may experience a loss on the related Mortgage Loan. A Servicer will not be
liable to the Certificateholders if it fails to foreclose on a Mortgaged
Property which it believes may be so contaminated or affected, even if such
48
<PAGE>
Mortgaged Property is, in fact, not so contaminated or affected. Conversely, a
Servicer will not be liable to the Certificateholders if, based on its belief
that no such contamination or effect exists, the Servicer forecloses on a
Mortgaged Property and takes title to such Mortgaged Property, and thereafter
such Mortgaged Property is determined to be so contaminated or affected.
The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event a
deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans -- Anti-Deficiency Legislation and
Other Limitations on Lenders" for a discussion of the availability of deficiency
judgments), may proceed for the deficiency. It is anticipated that in most cases
the Servicer will not seek deficiency judgments, and will not be required under
the applicable Underlying Servicing Agreement to seek deficiency judgments. In
lieu of foreclosure, each Servicer may arrange for the sale by the borrower of
the Mortgaged Property related to a defaulted Mortgage Loan to a third party,
rather than foreclosing upon and selling such Mortgaged Property.
With respect to a Trust Estate (or any segregated pool of assets therein) as
to which a REMIC election has been made, if the Trustee acquires ownership of
any Mortgaged Property as a result of a default or reasonably foreseeable
default of any Mortgage Loan secured by such Mortgaged Property, the Trustee or
Master Servicer will be required to dispose of such property within two years
following its acquisition by the Trust Estate unless the Trustee (a) receives an
opinion of counsel to the effect that the holding of the Mortgaged Property by
the Trust Estate will not cause the Trust Estate to be subject to the tax on
"prohibited transactions" imposed by Code Section 860F(a)(1) or cause the Trust
Estate (or any segregated pool of assets therein as to which one or more REMIC
elections have been made or will be made) to fail to qualify as a REMIC or (b)
applies for and is granted an extension of the two-year period in the manner
contemplated by Code Section 856(e)(3). The Servicer also will be required to
administer the Mortgaged Property in a manner which does not cause the Mortgaged
Property to fail to qualify as "foreclosure property" within the meaning of Code
Section 860G(a)(8) or result in the receipt by the Trust Estate of any "net
income from foreclosure property" within the meaning of Code Section 860G(c)(2),
respectively. In general, this would preclude the holding of the Mortgaged
Property by a party acting as a dealer in such property or the receipt of rental
income based on the profits of the lessee of such property. See "Certain Federal
Income Tax Consequences."
INSURANCE POLICIES
Each Underlying Servicing Agreement will require the related Servicer to
cause to be maintained for each Mortgage Loan a standard hazard insurance policy
issued by a generally acceptable insurer insuring the improvements on the
Mortgaged Property underlying such Mortgage Loan against loss by fire, with
extended coverage (a "Standard Hazard Insurance Policy"). The Underlying
Servicing Agreements will require that such Standard Hazard Insurance Policy be
in an amount at least equal to the lesser of 100% of the insurable value of the
improvements on the Mortgaged Property or the principal balance of such Mortgage
Loan; provided, however, that such insurance may not be less than the minimum
amount required to fully compensate for any damage or loss on a replacement cost
basis. Each Servicer will also maintain on property acquired upon foreclosure,
or deed in lieu of foreclosure, of any Mortgage Loan, a Standard Hazard
Insurance Policy in an amount that is at least equal to the lesser of 100% of
the insurable value of the improvements which are a part of such property or the
principal balance of such Mortgage Loan plus accrued interest and liquidation
expenses; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Any amounts collected under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or released to the borrower in accordance with normal servicing
procedures) will be deposited in the Servicer Custodial Account for remittance
to the Certificate Account by a Servicer.
The Standard Hazard Insurance Policies covering the Mortgage Loans generally
will cover physical damage to, or destruction of, the improvements on the
Mortgaged 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
49
<PAGE>
relating to such Mortgage Loans will be underwritten by different insurers and
will cover Mortgaged Properties located in various states, such policies will
not contain identical terms and conditions. The most significant terms thereof,
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 the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, hazardous wastes or hazardous substances, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not all-inclusive.
In general, if the improvements on a Mortgaged Property are located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available) each Underlying Servicing Agreement will require the related Servicer
to cause to be maintained a flood insurance policy meeting the requirements of
the current guidelines of the Federal Insurance Administration with a generally
acceptable insurance carrier. Generally, the Underlying Servicing Agreement will
require that such flood insurance be in an amount not less than the least of (i)
the outstanding principal balance of the Mortgage Loan, (ii) the full insurable
value of the improvements, or (iii) the maximum amount of insurance which is
available under the Flood Disaster Protection Act of 1973, as amended. Norwest
Mortgage does not provide financing for flood zone properties located in
communities not participating in the National Flood Insurance Program or if
available insurance coverage is, in its judgment, unrealistically low.
Each Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties in lieu of maintaining the required Standard
Hazard Insurance Policies and may maintain a blanket policy insuring against
special hazards in lieu of maintaining any required flood insurance. Each
Servicer will be liable for the amount of any deductible under a blanket policy
if such amount would have been covered by a required Standard Hazard Insurance
Policy or flood insurance, had it been maintained.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows, floods and hazardous wastes or hazardous
substances) or insufficient hazard insurance proceeds will adversely affect
distributions to the Certificateholders.
FIXED RETAINED YIELD, SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Fixed Retained Yield with respect to any Mortgage Loan is that portion, if
any, of interest at the Mortgage Interest Rate that is not included in the
related Trust Estate. The Prospectus Supplement for a Series will specify
whether there is any Fixed Retained Yield with respect to the Mortgage Loans of
such Series. If so, the Fixed Retained Yield will be established on a
loan-by-loan basis and will be specified in the schedule of Mortgage Loans
attached as an exhibit to the applicable Pooling and Servicing Agreement.
Norwest Mortgage as Servicer may deduct the Fixed Retained Yield from mortgagor
payments as received or deposit such payments in the Servicer Custodial Account
or Certificate Account for such Series and then either withdraw the Fixed
Retained Yield from the Servicer Custodial Account or Certificate Account or
request the Master Servicer to withdraw the Fixed Retained Yield from the
Certificate Account for remittance to Norwest Mortgage. In the case of any Fixed
Retained Yield with respect to Mortgage Loans serviced by a Servicer other than
Norwest Mortgage, the Master Servicer will make withdrawals from the Certificate
Account for the purpose of remittances to Norwest Mortgage as owner of the Fixed
Retained Yield. Notwithstanding the foregoing, with respect to any payment of
interest received by Norwest Mortgage as Servicer relating to a Mortgage Loan
(whether paid by the mortgagor or received as Liquidation Proceeds, insurance
proceeds or otherwise) which is less than the full amount of interest then due
with respect to such Mortgage Loan, the owner of the Fixed Retained Yield with
respect to such Mortgage Loan will bear a ratable share of such interest
shortfall.
For each Series of Certificates, each Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans serviced by such Servicer until
termination of the applicable Underlying
50
<PAGE>
Servicing Agreement. A Servicer, at its election, will pay itself the Servicing
Fee for a Series with respect to each Mortgage Loan by (a) withholding the
Servicing Fee from any scheduled payment of interest prior to deposit of such
payment in the Servicer Custodial Account for such Series or (b) withdrawing the
Servicing Fee from the Servicer Custodial Account after the entire interest
payment has been deposited in such account. A Servicer may also pay itself out
of the Liquidation Proceeds of a Mortgage Loan or other recoveries with respect
thereto, or withdraw from the Servicer Custodial Account or request the Master
Servicer to withdraw from the Certificate Account for remittance to the Servicer
such amounts after the deposit thereof in such accounts, or if such Liquidation
Proceeds or other recoveries are insufficient, from Net Foreclosure Profits with
respect to the related Distribution Date the Servicing Fee in respect of such
Mortgage Loan to the extent provided in the applicable Pooling and Servicing
Agreement. The Servicing Fee or the range of Servicing Fees with respect to the
Mortgage Loans underlying the Certificates of a Series will be specified in the
applicable Prospectus Supplement. Additional servicing compensation in the form
of prepayment charges, assumption fees, late payment charges or otherwise will
be retained by the Servicers.
Each Servicer will pay all expenses incurred in connection with the
servicing of the Mortgage Loans serviced by such Servicer underlying a Series,
including, without limitation, payment of the hazard insurance policy premiums.
The Servicer will be entitled, in certain circumstances, to reimbursement from
the Certificate Account of Periodic Advances, of Other Advances made by it to
pay taxes, insurance premiums and similar items with respect to any Mortgaged
Property or for expenditures incurred by it in connection with the restoration,
foreclosure or liquidation of any Mortgaged Property (to the extent of
Liquidation Proceeds or insurance policy proceeds in respect of such Mortgaged
Property) and of certain losses against which it is indemnified by the Trust
Estate.
As set forth in the preceding paragraph, a Servicer may be entitled to
reimbursement for certain expenses incurred by it, and payment of additional
fees for certain extraordinary services rendered by it (provided that such fees
do not exceed those which would be charged by third parties for similar
services) in connection with the liquidation of defaulted Mortgage Loans and
related Mortgaged Properties. In the event that claims are either not made or
are not fully paid from any applicable form of credit enhancement, the related
Trust Estate will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicing Fee and the expenses of the Servicer, are less
than the principal balance of the related Mortgage Loan.
EVIDENCE AS TO COMPLIANCE
Each Servicer will deliver annually to the Trustee or Master Servicer, as
applicable, on or before the date specified in the applicable Underlying
Servicing Agreement, an Officer's Certificate stating that (i) a review of the
activities of such Servicer during the preceding calendar year and of
performance under the applicable Underlying Servicing Agreement has been made
under the supervision of such officer, and (ii) to the best of such officer's
knowledge, based on such review, such Servicer has fulfilled all its obligations
under the applicable Underlying Servicing Agreement throughout such year, or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default known to such officer and the nature and status thereof. Such
Officer's Certificate shall be accompanied by a statement of a firm of
independent public accountants to the effect that, on the basis of an
examination of certain documents and records relating to a random sample of the
mortgage loans being serviced by such Servicer pursuant to such Underlying
Servicing Agreement and/or other similar agreements, conducted substantially in
compliance with the Uniform Single Audit Program for Mortgage Bankers, the
servicing of such mortgage loans was conducted in compliance with the provisions
of the applicable Underlying Servicing Agreement and other similar agreements,
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 Master Servicer will deliver annually to the Trustee, on or before the
date specified in the applicable Pooling and Servicing Agreement, an Officer's
Certificate stating that such officer has
51
<PAGE>
received, with respect to each Servicer, the Officer's Certificate and
accountant's statement described in the preceding paragraph, and, that on the
basis of such officer's review of such information, each Servicer has fulfilled
all its obligations under the applicable Underlying Servicing Agreement
throughout such year, or, if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Master Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series without the consent of the
Trustee, except upon its determination that its duties thereunder are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature carried on by it.
No such resignation will become effective until the Trustee for such Series or a
successor master servicer has assumed the Master Servicer's obligations and
duties under the Pooling and Servicing Agreement. If the Master Servicer resigns
for any of the foregoing reasons and the Trustee is unable or unwilling to
assume responsibility for its duties under the Pooling and Servicing Agreement,
it may appoint another institution to so act as described under "The Pooling and
Servicing Agreement -- Rights Upon Event of Default" below.
The Pooling and Servicing Agreement will also provide that neither the
Master Servicer nor any subcontractor, nor any partner, director, officer,
employee or agent of any of them, will be under any liability to the Trust
Estate or the Certificateholders, for the taking of any action or for refraining
from the taking of any action in good faith pursuant to the Pooling and
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Master Servicer, any subcontractor, nor any such person will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of his or its
duties or by reason of reckless disregard of his or its obligations and duties
thereunder. The Pooling and Servicing Agreement will further provide that the
Master Servicer, any subcontractor, and any partner, director, officer, employee
or agent of either of them shall be entitled to indemnification by the Trust
Estate 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 gross negligence in the
performance of his or its duties thereunder or by reason of reckless disregard
of his or its obligations and duties thereunder. In addition, the Pooling and
Servicing Agreement will provide that the Master Servicer will not be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Pooling and Servicing Agreement and that in
its opinion may involve it in any expense or liability. The Master Servicer may,
however, in its discretion, undertake any such action deemed by it 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 Estate and the Master Servicer will be entitled to be reimbursed therefor
out of the Certificate Account, and any loss to the Trust Estate arising from
such right of reimbursement will be allocated first to the Subordinated
Certificate of a Series before being allocated to the related Senior
Certificates, or if such Series does not contain Subordinated Certificates, pro
rata among the various Classes of Certificates unless otherwise specified in the
applicable Pooling and Servicing Agreement.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger, conversion or consolidation to which the
Master Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets or all assets relating to such
business, or otherwise, of the Master Servicer will be the successor of the
Master Servicer under the Pooling and Servicing Agreement for each Series
provided that such successor or resulting entity has a net worth of not less
than $15,000,000 and is qualified to service mortgage loans for FNMA or FHLMC.
52
<PAGE>
The Master Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each
Series; provided that, if the Master Servicer desires to be released from its
obligations under the Pooling and Servicing Agreement, (i) the purchaser or
transferee accepting such assignment or delegation is qualified to service
mortgage loans for FNMA or FHLMC, (ii) the purchaser is satisfactory to the
Trustee for such Series, in the reasonable exercise of its judgment, and
executes and delivers to 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 observance of
each covenant and condition to be performed or observed by the Master Servicer
under the Pooling and Servicing Agreement from and after the date of such
agreement; and (iii) each applicable Rating Agency's rating of any Certificates
for such Series in effect immediately prior to such assignment, sale or transfer
would not be qualified, downgraded or withdrawn as a result of such assignment,
sale or transfer and the Certificates would not be placed on credit review
status by any such Rating Agency. The Master Servicer will be released from its
obligations under the Pooling and Servicing Agreement upon any such assignment
and delegation, except that the Master Servicer will remain liable for all
liabilities and obligations incurred by it prior to the time that the conditions
contained in clauses (i), (ii) and (iii) above are met.
