<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME A
FINAL PROSPECTUS SUPPLEMENT IS DELIVERED. THIS PROSPECTUS SUPPLEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 10, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY , 1996)
$373,217,000 (APPROXIMATE)
NORWEST ASSET SECURITIES CORPORATION
("NASCOR")
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-1
PRINCIPAL AND INTEREST PAYABLE MONTHLY, COMMENCING IN AUGUST 1996
---------------------
The Series 1996-1 Mortgage Pass-Through Certificates (the "Series 1996-1
Certificates") will consist of one class of senior certificates (the "Class A
Certificates") and one class of subordinated certificates (the "Class B
Certificates"). The Class A Certificates are entitled to a certain priority,
relative to the Class B Certificates, in right of distributions on the Mortgage
Loans. The Class A Certificates will consist of twenty-one 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-18,
Class A-19, Class A-R and Class A-LR Certificates. The Class B Certificates will
consist of six subclasses of Certificates designated as the Class B-1, Class
B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates, none of which
is offered hereby. Each subclass of Class A Certificates or Class B Certificates
is referred to herein as a "Subclass." The Class A Certificates, other than the
Class A-7 Certificates, are the only Series 1996-1 Certificates being offered
hereby and are referred to herein collectively as the "Offered 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>
Initial Subclass
Principal Pass-Through Price to Underwriting Proceeds to
Subclass Designation Balance(1) Rate Public(2) Discount Seller(3)
<S> <C> <C> <C> <C> <C>
Class A-1.................................. $ 28,468,000 6.70% % % $
Class A-2.................................. $ 23,379,000 7.00% % % $
Class A-3.................................. $ 25,984,000 7.15% % % $
Class A-4.................................. $ 20,111,000 7.30% % % $
Class A-5.................................. $ 43,850,000 7.40% % % $
Class A-6.................................. $ 25,738,000 7.50% % % $
Class A-8.................................. $ 40,187,000 7.50% % % $
Class A-9.................................. $ 26,999,800 7.50% % % $
Class A-10................................. $ 12,943,000 7.50% % % $
Class A-11................................. $ 12,444,000 7.50% % % $
Class A-12................................. $ 16,074,000 7.50% % % $
Class A-13................................. $ 11,882,000 7.50% % % $
Class A-14................................. $ 10,957,000 7.50% % % $
Class A-15................................. $ 22,008,000 7.50% % % $
Class A-16................................. $ 14,192,000 7.50% % % $
Class A-17................................. $ 22,500,000 % % % $
Class A-18................................. $ 500,000 (4) % % $
Class A-19................................. $ 15,000,000 7.50 % % % $
Class A-R.................................. $ 100 7.50 % (5) N/A (5)
Class A-LR................................. $ 100 7.50 % (5) N/A (5)
Total.................................. $ 373,217,000 N/A $ $ $
</TABLE>
(1) Approximate. The initial Subclass Principal Balances are subject to
adjustment as described herein.
(2) Plus accrued interest from July 1, 1996 to (but not including) July 25,
1996.
(3) Before deducting expenses payable by the Seller estimated to be $ .
(4) The Class A-18 Certificates are principal-only certificates and will not be
entitled to distributions in respect of interest.
(5) The Class A-R and Class A-LR Certificates will be offered by Lehman Brothers
Inc. from time to time in negotiated transactions and otherwise at varying
prices to be determined at the time of sale. The Seller is not expected to
receive proceeds with respect to the Class A-R and Class A-LR Certificates.
---------------------------
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE
FACTORS DISCUSSED UNDER "RISK FACTORS" IN THIS PROSPECTUS SUPPLEMENT ON PAGE
S-32 AND IN THE PROSPECTUS ON PAGE 13.
The Offered Certificates (other than the Class A-R and Class A-LR
Certificates) are offered by Lehman Brothers Inc., Bear, Stearns & Co. Inc. and
Salomon Brothers Inc (the "Underwriters"), the Class A-R and Class A-LR
Certificates are offered by Lehman Brothers Inc. and the Class A-17 Certificates
are also offered by Edward D. Jones & Co. (the "Dealer") subject to prior sale,
when, as and if accepted by the Underwriters and subject to certain conditions.
It is expected that the Offered Certificates will be available for delivery
through the facilities of The Depository Trust Company or, in the case of the
Class A-18, Class A-R and Class A-LR Certificates, at the offices of Lehman
Brothers Inc., New York, New York, in each case, on or about July 25, 1996.