THE POOLING AND SERVICING AGREEMENT
ASSIGNMENT OF MORTGAGE LOANS TO THE TRUSTEE
The Seller will have acquired the Mortgage Loans included in each Trust
Estate from Norwest Mortgage pursuant to an agreement (the "Norwest Mortgage
Sale Agreement"). In connection with the conveyance of the Mortgage Loans to the
Seller, Norwest Mortgage will (i) agree to deliver to the Seller all of the
documents which the Seller is required to deliver to the Trustee; (ii) make
certain representations and warranties to the Seller which will be the basis of
certain of the Seller's representations and warranties to the Trustee or assign
the representations and warranties made by a Correspondent to Norwest Mortgage;
and (iii) agree to repurchase or substitute (or assign rights to a comparable
agreement of a Correspondent) for any Mortgage Loan for which any document is
not delivered or is found to be defective in any material respect, or which
Mortgage Loan is discovered at any time not to be in conformance with any
representation and warranty Norwest Mortgage has made to the Seller and the
breach of such representation and warranty materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan, if Norwest
Mortgage cannot deliver such document or cure such defect or breach within 60
days after notice thereof. Such agreement will inure to the benefit of the
Trustee and is intended to help ensure the Seller's performance of its limited
obligation to repurchase or substitute for Mortgage Loans. See "The Mortgage
Loan Programs -- Representations and Warranties" above.
At the time of issuance of each Series of Certificates, the Mortgage Loans
in the related Trust Estate will, pursuant to the applicable Pooling and
Servicing Agreement, be assigned to the Trustee, together with all principal and
interest received on or with respect to such Mortgage Loans after the applicable
Cut-Off Date other than principal and interest due and payable on or before such
Cut-Off Date and interest attributable to the Fixed Retained Yield on such
Mortgage Loans, if any. See "Servicing of the Mortgage Loans -- Fixed Retained
Yield, Servicing Compensation and Payment of Expenses." The Trustee or its agent
will, concurrently with such assignment, authenticate and deliver the
Certificates evidencing such Series to the Seller in exchange for the Mortgage
Loans. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the applicable Pooling and Servicing Agreement. Each such schedule
will include, among other things, the unpaid principal balance as of the close
of business on the applicable Cut-Off Date, the maturity date and the Mortgage
Interest Rate for each Mortgage Loan in the related Trust Estate.
In addition, with respect to each Mortgage Loan in a Trust Estate, the
mortgage or other promissory note, any assumption, modification or conversion to
fixed interest rate agreement, a mortgage assignment in recordable form and the
recorded Mortgage (or other documents as are required under applicable law to
create perfected security interest in the Mortgaged Property in favor
53
<PAGE>
of the Trustee) will be delivered to the Trustee or, if indicated in the
applicable Prospectus Supplement, to a custodian; provided that, in instances
where recorded documents cannot be delivered due to delays in connection with
recording, copies thereof, certified by the Seller to be true and complete
copies of such documents sent for recording, may be delivered and the original
recorded documents will be delivered promptly upon receipt. The assignment of
each Mortgage will be recorded promptly after the initial issuance of
Certificates for the related Trust Estate, 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 against the claim of any
subsequent transferee or any successor to or creditor of the Seller, Norwest
Mortgage or the originator of such Mortgage Loan.
The Trustee or custodian will hold such documents in trust for the benefit
of Certificateholders of the related Series and will review such documents
within 180 days of the date of the applicable Pooling and Servicing Agreement.
If any document is not delivered or is found to be defective in any material
respect, or if the Seller is in breach of any of its representations and
warranties, and such breach materially and adversely affects the interests of
the Certificateholders in a Mortgage Loan, and the Seller cannot deliver such
document or cure such defect or breach within 60 days after written notice
thereof, the Seller will, within 60 days of such notice, either repurchase the
related Mortgage Loan from the Trustee at a price equal to the then unpaid
principal balance thereof, plus accrued and unpaid interest at the applicable
Mortgage Interest Rate (minus any Fixed Retained Yield) through the last day of
the month in which such repurchase takes place, or (in the case of a Series for
which one or more REMIC elections have been or will be made, unless the maximum
period as may be provided by the Code or applicable regulations of the
Department of the Treasury ("Treasury Regulations") shall have elapsed since the
execution of the applicable Pooling and Servicing Agreement) substitute for such
Mortgage Loan a new mortgage loan having characteristics such that the
representations and warranties of the Seller made pursuant to the applicable
Pooling and Servicing Agreement (except for representations and warranties as to
the correctness of the applicable schedule of mortgage loans) would not have
been incorrect had such substitute Mortgage Loan originally been a Mortgage
Loan. In the case of a repurchased Mortgage Loan, the purchase price will be
deposited by the Seller in the related Certificate Account. In the case of a
substitute Mortgage Loan, the mortgage file relating thereto will be delivered
to the Trustee or the custodian and the Seller will deposit in the Certificate
Account, an amount equal to the excess of (i) the unpaid principal balance of
the Mortgage Loan which is substituted for, over (ii) the unpaid principal
balance of the substitute Mortgage Loan, together with interest on such excess
at the Mortgage Interest Rate (minus any Fixed Retained Yield) to the next
scheduled Due Date of the Mortgage Loan which is being substituted for. In no
event will any substitute Mortgage Loan have an unpaid principal balance greater
than the scheduled principal balance calculated in accordance with the
amortization schedule (the "Scheduled Principal Balance") of the Mortgage Loan
for which it is substituted (after giving effect to the scheduled principal
payment due in the month of substitution on the Mortgage Loan substituted for),
or a term greater than, a Mortgage Interest Rate less than, a Mortgage Interest
Rate more than one percent per annum greater than or a Loan-to-Value Ratio
greater than, the Mortgage Loan for which it is substituted. If substitution is
to be made for an adjustable rate Mortgage Loan, the substitute Mortgage Loan
will have an unpaid principal balance no greater than the Scheduled Principal
Balance of the Mortgage Loan for which it is substituted (after giving effect to
the scheduled principal payment due in the month of substitution on the Mortgage
Loan substituted for), a Loan-to-Value Ratio less than or equal to, and a
Mortgage Interest Rate at least equal to, that of the Mortgage Loan for which it
is substituted, and will bear interest based on the same index, margin and
frequency of adjustment as the substituted Mortgage Loan. The repurchase
obligation and the mortgage substitution referred to above will constitute the
sole remedies available to the Certificateholders or the Trustee with respect to
missing or defective documents or breach of the Seller's representations and
warranties.
If no custodian is named in the Pooling and Servicing Agreement, the Trustee
will be authorized to appoint a custodian to maintain possession of the
documents relating to the Mortgage Loans and to conduct the review of such
documents described above. Any custodian so appointed will keep and review such
documents as the Trustee's agent under a custodial agreement.
54
<PAGE>
OPTIONAL PURCHASES
Subject to the provisions of the applicable Pooling and Servicing Agreement,
the Seller or the Master Servicer may, at such party's option, repurchase any
Mortgage Loan which is in default or as to which default is reasonably
foreseeable if, in the Seller's or the Master Servicer's judgment, the related
default is not likely to be cured by the borrower or default is not likely to be
averted, at a price equal to the unpaid principal balance thereof plus accrued
interest thereon and under the conditions set forth in the applicable Prospectus
Supplement.
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise specified or modified in the related Pooling and Servicing
Agreement for each Series, the Master Servicer will prepare and the Trustee will
include with each distribution to Certificateholders of record of such Series a
statement setting forth the following information, if applicable:
(i)
the amount of such distribution allocable to principal of the related
Mortgage Loans, separately identifying the aggregate amount of any
principal prepayments included therein, the amount of such distribution
allocable to interest on the related Mortgage Loans and the aggregate unpaid
principal balance of the Mortgage Loans evidenced by each Class after giving
effect to the principal distributions on such Distribution Date;
(ii)
the amount of servicing compensation with respect to the related
Trust Estate and such other customary information as is required to
enable Certificateholders to prepare their tax returns;
(iii)
the amount by which the Servicing Fee for the related Distribution
Date has been reduced by interest shortfalls due to prepayments;
(iv)
the aggregate amount of any Periodic Advances by the Servicer, the
Master Servicer or the Trustee included in the amounts actually
distributed to the Certificateholders;
(v)
to each holder of a Certificate entitled to the benefits of payments
under any form of credit enhancement or from any Reserve Fund:
(a)
the amounts so distributed under any such form of credit
enhancement or from any such Reserve Fund on the applicable
Distribution Date; and
(b)
the amount of coverage remaining under any such form of credit
enhancement and the balance in any such Reserve Fund, after
giving effect to any payments thereunder and other amounts charged
thereto on the Distribution Date;
(vi)
in the case of a Series of Certificates with a variable Pass-Through
Rate, such Pass-Through Rate;
(vii)
the book value of any collateral acquired by the Trust Estate through
foreclosure or otherwise;
(viii)
the unpaid principal balance of any Mortgage Loan as to which the
Servicer has notified the Master Servicer that such Servicer has
determined not to foreclose because it believes the related Mortgaged
Property may be contaminated with or affected by hazardous wastes or
hazardous substances; and
(ix)
the number and aggregate principal amount of Mortgage Loans one
month, two months and three or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer will furnish either directly, or through the
Trustee, a report to each Certificateholder of record at any time during such
calendar year such information as required by the Code and applicable
regulations thereunder to enable Certificateholders to prepare their tax
returns. In the event that an election has been made to treat the Trust Estate
(or one or more segregated pools of assets therein) as
55
<PAGE>
a REMIC, the Trustee will be required to sign the federal and applicable state
and local income tax returns of the REMIC (which will be prepared by the Master
Servicer). See "Certain Federal Income Tax Consequences -- Administrative
Matters."
LIST OF CERTIFICATEHOLDERS
The Pooling and Servicing Agreement for each Series will require the Trustee
to provide access to the most current list of names and addresses of
Certificateholders of such Series to any group of five or more
Certificateholders who advise the Trustee in writing that they desire to
communicate with other Certificateholders with respect to their rights under the
Pooling and Servicing Agreement or under the Certificates.
EVENTS OF DEFAULT
Events of Default under the Pooling and Servicing Agreement for each Series
include (i) any failure by the Master Servicer to make a required deposit which
continues unremedied for three business days after the giving of written notice
of such failure to the Master Servicer by the Trustee for such Series, or to the
Master Servicer and the Trustee by the holders of Certificates of such Series
having voting rights allocated to such Certificates ("Voting Interests")
aggregating not less than 25% of the Voting Interests allocated to all
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 30 days in the case of a failure to maintain any pool 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 to the Master Servicer and the Trustee by the
holders of Certificates aggregating not less than 25% of the Voting Interests;
(iii) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain action by the Master Servicer
indicating its insolvency, reorganization or inability to pay its obligations
and (iv) it and any subservicer appointed by it becoming ineligible to service
for both FNMA and FHLMC (unless remedied within 90 days). (Section 7.01).
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 66 2/3% of the Voting
Interests in the Trust Estate for such Series may terminate all of the rights
and obligations of the Master Servicer under the Pooling and Servicing Agreement
and in and to the Mortgage Loans (other than the Master Servicer's right to
recovery of the aggregate Master Servicing Fees due prior to the date of
termination, and other expenses and amounts advanced pursuant to the terms of
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 monthly compensation not
to exceed the aggregate Master Servicing Fees together with the other
compensation to which the Master Servicer is entitled under the Pooling and
Servicing Agreement. In the event that the Trustee is unwilling or unable so to
act, it may select, pursuant to the public bid procedure described in the
applicable Pooling and Servicing Agreement, or petition a court of competent
jurisdiction to appoint, a housing and home finance institution, bank or
mortgage servicing institution with a net worth of at least $10,000,000 to act
as successor to the Master Servicer under the provisions of the Pooling and
Servicing Agreement; provided however, that until such a successor Master
Servicer is appointed and has assumed the responsibilities, duties and
liabilities of the Master Servicer under the Pooling and Servicing Agreement,
the Trustee shall continue as the successor to the Master Servicer as described
above. In the event such public bid procedure is utilized, the successor would
be entitled to compensation in an amount equal to the aggregate Master Servicing
Fees, together with the other compensation to which the Master Servicer is
entitled under the Pooling and Servicing Agreement, and the Master Servicer
would be entitled to receive the net profits, if any, realized from the sale of
its rights and obligations under the Pooling and Servicing Agreement. (Sections
7.01 and 7.05).
56
<PAGE>
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 Voting Interests 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 the 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 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. (Sections 7.02 and 7.03).
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
Pooling and Servicing 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 Voting Interests 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. (Section 10.03).
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Seller, the
Master Servicer and the Trustee without the consent of the Certificateholders,
(i) to cure any ambiguity or mistake, (ii) to correct or supplement any
provision therein that may be inconsistent with any other provision therein,
(iii) to modify, eliminate or add to any of its provisions to such extent as
shall be necessary to maintain the qualification of the Trust Estate (or one or
more segregated pools of assets therein) as a REMIC at all times that any
Certificates are outstanding or to avoid or minimize the risk of the imposition
of any tax on the Trust Estate pursuant to the Code that would be a claim
against the Trust Estate, provided that the Trustee has received an opinion of
counsel to the effect that such action is necessary or desirable to maintain
such qualification or to avoid or minimize the risk of the imposition of any
such tax and such action will not, as evidenced by such opinion of counsel,
adversely affect in any material respect the interests of any Certificateholder,
(iv) to change the timing and/or nature of deposits into the Certificate
Account, provided that such change will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of any
Certificateholder and that such change will not adversely affect the then
current rating assigned to any Certificates, as evidenced by a letter from each
Rating Agency to such effect, (v) to add to, modify or eliminate any provisions
therein restricting transfers of residual Certificates to certain disqualified
organizations described below under "Certain Federal Income Tax Consequences --
Federal Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates -- Tax-Related Restrictions on Transfer of Residual Certificates,"
(vi) to make certain provisions with respect to the denominations of, and the
manner of payments on, certain Classes or Subclasses of Certificates initially
retained by the Seller or an affiliate, or (vii) to make any other provisions
with respect to matters or questions arising under such Pooling and Servicing
Agreement that are not inconsistent with the provisions thereof, provided that
such action will not, as evidenced by an opinion of counsel, adversely affect in
any material respect the interests of the Certificateholders of the related
Series. The Pooling and Servicing Agreement may also be amended by the Seller,
the Master Servicer and the Trustee with the consent of the holders of
Certificates evidencing interests aggregating not less than 66 2/3% of the
Voting Interests evidenced by the Certificates of each Class or Subclass
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 of modifying in any manner the rights of the Certificateholders;
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, any payments
57
<PAGE>
received on or with respect to Mortgage Loans that are required to be
distributed on any Certificates, without the consent of the holder of such
Certificate, (ii) adversely affect in any material respect the interests of the
holders of a Class or Subclass of Certificates of a Series in a manner other
than that set forth in (i) above without the consent of the holders of
Certificates aggregating not less than 66 2/3% of the Voting Interests evidenced
by such Class or Subclass, or (iii) reduce the aforesaid percentage of
Certificates of any Class or Subclass, the holders of which are required to
consent to such amendment, without the consent of the holders of all
Certificates of such Class or Subclass affected then outstanding.
Notwithstanding the foregoing, the Trustee will not consent to any such
amendment if such amendment would subject the Trust Estate (or any segregated
pool of assets therein) to tax or cause the Trust Estate (or any segregated pool
of assets therein) to fail to qualify as a REMIC.
TERMINATION; OPTIONAL PURCHASE OF MORTGAGE LOANS
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate on the Distribution Date following the final
payment or other liquidation of the last Mortgage Loan subject thereto and the
disposition of all property acquired upon foreclosure of any such Mortgage Loan.
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 named in such Pooling and Servicing Agreement. For
each Series of Certificates, the Trustee 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 appointed by the Seller and specified in the
notice of termination.
If so provided in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the Seller, Norwest Mortgage or such other party as is specified in the
applicable Prospectus Supplement, to purchase from the Trust Estate for such
Series all remaining Mortgage Loans at the time subject to the Pooling and
Servicing Agreement at a price specified in such Prospectus Supplement. In the
event that such party has caused the related Trust Estate (or any segregated
pool of assets therein) to be treated as a REMIC, any such purchase will be
effected only pursuant to a "qualified liquidation" as defined in Code Section
860F(a)(4)(A) and the receipt by the Trustee of an opinion of counsel or other
evidence that such purchase will not (i) result in the imposition of a tax on
"prohibited transactions" under Code Section 860F(a)(1), (ii) otherwise subject
the Trust Estate to tax, or (iii) cause the Trust Estate (or any segregated pool
of assets) to fail to qualify as a REMIC. The exercise of such right will effect
early retirement of the Certificates of that Series, but the right so to
purchase may be exercised only after the aggregate principal balance of the
Mortgage Loans for such Series at the time of purchase is less than a specified
percentage of the aggregate principal balance at the Cut-Off Date for the
Series, or after the date set forth in the applicable Prospectus Supplement.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement (the "Trustee") will
be named in the applicable Prospectus Supplement. The commercial bank or trust
company serving as Trustee may have normal banking relationships with the Seller
or any of its affiliates.
The Trustee may resign at any time, in which event the Master Servicer will
be obligated to appoint a successor trustee. The Master Servicer may also remove
the Trustee if the Trustee ceases to be eligible to act as Trustee under the
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in order to
change the situs of the Trust Estate for state tax reasons. Upon becoming aware
of such circumstances, the Master Servicer will become obligated to appoint a
successor trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the Voting Interests in the Trust
Estate, except that, any Certificate registered in the name of the Seller, the
Master Servicer or any affiliate thereof will not be taken into account in
determining whether the requisite Voting Interest in the Trust Estate necessary
to effect any such removal has been obtained. Any resignation and removal of the
Trustee, and the appointment of a successor trustee, will not become effective
until acceptance of such appointment by the successor trustee. The
58
<PAGE>
Trustee, and any successor trustee, will have a combined capital and surplus of
at least $50,000,000, or will be a member of a bank holding system, the
aggregate combined capital and surplus of which is at least $50,000,000,
provided that the Trustee's and any such successor trustee's separate capital
and surplus shall at all times be at least the amount specified in Section
310(a)(2) of the Trust Indenture Act of 1939, and will be subject to supervision
or examination by federal or state authorities.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete or to reflect the laws of any particular
state, nor to encompass the laws of all states in which the security for the
Mortgage Loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans will, in general, be secured by either first mortgages or
first deeds of trust, depending upon the prevailing practice in the state in
which the underlying property is located. A mortgage creates a lien upon the
real property described in the mortgage. There are two parties to a mortgage:
the mortgagor, who is the borrower (or, in the case of a Mortgage Loan secured
by a property that has been conveyed to an INTER VIVOS revocable trust, the
settlor of such trust); and the mortgagee, who is the lender. In a mortgage
instrument state, the mortgagor delivers to the mortgagee a note or bond
evidencing the loan and the mortgage. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties: a borrower called the trustor
(similar to a mortgagor), a lender called the beneficiary (similar to a
mortgagee), and a third-party grantee called the trustee. Under a deed of trust,
the borrower grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure payment of the loan.
The trustee's authority under a deed of trust and the mortgagee's authority
under a mortgage are governed by the express provisions of the deed of trust or
mortgage, applicable law, and, in some cases, with respect to the deed of trust,
the directions of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right of foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming. After the completion of a judicial foreclosure proceeding, the
court may issue a judgment of foreclosure and appoint a receiver or other
officer to conduct the sale of the property. In some states, mortgages may also
be foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, a notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
59
<PAGE>
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
receiver for an amount equal to the unpaid principal amount of the note, accrued
and unpaid interest and the expenses of foreclosure. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a 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 mortgage
insurance proceeds, if any, or by judicial action against the borrower for the
deficiency, if such action is permitted by law. See "-- Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the cooperative's Certificate of Incorporation and By-laws, as well as
in the proprietary lease or occupancy agreement, and 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. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided an opportunity to cure the default.
The recognition agreement typically provides that if the proprietary lease or
occupancy agreement is terminated, the cooperative will recognize the lender's
lien against proceeds from a sale of the cooperative apartment, subject,
however, to the cooperative's right to sums due under such proprietary lease or
occupancy agreement. The total amount owed to the cooperative by the tenant-
stockholder, which the lender generally cannot restrict and does not monitor,
could reduce the value of the collateral below the outstanding principal balance
of the cooperative loan and accrued and unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited by the agreement in any rights it may have to dispossess the
tenant-stockholders.
60
<PAGE>
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "-- Anti-Deficiency Legislation
and Other Limitations on Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust and/or foreclosure of
a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to delay the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may 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, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
61
<PAGE>
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. 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 Mortgage Loan secured by
shares of a cooperative, would be such shares and the related proprietary lease
or occupancy agreement) was conducted in a commercially reasonable manner.
A Servicer generally will not be required under the applicable Underlying
Servicing Agreement to pursue deficiency judgments on the Mortgage Loans even if
permitted by law.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 ET SEQ., (the "Bankruptcy Code") may interfere with or affect the
ability of the Seller to obtain payment of a Mortgage Loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a Mortgage Loan by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no foreclosure sale had
yet occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the case, that effected the curing of a mortgage loan default by paying
arrearages over a number of years.
If a Mortgage Loan is secured by property NOT consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits such Mortgage
Loan to be modified. 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 property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
Mortgage Loan. Some courts have permitted such modifications when the Mortgage
Loan is secured both by the debtor's principal residence and by personal
property.
If a court relieves a borrower's obligation to repay amounts otherwise due
on a Mortgage Loan, the Servicer will not be required to advance such amounts,
and any loss in respect thereof will be borne by the Certificateholders.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage or deed of trust. The laws of some
states provide priority to certain tax liens over the lien of the mortgage or
deed of trust. Numerous federal and some state consumer protection laws impose
substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. These laws include the
federal Truth in Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes and regulations. These federal laws and state laws impose
specific statutory liabilities upon lenders who originate or service mortgage
loans and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the mortgage loans.
62
<PAGE>
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT AND SIMILAR LAWS
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 action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans in a Trust Estate. Any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Certificates of the related
Series. Further, the Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a Mortgage
Loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the Mortgaged Property in a timely fashion. Certain
states have enacted comparable legislation which may interfere with or affect
the ability of the Servicer to timely collect payments of principal and interest
on, or to foreclose on, Mortgage Loans of borrowers in such states who are
active or reserve members of the armed services.
ENVIRONMENTAL CONSIDERATIONS
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale or operates a mortgaged property may become
liable in certain circumstances for the costs of remedial action ("Cleanup
Costs") if hazardous wastes or hazardous substances have been released or
disposed of on the property. Such Cleanup Costs may be substantial. Under the
laws of certain states, failure to perform the remediation required or demanded
by the state of any condition or circumstance that (i) may pose an imminent or
substantial endangerment to the public health or welfare or the environment,
(ii) may result in a release or threatened release of any hazardous substances,
or (iii) may give rise to any environmental claim or demand may give rise to a
lien on the property to ensure the reimbursement of Cleanup Costs (a
"Superlien"). All subsequent liens on such property are subordinated to such
Superlien and, in some states, even prior recorded liens are subordinated to
such Superliens. In the latter states, the security interest of the Trustee in a
property that is subject to such a Superlien could be adversely affected.
The state of the law is currently unclear as to whether and under what
circumstances Cleanup Costs, or the obligation to take remedial actions, could
be imposed on a secured lender such as the Trust Estate. Under the laws of some
states and under CERCLA, a lender may be liable as an "owner or operator" for
costs of addressing releases or threatened releases of hazardous substances on a
mortgaged property if such lender or its agents or employees have participated
in the management of the operations of the borrower, even though the
environmental damage or threat was caused by a prior owner or current owner or
operator or other third party. Excluded from CERCLA's definition of "owner or
operator," however, is a person "who without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest" (the "secured-creditor exemption"). This exemption for holders of a
security interest such as a secured lender applies only when the lender seeks to
protect its security interest in the contaminated facility or property. Thus, if
a lender's activities begin to encroach on the actual management of such
facility or property, the lender faces potential liability as an "owner or
operator" under CERCLA. Similarly, when a lender forecloses and takes title to a
contaminated facility or property, the lender may incur potential CERCLA
liability in various circumstances, including among others, when it holds the
facility or property as an investment (including leasing the facility or
property to a third party), fails to market the property in a timely fashion or
fails to properly address environmental conditions at the property or facility.
63
<PAGE>
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in UNITED STATES V. FLEET FACTORS CORP. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggests that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility is broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in IN RE BERGSOE METAL CORP., apparently disagreeing with, but not
expressly contradicting, the FLEET FACTORS court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender. On April 29, 1992, the United States Environmental Protection Agency
(the "EPA") issued a final rule interpreting and delineating CERCLA's
secured-creditor exemption and the range of permissible actions that may be
undertaken by a holder of a contaminated facility without exceeding the bounds
of the secured-creditor exemption. On February 4, 1994, the United States Court
of Appeals for the District of Columbia Circuit in KELLEY V. EPA invalidated the
EPA rule. As a result of the KELLEY case, the state of the law with respect to
the secured creditor exemption remains unclear. In addition, even if the EPA
rule or a replacement were to be reinstated, the EPA rule or its replacement
would not necessarily affect the potential for liability in actions by either a
state or a private party under CERCLA or in actions under other federal or state
laws which may impose liability on "owners or operators" but do not incorporate
the secured-creditor exemption. Traditionally, residential mortgage lenders have
not taken steps to evaluate whether hazardous wastes or hazardous substances are
present with respect to any mortgaged property prior to the origination of the
mortgage loan or prior to foreclosure or accepting a deed-in-lieu of
foreclosure. Accordingly, neither the Seller, Norwest Mortgage nor Norwest
Funding has made such evaluations prior to the origination of the Mortgage
Loans, nor does Norwest Mortgage or Norwest Funding require that such
evaluations be made by originators who have sold the Mortgage Loans to Norwest
Mortgage. Neither the Seller nor Norwest Mortgage is required to undertake any
such evaluations prior to foreclosure or accepting a deed-in-lieu of
foreclosure. Neither the Seller nor the Master Servicer makes any
representations or warranties or assumes any liability with respect to the
absence or effect of hazardous wastes or hazardous substances on any Mortgaged
Property or any casualty resulting from the presence or effect of hazardous
wastes or hazardous substances. See "The Trust Estates -- Mortgage Loans --
Representations and Warranties" and "Servicing of the Mortgage Loans --
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans"
above.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the borrower transfers its interest in the property. In
recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce such clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn Act") which purports to preempt
state laws which prohibit the enforcement of "due-on-sale" clauses by providing
among other matters, that "due-on-sale" clauses in certain loans (which loans
may include the Mortgage Loans) made after the effective date of the Garn Act
are enforceable, within certain limitations as set forth in the Garn Act and the
regulations promulgated thereunder. "Due-on-sale" clauses contained in mortgage
loans originated by federal savings and loan associations or federal savings
banks are fully enforceable pursuant to regulations of the Office of Thrift
Supervision ("OTS"), as successor to the Federal Home Loan Bank Board ("FHLBB"),
which preempt state law restrictions on the enforcement of such clauses.