---------------------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
SALOMON BROTHERS INC
EDWARD JONES
JULY , 1996
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates
are referred to herein collectively as the "Scheduled Certificates." The Class
A-6, Class A-7 and Class A-8 Certificates will each be deemed to consist of
multiple components. The Class A-6 Certificates will consist of two scheduled
components (each, a "Class A-6 Component" and, individually, the "Class A-6 A
Scheduled Component" and the "Class A-6 B Scheduled Component"). The Class A-7
Certificates, which are not offered hereby, will be deemed to consist of four
components (each, a "Class A-7 Component"), consisting of two interest-only
components (the "Class A-7 IO A Component" and the "Class A-7 IO B Component"),
an accrual component (the "Class A-7 Accrual Component") and a principal-only
component (the "Class A-7 PO Component"). The Class A-8 Certificates will be
deemed to consist of two components (each a "Class A-8 Component" and,
individually, the "Class A-8 A Component" and the "Class A-8 B Component"). Each
Class A-6 Component, Class A-7 Component and Class A-8 Component is also
referred to herein as a "Component." THE BENEFICIAL OWNER OF A CLASS A-6, CLASS
A-7 OR CLASS A-8 CERTIFICATE WILL NOT HAVE A SEVERABLE INTEREST IN ANY COMPONENT
BUT WILL HAVE AN UNDIVIDED INTEREST IN THE ENTIRE SUBCLASS.
The Scheduled Certificates, the Class A-6 Components, the Class A-7 Accrual
Component, the Class A-8 Components and the Class A-9, Class A-R and Class A-LR
Certificates are referred to herein collectively as the "Group I Certificates
and Components." The 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-18 and Class A-19 Certificates are
referred to herein collectively as the "Group II Certificates."
The credit enhancement for the Series 1996-1 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-7 Certificates with respect to the Class A-7 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 1996-1 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"), 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 1996-1
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 remaining
approximate 6.00% undivided interest in the principal balance of the Mortgage
Loans will be evidenced by the Class B 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 August 1996, to the
holders of Offered Certificates, as described herein. The Class A-7 Accrual
Component will accrete interest as described herein. Holders of the Class A-7
Certificates will not be entitled to current distributions of interest with
respect to the Class A-7 Accrual Component until the Cross-Over Date. Instead,
on each Distribution Date prior to the Cross-Over Date, an amount equal to the
accrued and unpaid interest on the Class A-7 Accrual Component will be added to
the Component Principal Balance thereof and will be distributed in reduction of
the principal balances and Component Principal Balances of certain of the Group
I Certificates and Components as described herein under "Description of the
Certificates -- Principal (Including Prepayments) -- Allocation of Amount to be
Distributed." The amount of interest accrued on any Subclass of Offered
Certificates (other than the Class A-18 Certificates) will
S-2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
be reduced by certain 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."
The Class A-17 Certificates are entitled to the benefit of a reserve fund (the
"Reserve Fund") as protection against Non-Supported Interest Shortfalls, up to
the amount of the initial deposit into such Reserve Fund. The Class A-17
Certificates will also be entitled to the benefit of an irrevocable financial
guaranty insurance policy (the "Policy") to be issued by Financial Security
Assurance Inc. ("Financial Security") pursuant to which Financial Security will
unconditionally and irrevocably guarantee the current payment of interest, other
than Non-Supported Interest Shortfalls that are covered by the Reserve Fund, and
the payment of any losses of principal allocated to the Class A-17 Certificates.
See "Description of the Certificates -- The Financial Guaranty Insurance Policy"
herein. Once the Reserve Fund has been reduced to zero, Non-Supported Interest
Shortfalls allocated to the Class A-17 Certificates will be covered by the
Policy. See "Description of the Certificates -- Interest" herein. 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 (other than the Class A-7 Certificates) and the Class A-7 Accrual
Component in the manner described herein under "Description of the Certificates
- -- Principal (Including Prepayments)." Distributions to each Subclass of Offered
Certificates, other than the Class A-17 Certificates, will be made pro rata
among Certificateholders of such Subclass. On any Distribution Date on which the
Class A-17 Certificates are entitled to receive distributions in reduction of
the principal balance of such Subclass, except as described below, such
distributions will be made to the Beneficial Owners of the Class A-17
Certificates in accordance with the following priorities: (i) any request by a
Deceased Holder, in an amount up to but not exceeding an aggregate principal
balance of $100,000 per request and (ii) any request by a Living Holder, in an
amount up to but not exceeding an aggregate principal balance of $10,000 per
request. Thereafter, distributions will be made as provided in clause (i) and
(ii) above up to a second $100,000 and $10,000, respectively. This sequence of
priorities will be repeated for each request for principal distributions made by
the Certificateholders of such Subclass until all such requests have been
honored. After all such requests have been honored, distributions will be made
to Beneficial Owners of the Subclass selected by random lot, to the extent of
any remaining funds. In each case, distributions of principal will be made in
lots of $1,000. On each Distribution Date following the first Distribution Date
on which any principal losses are allocated to the Class A Certificateholders,
principal distributions on the Class A-17 Certificates will be made pro rata
among the holders of the Class A-17 Certificates. See "Description of the
Certificates -- Distributions in Reduction of the Class A Subclass Principal
Balance of the Class A-17 Certificates" herein.