Similarly, "due-on-sale" clauses in mortgage loans made by national banks and
federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
64
<PAGE>
The Garn Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by constitutional provision, statute or statewide court decision (the
"Window Period"). Though neither the Garn Act nor the OTS regulations actually
names the Window Period States, the Federal Home Loan Mortgage Corporation has
taken the position, in prescribing mortgage loan servicing standards with
respect to mortgage loans which it has purchased, that the Window Period States
were: Arizona, Arkansas, California, Colorado, Georgia, Iowa, Michigan,
Minnesota, New Mexico, Utah and Washington. Under the Garn Act, unless a Window
Period State took action by October 15, 1985, the end of the Window Period, to
further regulate enforcement of "due-on-sale" clauses in Window Period Loans,
"due-on-sale" clauses would become enforceable even in Window Period Loans. Five
of the Window Period States (Arizona, Minnesota, Michigan, New Mexico and Utah)
have taken actions which restrict the enforceability of "due-on-sale" clauses in
Window Period Loans beyond October 15, 1985. The actions taken vary among such
states.
By virtue of the Garn Act, a Servicer may generally be permitted to
accelerate any conventional Mortgage Loan which contains a "due-on-sale" clause
upon transfer of an interest in the property subject to the mortgage or deed of
trust. With respect to any Mortgage Loan secured by a residence occupied or to
be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including (i) the granting of a leasehold interest
which has a term of three years or less and which does not contain an option to
purchase, (ii) a transfer to a relative resulting from the death of a borrower,
or a transfer where the spouse or children become an owner of the property in
each case where the transferee(s) will occupy the property, (iii) a transfer
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse becomes
an owner of the property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed), (v) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety, (vi) a transfer into an INTER VIVOS trust in which the borrower is
the beneficiary and which does not relate to a transfer of rights of occupancy;
and (vii) other transfers as set forth in the Garn Act and the regulations
thereunder. The extent of the effect of the Garn Act on the average lives and
delinquency rates of the Mortgage Loans cannot be predicted. See "Prepayment and
Yield Considerations."
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The OTS as successor to the
FHLBB is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to reimpose interest rate limits by adopting before April 1, 1983, a law
or constitutional provision which expressly rejects application of the federal
law. Fifteen states have adopted laws reimposing or reserving the right to
reimpose interest rate limits. In addition, even where Title V is not so
rejected, any state is authorized to adopt a provision limiting certain other
loan charges.
The Seller will represent and warrant in the Pooling and Servicing Agreement
to the Trustee for the benefit of Certificateholders that all Mortgage Loans are
originated in full compliance with applicable state laws, including usury laws.
See "The Pooling and Servicing Agreement -- Assignment of Mortgage Loans to the
Trustee."
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are
65
<PAGE>
or may be specific limitations upon late charges which a lender may collect from
a borrower for delinquent payments. Certain states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling and Servicing Agreement, late charges and prepayment
fees (to the extent permitted by law and not waived by the Servicer) will be
retained by the Servicer as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be 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 lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
the deeds of trust receive notices in addition to the statutorily-prescribed
minimum requirements. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protections to the borrower.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion represents the opinion of Cadwalader,
Wickersham & Taft as to the anticipated material federal income tax consequences
of the purchase, ownership and disposition of Certificates. The discussion below
does not purport to address all federal income tax consequences that may be
applicable to particular categories of investors, some of which may be subject
to special rules. The authorities on which this discussion is based are subject
to change or differing interpretations, and any such change or interpretation
could apply retroactively. This discussion reflects the applicable provisions of
the Code, as well as regulations (the "REMIC Regulations") promulgated by the
U.S. Department of the Treasury on December 23, 1992. Investors should consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a Fixed Retained Yield with respect to the Mortgage Loans of a
Series of Certificates, references to the Mortgage Loans will be deemed to refer
to that portion of the Mortgage Loans held by the Trust Estate that does not
include the Fixed Retained Yield. References to a "Holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of a
Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may be made
to treat the Trust Estate or one or more segregated pools of assets therein as
one or more REMICs within the meaning of Code Section 860D. A Trust Estate or a
portion or portions thereof as to which one or more REMIC elections will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. With respect to each Series of REMIC Certificates,
Cadwalader, Wickersham & Taft, counsel to the Seller, has advised the Seller
that in the firm's opinion, assuming (i) the making of an appropriate election,
(ii) compliance with the Pooling and Servicing Agreement,
66
<PAGE>
and (iii) compliance with any changes in the law, including any amendments to
the Code or applicable Treasury regulations thereunder, each REMIC Pool will
qualify as a REMIC. In such case, the Regular Certificates will be considered to
be "regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt instruments,
and the Residual Certificates will be considered to be "residual interests" in
the REMIC Pool. The Prospectus Supplement for each Series of Certificates will
indicate whether one or more REMIC elections with respect to the related Trust
Estate will be made, in which event references to "REMIC" or "REMIC Pool" herein
shall be deemed to refer to each such REMIC Pool.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans...secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C). REMIC Certificates held by a real
estate investment trust will constitute "real estate assets" within the meaning
of Code Section 856(c)(5)(A), and interest on the Regular Certificates and
income with respect to Residual Certificates will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) in the same proportion
that, for both purposes, the assets of the REMIC Pool would be so treated. If at
all times 95% or more of the assets of the REMIC Pool qualify for each of the
foregoing treatments, the REMIC Certificates will qualify for the corresponding
status in their entirety. For purposes of Code Section 856(c)(5)(A), payments of
principal and interest on the Mortgage Loans that are reinvested pending
distribution to holders of REMIC Certificates qualify for such treatment. Where
two REMIC Pools are a part of a tiered structure they will be treated as one
REMIC for purposes of the tests described above respecting asset ownership of
more or less than 95%. In addition, if the assets of the REMIC include Buy-Down
Loans, it is possible that the percentage of such assets constituting
"loans...secured by an interest in real property" for purposes of Code Section
7701(a)(19)(C)(v) may be required to be reduced by the amount of the related
Buy-Down Funds. REMIC Certificates held by a regulated investment company will
not constitute "Government securities" within the meaning of Code Section
851(b)(4)(A)(i). REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1). The Small Business Job Protection Act of 1996 (the "SBJPA of 1996")
repealed the reserve method for bad debts of domestic building and loan
associations and mutual savings banks, and thus has eliminated the asset
category of "qualifying real property loans" in former Code Section 593(d) for
taxable years beginning after December 31, 1995. The requirement in the SBJPA of
1996 that such institutions must "recapture" a portion of their existing bad
debt reserves is suspended if a certain portion of their assets are maintained
in "residential loans" under Code Section 7701(a)(19)(C)(v), but only if such
loans were made to acquire, construct or improve the related real property and
NOT for the purpose of refinancing. However, no effort will be made to identify
the portion of the Mortgage Loans of any Series meeting this requirement, and no
representation is made in this regard.
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a DE MINIMIS portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the DE MINIMIS requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a DE MINIMIS
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
67
<PAGE>
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. See "Taxation of Residual
Certificates -- Tax-Related Restrictions on Transfer of Residual Certificates --
Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests and shares held by a tenant stockholder in a
cooperative housing corporation can be qualified mortgages. A qualified mortgage
includes a qualified replacement mortgage, which is any property that would have
been treated as a qualified mortgage if it were transferred to the REMIC Pool on
the Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary representation
or warranty made at the time of transfer to the REMIC Pool has been breached,
(iii) a mortgage that was fraudulently procured by the mortgagor, and (iv) a
mortgage that was not in fact principally secured by real property (but only if
such mortgage is disposed of within 90 days of discovery). A Mortgage Loan that
is "defective" as described in clause (iv) that is not sold or, if within two
years of the Startup Day, exchanged, within 90 days of discovery, ceases to be a
qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the Mortgage Loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally held for not more than two years, with extensions granted by the
Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual
68
<PAGE>
interest. An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal with respect to such interest are subordinated to
payments on other regular interests or the residual interest in the REMIC Pool,
and are dependent on the absence of defaults or delinquencies on qualified
mortgages or permitted investments, lower than reasonably expected returns on
permitted investments, unanticipated expenses incurred by the REMIC Pool or
prepayment interest shortfalls. Accordingly, the Regular Certificates of a
Series will constitute one or more classes of regular interests, and the
Residual Certificates with respect to that Series will constitute a single class
of residual interests on which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, authorizes the Treasury Department
to issue regulations that address situations where failure to meet one or more
of the requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL
In general, interest, original issue discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder"), and principal payments on
a Regular Certificate will be treated as a return of capital to the extent of
the Regular Certificateholder's basis in the Regular Certificate allocable
thereto. Regular Certificateholders must use the accrual method of accounting
with regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
ORIGINAL ISSUE DISCOUNT
Compound Interest Certificates will be, and other classes of Regular
Certificates may be, issued with "original issue discount" within the meaning of
Code Section 1273(a). Holders of any Class or Subclass of Regular Certificates
having original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
following discussion is based in part on temporary and final Treasury
regulations issued on February 2, 1994, as amended on June 14, 1996, (the "OID
Regulations") under Code Sections 1271 through 1273 and 1275 and in part on the
provisions of the 1986 Act. Regular Certificateholders should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Certificates. To the extent such
issues are not addressed in such regulations, the Seller intends to apply the
methodology described in the Conference Committee Report to the 1986 Act. No
assurance can be provided that the Internal Revenue Service will not take a
different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result in light of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion herein and the appropriate
method for reporting interest and original issue discount with respect to the
Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts
69
<PAGE>
upon the request of a Certificateholder or by random lot (a "Non-Pro Rata
Certificate")) will be treated as a single installment obligation for purposes
of determining the original issue discount includible in a Regular
Certificateholder's income. The total amount of original issue discount on a
Regular Certificate is the excess of the "stated redemption price at maturity"
of the Regular Certificate over its "issue price." The issue price of a Class of
Regular Certificates offered pursuant to this Prospectus generally is the first
price at which a substantial amount of such Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, the Seller intends to treat the issue price of a Class as to
which there is no substantial sale as of the issue date or that is retained by
the Seller as the fair market value of that Class as of the issue date. The
issue price of a Regular Certificate also includes any amount paid by an initial
Regular Certificateholder for accrued interest that relates to a period prior to
the issue date of the Regular Certificate, unless the Regular Certificateholder
elects on its federal income tax return to exclude such amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always includes the original
principal amount of the Regular Certificate, but generally will not include
distributions of interest if such distributions constitute "qualified stated
interest." Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or a qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Certificate. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Certificate, it is possible
that no interest on any Class of Regular Certificates will be treated as
qualified stated interest. However, except as provided in the following three
sentences or in the applicable Prospectus Supplement, because the underlying
Mortgage Loans provide for remedies in the event of default, the Seller intends
to treat interest with respect to the Regular Certificates as qualified stated
interest. Distributions of interest on a Compound Interest Certificate, or on
other Regular Certificates with respect to which deferred interest will accrue,
will not constitute qualified stated interest, in which case the stated
redemption price at maturity of such Regular Certificates includes all
distributions of interest as well as principal thereon. Likewise, the Seller
intends to treat an interest-only Class or a Class on which interest is
substantially disproportionate to its principal amount (a so-called
"super-premium" Class) as having no qualified stated interest. Where the
interval between the issue date and the first Distribution Date on a Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
the interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a DE MINIMIS rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (I.E.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans (the "Prepayment Assumption")
and the anticipated reinvestment rate, if any, relating to the Regular
Certificates. The Prepayment Assumption with respect to a Series of Regular
Certificates will be set forth in the applicable Prospectus Supplement. Holders
generally must report DE MINIMIS original issue discount pro rata as principal
payments are received, and such income will be capital gain if the Regular
Certificate is held as a capital asset. Under the OID Regulations, however,
Regular Certificateholders may elect to accrue all DE MINIMIS original issue
discount as well as market discount and market premium, under the constant yield
method. See "Election to Treat All Interest Under the Constant Yield Method."
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate
70
<PAGE>
accrued during an accrual period for each day on which it holds the Regular
Certificate, including the date of purchase but excluding the date of
disposition. The Seller will treat the monthly period ending on the day before
each Distribution Date as the accrual period. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Certificate. The Conference Committee Report to the 1986 Act
states that the rate of accrual of original issue discount is intended to be
based on the Prepayment Assumption. Other than as discussed below with respect
to a Non-Pro Rata Certificate, the original issue discount accruing in a full
accrual period would be the excess, if any, of (i) the sum of (a) the present
value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period, and (b) the distributions made
on the Regular Certificate during the accrual period that are included in the
Regular Certificate's stated redemption price at maturity, over (ii) the
adjusted issue price of the Regular Certificate at the beginning of the accrual
period. The present value of the remaining distributions referred to in the
preceding sentence is calculated based on (i) the yield to maturity of the
Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period, and
(iii) the Prepayment Assumption. For these purposes, the adjusted issue price of
a Regular Certificate at the beginning of any accrual period equals the issue
price of the Regular Certificate, increased by the aggregate amount of original
issue discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior periods. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Non-Pro Rata Certificate, the Seller intends to determine
the yield to maturity of such Certificate based upon the anticipated payment
characteristics of the Class as a whole under the Prepayment Assumption. In
general, the original issue discount accruing on each Non-Pro Rata Certificate
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution in retirement of the
entire unpaid principal balance of any Non-Pro Rata Certificate (or portion of
such unpaid principal balance), (a) the remaining unaccrued original issue
discount allocable to such Certificate (or to such portion) will accrue at the
time of such distribution, and (b) the accrual of original issue discount
allocable to each remaining Certificate of such Class (or the remaining unpaid
principal balance of a partially redeemed Non-Pro Rata Certificate after a
distribution of principal has been received) will be adjusted by reducing the
present value of the remaining payments on such Class and the adjusted issue
price of such Class to the extent attributable to the portion of the unpaid
principal balance thereof that was distributed. The Seller believes that the
foregoing treatment is consistent with the "pro rata prepayment" rules of the
OID Regulations, but with the rate of accrual of original issue discount
determined based on the Prepayment Assumption for the Class as a whole.
Investors are advised to consult their tax advisors as to this treatment.
71
<PAGE>
ACQUISITION PREMIUM
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under the
constant yield method, as described below under the heading "Election to Treat
All Interest Under the Constant Yield Method."
VARIABLE RATE REGULAR CERTIFICATES
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations in the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds, where such rate
is subject to a fixed multiple that is greater than 0.65 but not more than 1.35.
Such rate may also be increased or decreased by a fixed spread or subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that such information is not (i) within the control of the
issuer or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
Class of Regular Certificates may be issued under this Prospectus that does not
have a variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Certificates. However, if
final regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion than would be the case under
the OID Regulations. Furthermore, application of such principles could lead to
the characterization of gain on the sale of contingent interest Regular
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Certificate that does not pay
interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable Prospectus Supplement, the Seller intends to treat
Regular Certificates that qualify as regular interests under this rule in the
same manner as obligations bearing a variable rate for original issue discount
reporting purposes.
72
<PAGE>
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Certificate generally to be determined by assuming that interest
will be payable for the life of the Regular Certificate based on the initial
rate (or, if different, the value of the applicable variable rate as of the
pricing date) for the relevant Class. Unless required otherwise by applicable
final regulations, the Seller intends to treat such variable interest as
qualified stated interest, other than variable interest on an interest-only or
super-premium Class, which will be treated as non-qualified stated interest
includible in the stated redemption price at maturity. Ordinary income
reportable for any period will be adjusted based on subsequent changes in the
applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Seller intends to treat Regular Certificates
bearing an interest rate that is a weighted average of the net interest rates on
Mortgage Loans as having qualified stated interest, except to the extent that
initial "teaser" rates cause sufficiently "back-loaded" interest to create more
than DE MINIMIS original issue discount. The yield on such Regular Certificates
for purposes of accruing original issue discount will be a hypothetical fixed
rate based on the fixed rates, in the case of fixed rate Mortgage Loans, and
initial "teaser rates" followed by fully indexed rates, in the case of
adjustable rate Mortgage Loans. In the case of adjustable rate Mortgage Loans,
the applicable index used to compute interest on the Mortgage Loans in effect on
the pricing date (or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. Adjustments will be made in each accrual
period either increasing or decreasing the amount of ordinary income reportable
to reflect the actual Pass-Through Rate on the Regular Certificates.
MARKET DISCOUNT
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated redemption
price at maturity thereof are received, in an amount not exceeding any such
distribution. Such market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate, or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Certificate
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Certificate as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect
73
<PAGE>
to include market discount in income currently as it accrues on all market
discount instruments acquired by such Regular Certificateholder in that taxable
year or thereafter, in which case the interest deferral rule will not apply. See
"Election to Treat All Interest Under the Constant Yield Method" below regarding
an alternative manner in which such election may be deemed to be made.
By analogy to the OID Regulations, market discount with respect to a Regular
Certificate will be considered to be zero if such market discount is less than
0.25% of the remaining stated redemption price at maturity of such Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above in the third paragraph under
"Original Issue Discount") remaining after the date of purchase. It appears that
DE MINIMIS market discount would be reported in a manner similar to DE MINIMIS
original issue discount. See "Original Issue Discount" above. Treasury
regulations implementing the market discount rules have not yet been issued, and
therefore investors should consult their own tax advisors regarding the
application of these rules. Investors should also consult Revenue Procedure
92-67 concerning the elections to include market discount in income currently
and to accrue market discount on the basis of the constant yield method.
PREMIUM
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. Such election will apply to all debt
obligations acquired by the Regular Certificateholder at a premium held in that
taxable year or thereafter, unless revoked with the permission of the Internal
Revenue Service. The Conference Committee Report to the 1986 Act indicates a
Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Certificates, although it is unclear whether the alternatives to the constant
interest method described above under "Market Discount" are available.
Amortizable bond premium will be treated as an offset to interest income on a
Regular Certificate, rather than as a separate deduction item. See "Election to
Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, DE MINIMIS original issue discount, market discount and DE MINIMIS
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own tax
advisors regarding the advisability of making such an election.
74
<PAGE>
TREATMENT OF LOSSES
Regular Certificateholders will be required to report income with respect to
Regular Certificates on the accrual method of accounting, without giving effect
to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such losses are uncollectible. Accordingly, the holder of a Regular
Certificate, particularly a Subordinated Certificate, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but may
not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectible, the Internal
Revenue Service may take the position that original issue discount must continue
to be accrued in spite of its uncollectibility until the debt instrument is
disposed of in a taxable transaction or becomes worthless in accordance with the
rules of Code Section 166. To the extent the rules of Code Section 166 regarding
bad debts are applicable, it appears that Regular Certificateholders that are
corporations or that otherwise hold the Regular Certificates in connection with
a trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on account
of any such Regular Certificates becoming wholly or partially worthless, and
that, in general, Regular Certificateholders that are not corporations and do
not hold the Regular Certificates in connection with a trade or business should
be allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any such Regular Certificates becoming
wholly worthless. Although the matter is not free from doubt, such non-corporate
Regular Certificateholders should be allowed a bad debt deduction at such time
as the principal balance of such Regular Certificates is reduced to reflect
losses resulting from any liquidated Mortgage Loans. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect such losses only after all the Mortgage
Loans remaining in the Trust Estate have been liquidated or the applicable Class
of Regular Certificates has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Certificates are deductible based
on some other method that may defer such deductions for all holders, such as
reducing future cash flow for purposes of computing original issue discount.
This may have the effect of creating "negative" original issue discount which
would be deductible only against future positive original issue discount or
otherwise upon termination of the Class. Regular Certificateholders are urged to
consult their own tax advisors regarding the appropriate timing, amount and
character of any loss sustained with respect to such Regular Certificates. While
losses attributable to interest previously reported as income should be
deductible as ordinary losses by both corporate and non-corporate holders, the
Internal Revenue Service may take the position that losses attributable to
accrued original issue discount may only be deducted as capital losses in the
case of non-corporate holders who do not hold the Regular Certificates in
connection with a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts. Such
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on Regular Certificates.
SALE OR EXCHANGE OF REGULAR CERTIFICATES
If a Regular Certificateholder sells or exchanges a Regular Certificate, the
Regular Certificateholder will recognize gain or loss equal to the difference,
if any, between the amount received and its adjusted basis in the Regular
Certificate. The adjusted basis of a Regular Certificate generally will equal
the cost of the Regular Certificate to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Regular Certificate and reduced by amounts included
in the stated redemption price at maturity of the Regular Certificate that were
previously received by the seller, by any amortized premium and by any
recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or
75
<PAGE>
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently, more than one year). Such gain
will be treated as ordinary income (i) if a Regular Certificate is held as part
of a "conversion transaction" as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the Regular Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable Federal rate under Code Section 1274(d) in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as part of such transaction, (ii) in the case of a non-corporate taxpayer, to
the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates, or
(iii) to the extent that such gain does not exceed the excess, if any, of (a)
the amount that would have been includible in the gross income of the holder if
its yield on such Regular Certificate were 110% of the applicable Federal rate
as of the date of purchase, over (b) the amount of income actually includible in
the gross income of such holder with respect to such Regular Certificate. In
addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Pursuant to the Revenue Reconciliation Act of
1993, capital gains of certain non-corporate taxpayers are subject to a lower
maximum tax rate than ordinary income of such taxpayers. The maximum tax rate
for corporations is the same with respect to both ordinary income and capital
gains.
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting, except
that (i) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. The REMIC
Pool's gross income includes interest, original issue discount income, and
market discount income, if any, on the Mortgage Loans, reduced by amortization
of any premium on the Mortgage Loans, plus income from amortization of issue
premium, if any, on the Regular Certificates, plus income on reinvestment of
cash flows and reserve assets, plus any cancellation of indebtedness income upon
allocation of realized losses to the Regular Certificates. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Certificates, servicing fees on the Mortgage Loans, other administrative
expenses of the REMIC Pool and realized losses on the Mortgage Loans. The
requirement that Residual Holders report their pro rata share of taxable income
or net loss of the REMIC Pool will continue until there are no Certificates of
any class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Certificates, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the Residual Holder may recognize taxable income without being entitled to
receive a corresponding amount of cash because (i) the prepayment may be used in
whole or in part to make distributions in reduction of principal or Stated
Amount on the Regular Certificates, and (ii) the discount on the Mortgage Loans
which is includible in income may exceed the deduction allowed upon such
distributions on those Regular Certificates on account of any unaccrued original
76
<PAGE>
issue discount relating to those Regular Certificates. When there is more than
one Class of Regular Certificates that distribute principal or payments in
reduction of Stated Amount sequentially, this mismatching of income and
deductions is particularly likely to occur in the early years following issuance
of the Regular Certificates when distributions in reduction of principal or
Stated Amount are being made in respect of earlier Classes of Regular
Certificates to the extent that such Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to such a
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Certificates are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Certificates,
may increase over time as distributions in reduction of principal or Stated
Amount are made on the lower yielding Classes of Regular Certificates, whereas,
to the extent the REMIC Pool consists of fixed rate Mortgage Loans, interest
income with respect to any given Mortgage Loan will remain constant over time as
a percentage of the outstanding principal amount of that loan. Consequently,
Residual Holders must have sufficient other sources of cash to pay any federal,
state, or local income taxes due as a result of such mismatching or unrelated
deductions against which to offset such income, subject to the discussion of
"excess inclusions" below under "-- Limitations on Offset or Exemption of REMIC
Income." The timing of such mismatching of income and deductions described in
this paragraph, if present with respect to a Series of Certificates, may have a
significant adverse effect upon a Residual Holder's after-tax rate of return. In
addition, a Residual Holder's taxable income during certain periods may exceed
the income reflected by such Residual Holder for such periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Certificates.
BASIS AND LOSSES
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC Pool
reportable by the Residual Holder and will be decreased (but not below zero),
first, by a cash distribution from the REMIC Pool and, second, by the amount of
loss of the REMIC Pool reportable by the Residual Holder. Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Holder as to whom such loss was disallowed and may be
used by such Residual Holder only to offset any income generated by the same
REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under "Taxation of REMIC Income," the period of time over which
such issue price is effectively amortized may be longer than the economic life
of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
77
<PAGE>
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "-- Treatment of Certain
Items of REMIC Income and Expense -- Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Although the Seller intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The Seller makes no representation as to the specific
method that it will use for reporting income with respect to the Mortgage Loans
and expenses with respect to the Regular Certificates and different methods
could result in different timing of reporting of taxable income or net loss to
Residual Holders or differences in capital gain versus ordinary income.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Certificates as described above under "Taxation of Regular Certificates --
Original Issue Discount" and "-- Variable Rate Regular Certificates," without
regard to the DE MINIMIS rule described therein, and "-- Premium."
MARKET DISCOUNT. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of such
market discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "Taxation of Regular
Certificates -- Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates -- Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Loans originated after September 27,
1985 under the constant yield method. Amortizable bond premium will be treated
as an offset to interest income on the Mortgage Loans, rather than as a separate
deduction item. Because substantially all of the mortgagors on the Mortgage
Loans are expected to be individuals, Code Section 171 will not be available for
premium on Mortgage Loans originated on or prior to September 27, 1985. Premium
with respect to such Mortgage Loans may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
such premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that such premium should
be allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
78
<PAGE>
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
A portion (or all) of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual
Certificate at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Certificate at the beginning of a quarter is
the issue price of the Residual Certificate, plus the amount of such daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Certificate
prior to the beginning of such quarterly period. Accordingly, the portion of the
REMIC Pool's taxable income that will be treated as excess inclusions will be a
larger portion of such income as the adjusted issue price of the Residual
Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "Tax-Related Restrictions on Transfer
of Residual Certificates -- Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors -- Residual Certificates" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Certificates
that have "significant value" within the meaning of the REMIC Regulations,
effective for taxable years beginning after December 31, 1995, except with
respect to Residual Certificates continuously held by a thrift institution since
November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have such rules apply only to
taxable years beginning after August 20, 1996.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on
79
<PAGE>
the Prepayment Assumption. The present value rate equals the applicable Federal
rate under Code Section 1274(d) as of the date of the transfer for a term ending
with the last calendar quarter in which excess inclusions are expected to
accrue. Such rate is applied to the anticipated excess inclusions from the end
of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and, as
of the time of the transfer, the transferor does not have actual knowledge that
such affidavit is false. The tax also may be waived by the Internal Revenue
Service if the Disqualified Organization promptly disposes of the Residual
Certificate and the transferor pays income tax at the highest corporate rate on
the excess inclusion for the period the Residual Certificate is actually held by
the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee furnishes to the
Seller and the Trustee an affidavit providing its taxpayer identification number
and stating that such transferee is the beneficial owner of the Residual
Certificate and is not a Disqualified Organization and is not purchasing such
Residual Certificate on behalf of a Disqualified Organization (I.E., as a
broker, nominee or middleman thereof) and (ii) the transferor provides a
statement in writing to the Seller and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation of
these transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a Series will
bear a legend referring to such restrictions on transfer, and each Residual
Holder will be deemed to have agreed, as a condition of ownership thereof, to
any amendments to the related Pooling and Servicing Agreement required
80
<PAGE>
under the Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must be
furnished to the Internal Revenue Service and to the requesting party within 60
days of the request, and the Seller or the Trustee may charge a fee for
computing and providing such information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person, as defined below under "Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing Agreement with respect to each Series of Certificates will require
the transferee of a Residual Certificate to certify to the matters in the
preceding sentence as part of the affidavit described above under the heading
"Disqualified Organizations."