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 Subclasses 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, in particular,
the Class A-17 Certificates would 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 (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,
PARTICULARLY THE CLASS A-18 CERTIFICATES, THE RISK THAT A SLOWER THAN
ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING
S-3
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER
THAN ANTICIPATED. 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 FOR INVESTORS PURCHASING OFFERED
CERTIFICATES AT A PREMIUM. 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. SEE
"DESCRIPTION OF THE CERTIFICATES -- INTEREST," "-- PRINCIPAL (INCLUDING
PREPAYMENTS)" AND "PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN AND IN THE
PROSPECTUS.
THE WEIGHTED AVERAGE LIFE OF THE CLASS A-8 CERTIFICATES WILL BE PARTICULARLY
SENSITIVE TO THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS. SEE "DESCRIPTION OF
THE CERTIFICATES -- PRINCIPAL (INCLUDING PREPAYMENTS) -- ALLOCATION OF AMOUNT TO
BE DISTRIBUTED" AND "PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN.
The Offered Certificates, other than the Class A-18, Class A-R and Class
A-LR 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 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 Underwriters and, with respect to the Class A-17 Certificates, the Dealer
intend to act as market makers in the Offered Certificates, subject to
applicable provisions of federal and state securities laws and other regulatory
requirements, but are 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 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 and Class A-LR 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, Class
A-4, Class A-5 and Class A-6 Certificates, the Class A-7 Accrual Component, the
Class A-7 IO A Component, the Class A-7 IO B Component, the Class A-7 PO
Component, the 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-18 and Class A-19
Certificates and the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and
Class B-6 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-7 Certificates) represent
twenty 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 July
,
S-4
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE OFFERED
CERTIFICATES (OTHER THAN THE CLASS A-R AND CLASS A-LR CERTIFICATES) AT LEVELS
ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
UNTIL OCTOBER , 1996, 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-8
Risk Factors............................................................................................. S-32
General................................................................................................ S-32
Distribution in Reduction of the Class A Subclass Principal Balance of the Class A-17 Certificates..... S-32
Book-Entry System for Certain Classes and Subclasses of Certificates................................... S-32
Description of the Certificates.......................................................................... S-33
Denominations.......................................................................................... S-33
Definitive Form........................................................................................ S-33
Book-Entry Form........................................................................................ S-33
Distributions.......................................................................................... S-33
Interest............................................................................................... S-36
Principal (Including Prepayments)...................................................................... S-44
Calculation of Amount to be Distributed to the Class A Certificates.................................. S-44
Calculation of Amount to be Distributed to the Class A-7 PO Component................................ S-47
Allocation of Amount to be Distributed............................................................... S-48
Distribution in Reduction of the Class A Subclass Principal Balance of the Class A-17 Certificates..... S-59
General.............................................................................................. S-59
Priority of Requested Distributions.................................................................. S-60
Procedure for Requested Distributions................................................................ S-60
Mandatory Distributions of Principal on Class A-17 Certificates...................................... S-61
Additional Rights of the Class A-R and Class A-LR Certificateholders................................... S-62
Periodic Advances...................................................................................... S-62
The Financial Guaranty Insurance Policy................................................................ S-62
Financial Security Assurance Inc....................................................................... S-64
Restrictions on Transfer of the Class A-R and Class A-LR Certificates.................................. S-66
Reports................................................................................................ S-67
Subordination of Class B Certificates.................................................................. S-67
Allocation of Losses................................................................................. S-68
Description of the Mortgage Loans........................................................................ S-72
General................................................................................................ S-72
Mortgage Loan Data..................................................................................... S-75
Mandatory Repurchase or Substitution of Mortgage Loans................................................. S-81
Optional Repurchase of Defaulted Mortgage Loans........................................................ S-82
Delinquency and Foreclosure Experience................................................................... S-82
Prepayment and Yield Considerations...................................................................... S-88