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Certificate back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision
81
<PAGE>
thereof, an estate that is subject to U.S. federal income tax regardless of the
source of its income, or a trust if (A) for taxable years beginning after
December 31, 1996 (or after August 20, 1996, if the trustee has made an
applicable election), a court within the United States is able to exercise
primary supervision over the administration of such trust, and one or more
United States fiduciaries have the authority to control all substantial
decisions of such trust, or (B) for all other taxable years, such trust is
subject to U.S. federal income tax regardless of the source of its income.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "Taxation of Residual
Certificates -- Basis and Losses") of such Residual Holder in such Residual
Certificate at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Certificate. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a Residual
Holder's Residual Certificate, in which case, if the Residual Holder has an
adjusted basis in its Residual Certificate remaining when its interest in the
REMIC Pool terminates, and if it holds such Residual Certificate as a capital
asset under Code Section 1221, then it will recognize a capital loss at that
time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Certificate by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a Residual Certificate.
MARK TO MARKET REGULATIONS
Prospective purchasers of the Residual Certificates should be aware that on
January 3, 1995, the Internal Revenue Service released proposed regulations (the
"Proposed Mark to Market Regulations") under Code Section 475 relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities of a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Proposed Mark to Market Regulations provide
that, for purposes of this mark-to-market requirement, a Residual Certificate is
not treated as a security and thus may not be marked to market. The Proposed
Mark to Market Regulations apply to all Residual Certificates acquired on or
after January 4, 1995.
82
<PAGE>
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell REMIC Pool property to prevent a default on Regular
Certificates as a result of a default on qualified mortgages or to facilitate a
clean-up call (generally, an optional termination to save administrative costs
when no more than a small percentage of the Certificates is outstanding). The
REMIC Regulations indicate that the modification of a Mortgage Loan generally
will not be treated as a disposition if it is occasioned by a default or
reasonably foreseeable default, an assumption of the Mortgage Loan, the waiver
of a due-on-sale or due-on-encumbrance clause, or the conversion of an interest
rate by a mortgagor pursuant to the terms of a convertible adjustable rate
Mortgage Loan.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
NET INCOME FROM FORECLOSURE PROPERTY
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC Pool'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 Pool will not be subject to the prohibited transaction
rules on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims) to holders of Regular Certificates and Residual
Holders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
83
<PAGE>
Return. The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Master Servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect to
the REMIC Pool, in its capacity as either Residual Holder or agent of the
Residual Holders. If the Code or applicable Treasury regulations do not permit
the Master Servicer to act as tax matters person in its capacity as agent of the
Residual Holders, the Residual Holder chosen by the Residual Holders or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (subject to adjustment for inflation), or
(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
In the case of a REMIC Pool, such deductions may include deductions under Code
Section 212 for the Servicing Fee and all administrative and other expenses
relating to the REMIC Pool, or any similar expenses allocated to the REMIC Pool
with respect to a regular interest it holds in another REMIC. Such investors who
hold REMIC Certificates either directly or indirectly through certain pass-
through entities may have their pro rata share of such expenses allocated to
them as additional gross income, but may be subject to such limitation on
deductions. In addition, such expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury regulations
provide that the additional gross income and corresponding amount of expenses
generally are to be allocated entirely to the holders of Residual Certificates
in the case of a REMIC Pool that would not qualify as a fixed investment trust
in the absence of a REMIC election. However, such additional gross income and
limitation on deductions will apply to the allocable portion of such expenses to
holders of Regular Certificates, as well as holders of Residual Certificates,
where such Regular Certificates are issued in a manner that is similar to
pass-through certificates in a fixed investment trust. Unless indicated
otherwise in the applicable Prospectus Supplement, all such expenses will be
allocable to the Residual Certificates. In general, such allocable portion will
be determined based on the ratio that a REMIC Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC, or certain other pass-through entities described in the foregoing
temporary Treasury regulations) may have taxable income in excess of the
interest income at the pass-through rate on Regular Certificates that are issued
in a single class or otherwise consistently with fixed investment trust status
or in excess of cash distributions for the related period on Residual
Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to
84
<PAGE>
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
RESIDUAL CERTIFICATES
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Certificates" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Estate or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Certificate relates, consists of obligations issued
in "registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, a Residual Holder
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "Taxation of Residual Certificates --
Limitations on Offset or Exemption of REMIC Income." If the amounts paid to
Residual Holders who are Non-U.S. Persons are effectively connected with the
conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Certificate is disposed of) under rules similar to withholding upon disposition
of debt instruments that have original issue discount. See "Tax-Related
Restrictions on Transfer of Residual Certificates -- Foreign Investors" above
concerning the disregard of certain transfers having "tax avoidance potential."
Investors who are Non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent or the
broker who effected the sale of the Regular Certificate, or such
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Internal Revenue Service or allowed as a
credit against the Regular Certificateholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular
85
<PAGE>
Certificates (including corporations, non-calendar year taxpayers, securities or
commodities dealers, real estate investment trusts, investment companies, common
trust funds, thrift institutions and charitable trusts) may request such
information for any calendar quarter by telephone or in writing by contacting
the person designated in Internal Revenue Service Publication 938 with respect
to a particular Series of Regular Certificates. Holders through nominees must
request such information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates."
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
GENERAL
In the event that no election is made to treat a Trust Estate (or a
segregated pool of assets therein) with respect to a Series of Certificates as a
REMIC, the Trust Estate will be classified as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no Fixed Retained Yield with respect to the Mortgage
Loans underlying the Certificates of a Series, and where such Certificates are
not designated as "Stripped Certificates," the holder of each such Certificate
in such Series will be treated as the owner of a pro rata undivided interest in
the ordinary income and corpus portions of the Trust Estate represented by its
Certificate and will be considered the beneficial owner of a pro rata undivided
interest in each of the Mortgage Loans, subject to the discussion below under
"Recharacterization of Servicing Fees." Accordingly, the holder of a Certificate
of a particular Series will be required to report on its federal income tax
return its pro rata share of the entire income from the Mortgage Loans
represented by its Certificate, including interest at the coupon rate on such
Mortgage Loans, original issue discount (if any), prepayment fees, assumption
fees, and late payment charges received by the Servicer, in accordance with such
Certificateholder's method of accounting. A Certificateholder generally will be
able to deduct its share of the Servicing Fee and all administrative and other
expenses of the Trust Estate in accordance with its method of accounting,
provided that such amounts are reasonable compensation for services rendered to
that Trust Estate. However, investors who are individuals, estates or trusts who
own Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitation with respect to certain itemized
deductions described in Code Section 67, including deductions under Code Section
212 for the Servicing Fee and all such administrative and other expenses of the
Trust Estate, to the extent that such deductions, in the aggregate, do not
exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000 ($50,000 in the case of a
married individual filing a separate return) (in each case, as adjusted for
inflation), or (ii) 80% of the amount of itemized deductions otherwise allowable
for such year. As a result, such investors holding Certificates, directly or
indirectly through a pass-through entity, may have aggregate taxable income in
excess of the aggregate amount of cash received on such Certificates with
respect to interest at the pass-through rate or as discount income on such
Certificates. In addition, such expenses are not deductible at all for purposes
of
86
<PAGE>
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Moreover, where there is Fixed
Retained Yield with respect to the Mortgage Loans underlying a Series of
Certificates or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Recharacterization of Servicing Fees,"
respectively.
TAX STATUS
Cadwalader, Wickersham & Taft has advised the Seller that, except as
described below with respect to Stripped Certificates:
1. A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans...secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v), provided that the real property
securing the Mortgage Loans represented by that Certificate is of the type
described in such section of the Code.
2. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of
Code Section 856(c)(5)(A) to the extent that the assets of the related Trust
Estate consist of qualified assets, and interest income on such assets will
be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
3. A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Estate consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in clauses 1 and 2 of the immediately
preceding paragraph. There is indirect authority supporting treatment of an
investment in a Buy-Down Loan as entirely secured by real property if the fair
market value of the real property securing the loan exceeds the principal amount
of the loan at the time of issuance or acquisition, as the case may be. There is
no assurance that the treatment described above is proper. Accordingly,
Certificateholders are urged to consult their own tax advisors concerning the
effects of such arrangements on the characterization of such Certificateholder's
investment for federal income tax purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Certificates or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "Federal
Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates -- Premium."
ORIGINAL ISSUE DISCOUNT. The original issue discount rules of Code Sections
1271 through 1275 will be applicable to a Certificateholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
are applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984. Under
the OID Regulations, such original issue discount could arise by the charging of
points by the originator of the mortgages in an amount greater than the
statutory DE MINIMIS exception, including a payment of points that is currently
deductible by the
87
<PAGE>
borrower under applicable Code provisions or, under certain circumstances, by
the presence of "teaser" rates on the Mortgage Loans. See "-- Stripped
Certificates" below regarding original issue discount on Stripped Certificates.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (I.E., points) will be includible by such holder.
MARKET DISCOUNT. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Regular Certificates -- Market Discount," except that the ratable accrual
methods described therein will not apply. Rather, the holder will accrue market
discount pro rata over the life of the Mortgage Loans, unless the constant yield
method is elected. Unless indicated otherwise in the applicable Prospectus
Supplement, no prepayment assumption will be assumed for purposes of such
accrual.
RECHARACTERIZATION OF SERVICING FEES
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Certificate, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. Recently
issued Internal Revenue Service guidance indicates that a servicing fee in
excess of reasonable compensation ("excess servicing") will cause the Mortgage
Loans to be treated under the "stripped bond" rules. Such guidance provides safe
harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of such amounts is not
greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the DE MINIMIS rule discussed below
under "-- Stripped Certificates," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Certificates, and the original issue discount rules of the
Code would apply to the holder thereof. While Certificateholders would still be
treated as owners of beneficial interests in a grantor trust for federal income
tax purposes, the corpus of such trust could be viewed as excluding the portion
of the Mortgage Loans the ownership of which is attributed to the Servicer, or
as including such portion as a second class of equitable interest. Applicable
Treasury regulations treat such an arrangement as a fixed investment trust,
since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership
88
<PAGE>
interests is incidental to that purpose. In general, such a recharacterization
should not have any significant effect upon the timing or amount of income
reported by a Certificateholder, except that the income reported by a cash
method holder may be slightly accelerated. See "Stripped Certificates" below for
a further description of the federal income tax treatment of stripped bonds and
stripped coupons.
SALE OR EXCHANGE OF CERTIFICATES
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its aggregate adjusted basis in the Mortgage Loans and other assets represented
by the Certificate. In general, the aggregate adjusted basis will equal the
Certificateholder's cost for the Certificate, increased by the amount of any
income previously reported with respect to the Certificate and decreased by the
amount of any losses previously reported with respect to the Certificate and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss generally would be capital gain or loss if the Certificate was
held as a capital asset. However, gain on the sale of a Certificate will be
treated as ordinary income (i) if a Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. Pursuant to the Revenue Reconciliation Act of 1993
capital gains of certain noncorporate taxpayers are subject to a lower maximum
tax rate than ordinary income of such taxpayers. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the Seller
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Fixed Retained Yield or otherwise, an ownership interest
in a portion of the payments on the Mortgage Loans, (ii) the Seller or any of
its affiliates is treated as having an ownership interest in the Mortgage Loans
to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"Certificates -- Recharacterization of Servicing Fees" above), and (iii) a Class
of Certificates are issued in two or more Classes or Subclasses representing the
right to non-pro-rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"Certificates -- Recharacterization of Servicing Fees." Although not free from
doubt, for purposes of reporting to Stripped Certificateholders, the servicing
fees will be allocated to the Stripped Certificates in proportion to the
respective entitlements to distributions of each Class (or
89
<PAGE>
Subclass) of Stripped Certificates for the related period or periods. The holder
of a Stripped Certificate generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "Certificates --
General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Seller has been
advised by counsel that (i) the Trust Estate will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of Code
Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and the
OID Regulations. Although it is possible that computations with respect to
Stripped Certificates could be made in one of the ways described below under
"Taxation of Stripped Certificates -- Possible Alternative Characterizations,"
the OID Regulations state, in general, that two or more debt instruments issued
by a single issuer to a single investor in a single transaction should be
treated as a single debt instrument. Accordingly, for OID purposes, all payments
on any Stripped Certificates should be aggregated and treated as though they
were made on a single debt instrument. The Pooling and Servicing Agreement will
require that the Trustee make and report all computations described below using
this aggregate approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount. In
addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a DE
MINIMIS original issue discount, or, presumably, at a premium. This treatment
indicates that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations, assuming it is
not an interest-only or super-premium Stripped Certificate. Further, these final
regulations provide that the purchaser of such a Stripped Certificate will be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Stripped
Certificate was treated as zero under the DE MINIMIS rule, or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Loans. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Regular Certificates -- Market Discount," without regard to the DE MINIMIS rule
therein, assuming that a prepayment assumption is employed in such computation.
STATUS OF STRIPPED CERTIFICATES
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Seller that Stripped Certificates owned by applicable holders should
be considered to represent "qualifying real property loans" within the meaning
of Code Section 593(d)(1), "real estate assets" within the meaning of Code
Section 856(c)(5)(A), "obligation[s]...principally secured by an interest in
real property" within the meaning of Code Section 860G(a)(3)(A), and
"loans...secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), and interest (including original issue discount)
income attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment. The
application of such Code provisions to Buy-Down Loans is uncertain. See
"Certificates -- Tax Status" above.
90
<PAGE>
TAXATION OF STRIPPED CERTIFICATES
ORIGINAL ISSUE DISCOUNT. Except as described above under "General," each
Stripped Certificate will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Certificate must be included in ordinary income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the income
of a holder of a Stripped Certificate (referred to in this discussion as a
"Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Original Issue Discount" and
"-- Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate issued with DE MINIMIS original issue discount as
described above under "General," the issue price of a Stripped Certificate will
be the purchase price paid by each holder thereof, and the stated redemption
price at maturity will include the aggregate amount of the payments to be made
on the Stripped Certificate to such Stripped Certificateholder, presumably under
the Prepayment Assumption, other than qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in such
Stripped Certificate to recognize a loss (which may be a capital loss) equal to
such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Certificates. However, if final regulations dealing with contingent
interest with respect to the Stripped Certificates apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Stripped Certificates as ordinary income. Investors
should consult their tax advisors regarding the appropriate tax treatment of
Stripped Certificates.
SALE OR EXCHANGE OF STRIPPED CERTIFICATES. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates -- Taxation
of Regular Certificates -- Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount in the manner described above. It is not clear
for this purpose whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than an original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
91
<PAGE>
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED CERTIFICATES. When an investor
purchases more than one Class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of (i) one installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to principal
on each Mortgage Loan and a second installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to interest
on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
Classes of Stripped Certificates may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that such
Stripped Certificate, or Classes of Stripped Certificates in the aggregate,
represent the same pro rata portion of principal and interest on each such
Mortgage Loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations less
likely to be applicable. The preamble to those regulations states that they are
premised on the assumption that an aggregation approach is appropriate for
determining whether original issue discount on a stripped bond or stripped
coupon is DE MINIMIS, and solicits comments on appropriate rules for aggregating
stripped bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, Stripped
Certificateholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Certificates for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Master Servicer will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as is necessary to enable such Certificateholders to prepare their
federal income tax returns. Such information will include the amount of original
issue discount accrued on Certificates held by persons other than
Certificateholders exempted from the reporting requirements. The amount required
to be reported by the Master Servicer may not be equal to the proper amount of
original issue discount required to be reported as taxable income by a
Certificateholder, other than an original Certificateholder that purchased at
the issue price. In particular, in the case of Stripped Certificates, unless
provided otherwise in the applicable Prospectus Supplement, such reporting will
be based upon a representative initial offering price of each Class of Stripped
Certificates. The Master Servicer will also file such original issue discount
information with the Internal Revenue Service. If a Certificateholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under "Federal Income Tax Consequences for REMIC Certificates --
Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other non-U.S. persons ("foreign
persons") generally will be subject to 30% United States withholding tax, or
such
92
<PAGE>
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the Certificateholder on the sale or
exchange of such a Certificate also will be subject to federal income tax at the
same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a foreign person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under "Federal
Income Tax Consequences for REMIC Certificates -- Taxation of Certain Foreign
Investors -- Regular Certificates."
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on those employee benefit plans to which it applies
("Plans") and on those persons who are fiduciaries with respect to such Plans.
The following is a general discussion of such requirements, and certain
applicable exceptions to and administrative exemptions from such requirements.
For purposes of this discussion, a person investing on behalf of an individual
retirement account established under Code Section 408 (an "IRA") is regarded as
a fiduciary and the IRA as a Plan.
Before purchasing any Certificates, a Plan fiduciary should consult with its
counsel and determine whether there exists any prohibition to such purchase
under the requirements of ERISA, whether prohibited transaction exemptions such
as PTE 83-1 or any individual administrative exemption (as described below)
applies, including whether the appropriate conditions set forth therein would be
met, or whether any statutory prohibited transaction exemption is applicable,
and further should consult the applicable Prospectus Supplement relating to such
Series of Certificates.
CERTAIN REQUIREMENTS UNDER ERISA
GENERAL. In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a Plan fiduciary should determine whether to do so is
permitted under the governing Plan instruments and is appropriate for the Plan
in view of its overall investment policy and the composition and diversification
of its portfolio. A Plan fiduciary should especially consider the ERISA
requirement of investment prudence and the sensitivity of the return on the
Certificates to the rate of principal repayments (including prepayments) on the
Mortgage Loans, as discussed in "Prepayment and Yield Considerations" herein.
PARTIES IN INTEREST/DISQUALIFIED PERSONS. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to the
Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Seller, the Master
Servicer or Master Servicer or the Trustee or certain affiliates thereof might
be considered or might become "parties in interest" or "disqualified persons"
with respect to a Plan. If so, the acquisition or holding of Certificates by or
on behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a Plan (including
assets that may be held in an insurance company's separate or general accounts
where assets in such accounts may be deemed Plan assets for purposes of ERISA)
are used to purchase a Certificate if, with respect to such assets, the Seller,
the Master Servicer or Master Servicer or the Trustee or an affiliate thereof
either: (a) has investment discretion with respect to the investment of such
assets of such Plan; or (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to such assets for a fee and
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such assets and that such
advice will be based on the particular investment needs of the Plan.
93
<PAGE>
DELEGATION OF FIDUCIARY DUTY. Further, if the assets included in a Trust
Estate were deemed to constitute Plan assets, it is possible that a Plan's
investment in the Certificates might be deemed to constitute a delegation, under
ERISA, of the duty to manage Plan assets by the fiduciary deciding to invest in
the Certificates, and certain transactions involved in the operation of the
Trust Estate might be deemed to constitute prohibited transactions under ERISA
and the Code. Neither ERISA nor the Code define the term "plan assets."
The U.S. Department of Labor (the "Department") has issued regulations (the
"Regulations") concerning whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an entity (such as a Trust
Estate) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an "equity interest"
(such as a Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be deemed merely to include its interest in the Certificates
instead of being deemed to include an interest in the assets of a Trust Estate.
However, it cannot be predicted in advance nor can there be any continuing
assurance whether such exceptions may be met, because of the factual nature of
certain of the rules set forth in the Regulations. For example, one of the
exceptions in the Regulations states that the underlying assets of an entity
will not be considered "plan assets" if less than 25% of the value of all
classes of equity interests are held by "benefit plan investors," which are
defined as Plans, IRAs, and employee benefit plans not subject to ERISA (for
example, governmental plans), but this exception is tested immediately after
each acquisition of an equity interest in the entity whether upon initial
issuance or in the secondary market.
ADMINISTRATIVE EXEMPTIONS
INDIVIDUAL ADMINISTRATIVE EXEMPTIONS. Several underwriters of
mortgage-backed securities have applied for and obtained ERISA prohibited
transaction exemptions (each, an "Underwriter's Exemption") which are in some
respects broader than Prohibited Transaction Class Exemption 83-1 (described
below). Such exemptions can only apply to mortgage-backed securities which,
among other conditions, are sold in an offering with respect to which such
underwriter serves as the sole or a managing underwriter, or as a selling or
placement agent. If such an Underwriter's Exemption might be applicable to a
Series of Certificates, the applicable Prospectus Supplement will refer to such
possibility.
Among the conditions that must be satisfied for an Underwriter's Exemption
to apply are the following:
(1) The acquisition of Certificates by a Plan is on terms (including the
price for the Certificates) that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated
party;
(2) The rights and interests evidenced by Certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by
other Certificates of the Trust Estate;
(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 ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch
Investors Service, L.P. ("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 underwriter in
connection with the distribution of 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 Mortgage Loans to the Trust Estate represents not more than the fair
market value of such Mortgage Loans. The sum of all payments made to and
retained by the Servicer (and
94
<PAGE>
any other servicer) represents not more than reasonable compensation for
such person's services under the Pooling and Servicing Agreement and
reimbursement 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 Estate must also meet the following requirements:
(i)
the assets of the Trust Estate must consist solely of assets of
the type that have been included in other investment pools in the
marketplace;
(ii)
certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's,
Fitch or DCR for at least one year prior to the Plan's acquisition of the
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 the Certificates.
If the conditions to an Underwriter's Exemption are met, whether or not a
Plan's assets would be deemed to include an ownership interest in the Mortgage
Loans in a mortgage pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction provisions
of ERISA and the Code.
Moreover, an Underwriter's Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur if a
Plan fiduciary causes a Plan to acquire Certificates in a Trust Estate in which
the fiduciary (or its affiliate) is an obligor on the Mortgage Loans held in the
Trust Estate provided that, among other requirements: (i) in the case of an
acquisition in connection with the initial issuance of Certificates, at least
fifty percent of each class of Certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the Trust Estate is acquired by persons
independent of the Restricted Group (as defined below); (ii) such fiduciary (or
its affiliate) is an obligor with respect to five percent or less of the fair
market value of the Mortgage Loans contained in the Trust Estate; (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.
An Underwriter's Exemption does not apply to Plans sponsored by the Seller,
the underwriter specified in the applicable Prospectus Supplement, the Master
Servicer, the Trustee, the Servicer, any obligor with respect to Mortgage Loans
included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group").
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for Certain
Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits
certain transactions involving the creation, maintenance and termination of
certain residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by Plans, whether or not the
Plan's assets would be deemed to include an ownership interest in the mortgages
in such mortgage pools, and whether or not such transactions would otherwise be
prohibited under ERISA.
The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTE 83-1, the
term
95
<PAGE>
"mortgage pool pass-through certificate" would include Certificates issued in a
single Class or in multiple Classes that evidence the beneficial ownership of
both a specified percentage of future interest payments (after permitted
deductions) and a specified percentage of future principal payments on a Trust
Estate.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of a
specified percentage of future interest payments (after permitted deductions) on
a Trust Estate or only of a specified percentage of future principal payments on
a Trust Estate, (b) Residual Certificates, (c) Certificates evidencing ownership
interests in a Trust Estate which includes Mortgage Loans secured by multifamily
residential properties or shares issued by cooperative housing corporations, or
(d) Certificates which are subordinated to other Classes of Certificates of such
Series. Accordingly, unless exemptive relief other than PTE 83-1 applies, Plans
should not purchase any such Certificates.
PTE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans or the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of one percent of the aggregate unpaid principal balance of the pooled
mortgages or the unpaid principal balance of the largest mortgage in the pool.
It should be noted that in promulgating PTE 83-1 (and a predecessor exemption),
the Department did not have under its consideration interests in pools of the
exact nature as some of the Certificates described herein.
EXEMPT PLANS
Employee benefit plans which are governmental plans (as defined in Section
3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements and assets of such plans may be invested
in Certificates without regard to the ERISA considerations described above but
such plans may be subject to the provisions of other applicable federal and
state law.
UNRELATED BUSINESS TAXABLE INCOME -- RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code Section
501(a), including most varieties of ERISA Plans, may give rise to "unrelated
business taxable income" as described in Code Sections 511-515 and 860E.
Further, prior to the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a "Disqualified
Organization," which term as defined above includes certain tax-exempt entities
not subject to Code Section 511 such as certain governmental plans, as discussed
above under the caption "Certain Federal Income Tax Consequences -- Federal
Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates -- Tax-Related Restrictions on Transfer of Residual Certificates --
Disqualified Organizations."
DUE TO THE COMPLEXITY OF THESE RULES AND THE PENALTIES IMPOSED UPON PERSONS
INVOLVED IN PROHIBITED TRANSACTIONS, IT IS PARTICULARLY IMPORTANT THAT POTENTIAL
INVESTORS WHO ARE PLAN FIDUCIARIES CONSULT WITH THEIR COUNSEL REGARDING THE
CONSEQUENCES UNDER ERISA OF THEIR ACQUISITION AND OWNERSHIP OF CERTIFICATES.
96
<PAGE>
THE SALE OF CERTIFICATES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY THE
SELLER OR THE APPLICABLE UNDERWRITER THAT THIS INVESTMENT MEETS ALL RELEVANT
LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY
PARTICULAR PLAN, OR THAT THIS INVESTMENT IS APPROPRIATE FOR PLANS GENERALLY OR
ANY PARTICULAR PLAN.
LEGAL INVESTMENT
As will be specified in the applicable Prospectus Supplement, certain
Classes of 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 one of the two highest rating categories by at least
one Rating Agency. As "mortgage related securities" such Classes will constitute
legal investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including but not limited to
state-chartered savings banks, commercial banks, savings and loan associations
and insurance companies, as well as trustees and state government employee
retirement systems) created pursuant to or existing under the laws of the United
States or 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. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for such
enactments, limiting to varying extents the ability of certain entities (in
particular, SMMEA insurance companies) to invest in mortgage related securities,
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Certificates only to the extent
provided in such legislation.