Sensitivity of the Class A-18 Certificates............................................................. S-100
Pooling and Servicing Agreement.......................................................................... S-101
General................................................................................................ S-101
Distributions.......................................................................................... S-101
Voting................................................................................................. S-101
Trustee................................................................................................ S-102
Trust Administrator.................................................................................... S-102
Master Servicer........................................................................................ S-102
Special Servicing Agreements........................................................................... S-102
Optional Termination................................................................................... S-103
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Servicing of the Mortgage Loans.......................................................................... S-103
The Servicers.......................................................................................... S-103
Servicer Custodial Accounts............................................................................ S-104
Unscheduled Principal Receipts......................................................................... S-104
Anticipated Changes in Servicing....................................................................... S-105
Servicing Compensation and Payment of Expenses......................................................... S-106
Servicer Defaults...................................................................................... S-106
Federal Income Tax Considerations........................................................................ S-106
Regular Certificates................................................................................... S-107
Residual Certificates.................................................................................. S-107
ERISA Considerations..................................................................................... S-109
Legal Investment......................................................................................... S-110
Secondary Market......................................................................................... S-110
Underwriting............................................................................................. S-111
Legal Matters............................................................................................ S-112
Experts.................................................................................................. S-112
Use of Proceeds.......................................................................................... S-112
Ratings.................................................................................................. S-113
Index of Significant Prospectus Supplement Definitions................................................... S-114
</TABLE>
S-7
<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 1996-1
Certificates (the "Series 1996-1 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 from The Prudential Home Mortgage
Company, Inc. ("PHMC") or various other entities (each
other such entity, a "Norwest Mortage 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>
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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 Serviceing Agreement -- Trustee" in this Prospectus
Supplement.
Trust Administrator............. First Bank National Association, a national banking
association (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 Offered
Certificates that they shall have been rated "AAA" by
Fitch Investors Service, L.P. ("Fitch"). It is a condition
to the issuance of the Offered Certificates, other than
the Class A-18 Certificates, that they shall have been
rated "AAA" by Standard and Poor's ("S&P"). It is a condi-
tion to the issuance of the Class A-18 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. The ratings of Fitch on mortgage
pass-through certificates 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 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. See "-- Effects of
Prepayments on Investment Expectations" below and "Rat-
ings" in this Prospectus Supplement.
</TABLE>
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Description of Certificates..... The Series 1996-1 Certificates will consist of the Class A
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 B
Certificates represent a type of interest referred to in
the Prospectus as "Subordinated Certificates." As these
designations suggest, the Class A Certificates are
entitled to a certain priority, relative to the Class B
Certificates, in right of distributions on the mortgage
loans underlying the Series 1996-1 Certificates (the
"Mortgage Loans"). See "-- Distributions of Principal and
Interest" below.
The Class A Certificates will consist of twenty-one
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-18, Class A-19, Class A-R and Class A-LR
Certificates. The Class B Certificates will consist of six
Subclasses, designated as the Class B-1, Class B-2, Class
B-3, Class B-4, Class B-5 and Class B-6 Certificates. The
Class A Certificates (other than the Class A-7
Certificates), are referred to in this Prospectus
Supplement as the "Offered Certificates." The Class A-7
Certificates and the Class B 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. Any difference between the
aggregate principal balance of the Class A Certificates as
of the date of issuance of the Series 1996-1 Certificates
and the approximate initial aggregate principal balance of
such Subclasses as of the date of this Prospectus
Supplement will not exceed 5% of the initial aggregate
principal balance of the Offered Certificates as stated on
the cover of this Prospectus Supplement plus the expected
initial principal balance of the Class A-7 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-R and Class A-LR
Certificates.