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 limitation 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. Section 24 (Seventh), subject in
each case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review National
Credit Union Administration ("NCUA") Letter to Credit Unions No. 96, as modified
by Letter to Credit Unions No. 108, which includes guidelines to assist federal
credit unions in making investment decisions for mortgage related securities.
The NCUA has adopted rules, codified as 12 C.F.R. Section 703.5(f)-(k), which
prohibit federal credit unions from investing in certain mortgage related
securities (such as the Residual Certificates and the Stripped Certificates),
except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities" dated
January 28, 1992, as revised April 15, 1994 (the "Policy Statement") of the
Federal Financial Institutions Examination Council. The Policy Statement, which
has been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Comptroller of the Currency and the
Office of Thrift Supervision and by the NCUA (with certain modifications),
prohibits depository institutions from investing in certain "high-risk mortgage
securities" (including securities such as certain Series and Classes of the
Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any of the
Certificates, as certain Series or Classes (in particular, Certificates which
are entitled solely or disproportionately to distributions of principal or
interest) may be deemed unsuitable investments, or may otherwise be restricted,
under such rules, policies or guidelines (in certain instances irrespective of
SMMEA).
97
<PAGE>
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investments
in securities which are issued in book-entry form.
Except as to the status of certain Classes of Certificates as "mortgage
related securities," no representation is made as to the proper characterization
of the Certificates for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
All investors should consult with their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
PLAN OF DISTRIBUTION
The Certificates are being offered hereby in Series through one or more of
the methods described below. The applicable Prospectus Supplement for each
Series will describe the method of offering being utilized for that Series and
will state the public offering or purchase price of each Class of Certificates
of such Series, or the method by which such price is to be determined, and the
net proceeds to the Seller from such sale.
The Certificates will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular Series of Certificates may be made
through a combination of two or more of these methods:
1. By negotiated firm commitment underwriting and public re-offering by
underwriters specified in the applicable Prospectus Supplement;
2. By placements by the Seller with investors through dealers; and
3. By direct placements by the Seller with investors.
If underwriters are used in a sale of any Certificates, such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, with respect to the offer
and sale of a particular Series of Certificates will be set forth on the cover
of the Prospectus Supplement applicable to such Series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement. The
Prospectus Supplement will describe any discounts and commissions to be allowed
or paid by the Seller to the underwriters, any other items constituting
underwriting compensation and any discounts and commissions to be allowed or
paid to the dealers. The obligations of the underwriters will be subject to
certain conditions precedent. The underwriters with respect to a sale of any
Class of Certificates will be obligated to purchase all such Certificates if any
are purchased. The Seller, and, if specified in the applicable Prospectus
Supplement, Norwest Mortgage, will indemnify the applicable underwriters against
certain civil liabilities, including liabilities under the Securities Act.
98
<PAGE>
The Prospectus Supplement with respect to any Series of Certificates offered
other than through underwriters will contain information regarding the nature of
such offering and any agreements to be entered into between the Seller and
dealers and/or the Seller and purchasers of Certificates of such Series.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer or sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Seller or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the underwriter or
underwriters at a price specified or described in such Prospectus Supplement.
Such purchaser may thereafter from time to time offer and sell, pursuant to this
Prospectus, some or all of such Certificates so purchased directly, through one
or more underwriters to be designated at the time of the offering of such
Certificates or through dealers acting as agent and/or principal. Such offering
may be restricted in the matter specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale, at
negotiated prices or at fixed prices. The underwriters and dealers participating
in such purchaser's offering of such Certificates may receive compensation in
the form of underwriting discounts or commissions from such purchaser and such
dealers may receive commissions from the investors purchasing such Certificates
for whom they may act as agent (which discounts or commissions will not exceed
those customary in those types of transactions involved). Any dealer that
participates in the distribution of such Certificates may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any commissions and
discounts received by such dealer and any profit on the resale of such
Certificates by such dealer might be deemed to be underwriting discounts and
commissions under the Securities Act.
USE OF PROCEEDS
The net proceeds from the sale of each Series of Certificates will be used
by the Seller for the purchase of the Mortgage Loans represented by the
Certificates of such Series from Norwest Mortgage. It is expected that Norwest
Mortgage will use the proceeds from the sale of the Mortgage Loans to the Seller
for its general business purposes, including, without limitation, the
origination or acquisition of new mortgage loans and the repayment of borrowings
incurred to finance the origination or acquisition of mortgage loans, including
the Mortgage Loans underlying the Certificates of such Series.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Certificateholders of an investment in the Certificates of a Series, will be
passed upon for the Seller by Cadwalader, Wickersham & Taft, New York.
RATING
It is a condition to the issuance of the Certificates of any Series offered
pursuant to this Prospectus and a Prospectus Supplement that they be rated in
one of the four highest categories by at least one Rating Agency.
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
Agency. Each securities rating should be evaluated independently of any other
rating.
99
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Accrual Certificates..................................................................................... 35
Act...................................................................................................... 2
Advances................................................................................................. 46
ALTA..................................................................................................... 25
Balloon Loan............................................................................................. 19
Balloon Period........................................................................................... 19
Bankruptcy Code.......................................................................................... 62
Bankruptcy Loss.......................................................................................... 37
Bankruptcy Loss Amount................................................................................... 37
Beneficial Owner......................................................................................... 32
Book-Entry Certificates.................................................................................. 11
Buy-Down Fund............................................................................................ 18
Buy-Down Loans........................................................................................... 18
Cede..................................................................................................... 32
CERCLA................................................................................................... 63
Certificate Account...................................................................................... 43
Certificateholder........................................................................................ 32
Certificates............................................................................................. Cover
Class.................................................................................................... Cover
Cleanup Costs............................................................................................ 63
Code..................................................................................................... 11
Commission............................................................................................... 2
Correspondents........................................................................................... 20
Credit Score............................................................................................. 22
DCR...................................................................................................... 94
Deferred Interest........................................................................................ 17
Definitive Certificates.................................................................................. 11
Delegated Underwriting................................................................................... 21
Department............................................................................................... 94
Depository............................................................................................... 43
Detailed Information..................................................................................... 2
Disqualified Organization................................................................................ 80
Distribution Date........................................................................................ 9
DTC...................................................................................................... 11
DTC Participants......................................................................................... 32
Due Date................................................................................................. 16
Due on Sale.............................................................................................. 64
EDGAR.................................................................................................... 2
Eligible Custodial Account............................................................................... 44
ERISA.................................................................................................... 11
Excess Bankruptcy Losses................................................................................. 37
Excess Fraud Losses...................................................................................... 37
Excess Special Hazard Losses............................................................................. 37
FDIC..................................................................................................... 44
FHLBB.................................................................................................... 65
FHLMC.................................................................................................... 25
Fitch.................................................................................................... 94
Fixed Retained Yield..................................................................................... 35
FNMA..................................................................................................... 25
Fraud Loss............................................................................................... 37
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Fraud Loss Amount........................................................................................ 37
Garn Act................................................................................................. 65
GEMICO................................................................................................... 25
Indirect DTC Participants................................................................................ 32
IRA...................................................................................................... 93
Joint Ventures........................................................................................... 20
Liquidation Proceeds..................................................................................... 44
Loan Stores.............................................................................................. 20
Master Servicer.......................................................................................... Cover
Master Servicing Fee..................................................................................... 35
Moody's.................................................................................................. 94
Mortgage Interest Rate................................................................................... 35
Mortgage Loans........................................................................................... Cover
Mortgage Notes........................................................................................... 15
Mortgaged Properties..................................................................................... 15
Mortgages................................................................................................ 15
NASCOR................................................................................................... Cover
NCUA..................................................................................................... 97
Net Foreclosure Profits.................................................................................. 35
1986 Act................................................................................................. 69
Non-Pro Rata Certificate................................................................................. 70
Non-U.S. Person.......................................................................................... 85
Norwest Bank............................................................................................. Cover
Norwest Corporation...................................................................................... 19
Norwest Funding.......................................................................................... 19
Norwest Mortgage......................................................................................... Cover
Norwest Mortgage Loan.................................................................................... 19
Norwest Mortgage Sale Agreement.......................................................................... 53
OID Regulations.......................................................................................... 70
Other Advances........................................................................................... 46
OTS...................................................................................................... 65
Partial Liquidation Proceeds............................................................................. 34
Pass-Through Rate........................................................................................ 9
Pass-Through Entity...................................................................................... 80
Paying Agent............................................................................................. 46
Percentage Interest...................................................................................... 34
Periodic Advances........................................................................................ 10
PHMC..................................................................................................... 19
PHMC Mortgage Loans...................................................................................... 19
Plans.................................................................................................... 93
Policy Statement......................................................................................... 97
Pool Distribution Amount................................................................................. 34
Pool Insurers............................................................................................ 25
Pooling and Servicing Agreement.......................................................................... 8
Prepayment Assumption.................................................................................... 70
Program Loans............................................................................................ 42
Proposed Mark to Market Regulations...................................................................... 82
PTE 83-1................................................................................................. 96
Qualified Mortgage....................................................................................... 30
Rating Agency............................................................................................ 12
Record Date.............................................................................................. 10
Regular Certificateholder................................................................................ 69
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Regular Certificates..................................................................................... 31
Regulations.............................................................................................. 94
Relief Act............................................................................................... 63
REMIC.................................................................................................... Cover
REMIC Certificates....................................................................................... 67
REMIC Pool............................................................................................... 67
REMIC Regulations........................................................................................ 67
Remittance Date.......................................................................................... 44
Reserve Fund............................................................................................. 38
Residual Certificates.................................................................................... 31
Residual Holders......................................................................................... 76
Restricted Group......................................................................................... 95
Rules.................................................................................................... 32
S&P...................................................................................................... 94
SBJPA of 1996............................................................................................ 67
Securities Act........................................................................................... 2
Seller................................................................................................... Cover
Senior Certificates...................................................................................... Cover
Series................................................................................................... Cover
Servicer................................................................................................. Cover
Servicer Custodial Account............................................................................... 44
Servicing Account........................................................................................ 47
Servicing Fee............................................................................................ 35
SMMEA.................................................................................................... 97
Special Hazard Loss...................................................................................... 37
Special Hazard Loss Amounts.............................................................................. 37
Standard Hazard Insurance Policy......................................................................... 49
Startup Day.............................................................................................. 68
Stripped Certificateholder............................................................................... 91
Stripped Certificates.................................................................................... 90
Subclass................................................................................................. Cover
Subordinated Certificates................................................................................ Cover
Subsidy Account.......................................................................................... 17
Subsidy Loans............................................................................................ 17
Subsidy Payments......................................................................................... 17
Superlien................................................................................................ 64
Title V.................................................................................................. 66
T.O.P. Loans............................................................................................. 25
Treasury Regulations..................................................................................... 54
Trust Estate............................................................................................. Cover
Trustee.................................................................................................. 59
Trustee Fee.............................................................................................. 35
U.S. Person.............................................................................................. 81
UCC...................................................................................................... 61
UGRIC.................................................................................................... 25
Underlying Servicing Agreement........................................................................... 8
Underwriter's Exemption.................................................................................. 94
Voting Interests......................................................................................... 56
Window Period............................................................................................ 65
Window Period Loans...................................................................................... 65
Window Period States..................................................................................... 65
</TABLE>
102
<PAGE>
- ---------------------------------------------------------
---------------------------------------------------------
- ---------------------------------------------------------
---------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER
OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
------------------------
INDEX
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Table of Contents................................. S-6
Summary Information............................... S-7
Risk Factors...................................... S-34
Description of the Certificates................... S-35
Description of Mortgage Loans..................... S-73
Delinquency and Foreclosure Experience............ S-80
Prepayment and Yield Considerations............... S-84
Pooling and Servicing Agreement................... S-100
Servicing of the Mortgage Loans................... S-102
Federal Income Tax Considerations................. S-106
ERISA Considerations.............................. S-109
Legal Investment.................................. S-110
Secondary Market.................................. S-111
Underwriting...................................... S-111
Legal Matters..................................... S-111
Use of Proceeds................................... S-111
Ratings........................................... S-111
Index of Significant Prospectus Supplement
Definitions..................................... S-113
PROSPECTUS
Reports........................................... 2
Additional Information............................ 2
Additional Detailed Information................... 2
Incorporation of Certain Information by
Reference....................................... 3
Table of Contents................................. 4
Summary of Prospectus............................. 8
Risk Factors...................................... 13
The Trust Estates................................. 15
The Seller........................................ 19
Norwest Mortgage.................................. 19
Norwest Bank...................................... 20
The Mortgage Loan Programs........................ 20
Description of the Certificates................... 30
Prepayment and Yield Considerations............... 39
Servicing of the Mortgage Loans................... 41
Certain Matters Regarding the Master Servicer..... 52
The Pooling and Servicing Agreement............... 53
Certain Legal Aspects of the Mortgage Loans....... 59
Certain Federal Income Tax Consequences........... 66
ERISA Considerations.............................. 93
Legal Investment.................................. 97
Plan of Distribution.............................. 98
Use of Proceeds................................... 99
Legal Matters..................................... 99
Rating............................................ 100
Index of Significant Definitions.................. 101
</TABLE>
[LOGO]
$341,961,200
(APPROXIMATE)
NORWEST ASSET
SECURITIES CORPORATION
("NASCOR")
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1996-5
------------------------
PROSPECTUS SUPPLEMENT
-------------------
PAINEWEBBER INCORPORATED
OCTOBER 25, 1996
- ---------------------------------------------------------
---------------------------------------------------------
- ---------------------------------------------------------
---------------------------------------------------------