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 remaining
approximate 6.00% undivided interest in the principal
balance of the Mortgage Loans will be evidenced by the
Class B Certificates. The Class A-7 Certificates, which
are not offered hereby, consist in part of the Class A-7
PO Component (as defined below). The Class A-7 PO
Component will evidence an interest in portions of the
principal balances of Mortgage Loans that have Net Mort-
gage Interest Rates, as defined on page S-40, less than
7.50% (the "Discount Mortgage Loans"), such initial
interest in the aggregate representing an approximate
1.50% interest by principal balance of the Mortgage Loans
(the "Pool Balance (PO Portion)") and an approximate 4.10%
initial interest in the principal balance of the Discount
Mortgage Loans. By virtue of the subordination of the
Class B Certificates, it is possible that the Class A-7 PO
Component may also receive support from certain
</TABLE>
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payments made with respect to the other Mortgage Loans in
the Trust Estate. The Class A Certificates (other than the
Class A-7 PO Component) 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)"). Initially, the Class A Certificates (other
than the Class A-7 PO Component) will evidence in the
aggregate an approximate 93.91 % (approximately
$513,236,000) undivided interest in the initial Pool Bal-
ance (Non-PO Portion) and the Class B Certificates will
evidence in the aggregate an approximate 6.09%
(approximately $33,291,970) undivided interest in the
initial Pool Balance (Non-PO Portion). The relative
interests in the initial Pool Balance (Non-PO Portion)
represented by the Class A Certificates (other than the
Class A-7 PO Component) 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-7 PO Component) for a specified period and the
allocation of certain losses and certain shortfalls to the
Class B Certificates in reverse numerical order, prior to
the allocation of such losses and shortfalls to the Class
A Certificates (other than the Class A-7 PO Component), as
discussed in "-- Distributions of Principal and Interest"
and "-- Credit Enhancement" below.
Solely for purposes of determining distributions in
reduction of principal balance, the Class A-6 and Class
A-8 Certificates will each be deemed to consist of two
components. The components of the Class A-6 Certificates
are referred to herein as the "Class A-6 A Scheduled
Component" and the "Class A-6 B Scheduled Component" and,
collectively, as the "Class A-6 Components." The
components of the Class A-8 Certificates are referred to
herein as the "Class A-8 A Component" and the "Class A-8 B
Component" and, collectively, as the "Class A-8
Components."
The Class A-7 Certificates, which are not offered hereby,
will be deemed to consist of four components (the "Class
A-7 Components"), consisting of two interest-only
components (the "Class A-7 IO A Component" and the "Class
A-7 IO B Component"), an accrual component (the "Class A-7
Accrual Component") and a principal-only component (the
"Class A-7 PO Component"). Each of the Class A-7 IO A
Component and the Class A-7 IO B Component is an
interest-only component and has no component principal
balance. Unless the aggregate principal balance of the
Class B Certificates has been reduced to zero, the
interest that accrues on the component principal balance
of the Class A-7 Accrual Component will not be paid cur-
rently as interest to the holders of the Class A-7
Certificates on any Distribution Date but, instead, such
amounts will be added to the component principal balance
of such component. On each Distribution Date, unless the
aggregate principal balance of the Class B Certificates
has been reduced to zero, an amount equal to the accrued
and unpaid interest on the Class A-7 Accrual
</TABLE>
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Component will be distributed in reduction of the
principal balances and component principal balances of
certain of the Group I Certificates and Components, as
described under the heading "Description of the
Certificates -- Principal (Including Prepayments) --
Allocation of Amount to be Distributed" in this Prospectus
Supplement.
</TABLE>
- --------------------------------------------------------------------------------
COMPONENT PRINCIPAL BALANCES AND COMPONENT RATES
<TABLE>
<CAPTION>
APPROXIMATE
INITIAL COMPONENT PRINCIPAL COMPONENT
COMPONENT BALANCE RATE
- ------------------------------------------------------------- --------------------------------- -----------------
<S> <C> <C>
Class A-6 A Component........................................ $ 2,500,000 (1)
Class A-6 B Component........................................ $ 23,238,000 (1)
Class A-7 Accrual Component.................................. $ 140,019,000 7.50%
Class A-7 PO Component....................................... $ 8,323,682 (2)
Class A-7 IO A Component..................................... (3) 7.50%
Class A-7 IO B Component..................................... (4) (5)
Class A-8 A Component........................................ $ 20,094,000 (1)
Class A-8 B Component........................................ $ 20,093,000 (1)
</TABLE>
- ------------------------------
(1) The Class A-6 and Class A-8 Certificates accrue interest at the rate of
7.50% per annum on the sum of the component prinicpal balances of the Class
A-6 and Class A-8 Certificates, respectively.
(2) The Class A-7 PO Component is a principal-only component and will not
accrue interest on its component principal balance.
(3) The Class A-7 IO A Component is an interest-only component, has no
principal balance and will bear interest on the Class A-7 IO A Component
Notional Amount (as defined herein) (initially approximately $6,928,733).
(4) The Class A-7 IO B Component is an interest-only component, has no
principal balance and will bear interest on the Class A-7 IO B Component
Notional Amount (as defined herein) (initially approximately $351,638,280).
(5) Interest will accrue on the Class A-7 IO B Component as described under
"Description of the Certificates -- Interest" in this Prospectus
Supplement.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The principal balances of the Class A-6, Class A-7 and
Class A-8 Certificates will equal the sum of component
principal balances of their respective components. The
holder of a Class A-6, Class A-7 or Class A-8 Certificate
will not have a severable interest in any component but
will have an undivided interest in the entire Subclass.
The Class A-1, Class A-2, Class A-3, Class A-4 and Class
A-5 Certificates are referred to herein collectively as
the "Scheduled Certificates." The Scheduled Certificates,
the Class A-6 Components, the Class A-7 Accrual Component,
the Class A-8 Components and the Class A-9, Class A-R and
Class A-LR Certificates are referred to herein
collectively as the "Group I Certificates and Components."
The 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-18 and
Class A-19 Certificates are referred to herein
collectively as the "Group II Certificates."
The Class A-17 Certificates are entitled to the benefit of
a reserve fund (the "Reserve Fund") as protection against
Non-Supported Interest Shortfalls up to the amount of the
initial
</TABLE>
S-12
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<S> <C>
deposit into such reserve fund. See "Description of the
Certificates -- Interest" in this Prospectus Supplement.
The Class A-17 Certificates will also be entitled to the
benefit of an irrevocable financial guaranty insurance
policy (the "Policy") to be issued by Financial Security
Assurance Inc. ("Financial Security"), pursuant to which
Financial Security will unconditionally and irrevocably
guarantee the current payment of interest, other than
Non-Supported Interest Shortfalls that are covered by the
Reserve Fund, and the payment of any losses of principal
allocated to the Class A-17 Certificates. Once the Reserve
Fund has been reduced to zero, the Policy will also cover
any Non-Supported Interest Shortfalls allocated to the
Class A-17 Certificates. See "Description of the
Certificates -- The Financial Guaranty Insurance Policy"
in this Prospectus Supplement.
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
owned in amounts lower than such minimum denominations.
See "Descriptions of the Certificates -- Denominations" in
this Prospectus Supplement.
</TABLE>
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FORM AND DENOMINATIONS OF OFFERED CERTIFICATES
<TABLE>
<CAPTION>
ORIGINAL CERTIFICATE MINIMUM INCREMENTAL
SUBCLASS FORM DENOMINATION DENOMINATION
- ---------------------------------------------------------- ----------------------- ------------- -------------
<S> <C> <C> <C>
Classes A-1, A-2, A-3, A-4, A-5, A-9*, A-10, A-11, A-12,
A-13, A-14, A-15 and A-16................................ Book-Entry $ 25,000 $ 1,000
Classes A-6, A-8 and A-19................................. Book-Entry $ 100,000 $ 1,000
Class A-17................................................ Book-Entry $ 1,000 $ 1,000
Class A-18................................................ Definitive $ 100,000 $ 1,000
Classes A-R and A-LR...................................... Definitive $ 100 N/A
</TABLE>
- ------------------------------
* In order to aggregate the original principal balance of the Class A-9
Certificates, one of the Class A-9 Certificates will be issued in any
denomination in excess of $25,000 initial principal balance.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BOOK-ENTRY FORM. The Offered Certificates, other than
the Class A-18, Class A-R and Class A-LR 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
</TABLE>
S-13
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<S> <C>
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-18, Class A-R and Class
A-LR 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 1996-1
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 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: July 1, 1996
Number of Mortgage Loans: 2,042
Aggregate Unpaid Principal Balance(2): $554,851,652
Range of Unpaid Principal Balances(2): $19,957 to $1,951,167
Average Unpaid Principal Balance(2): $271,720
Range of Mortgage Interest Rates: 6.250% to 9.750%
Weighted Average Mortgage Interest Rate(2): 8.008%
Range of Remaining Terms to Stated Maturity: 227 months to 360 months
Weighted Average Remaining Term to Stated Maturity(2): 356 months
Range of Original Loan-to-Value Ratios(2): 9.17% to 95.00%
Weighted Average Original Loan-to-Value Ratio(2): 75.94%
Geographic Concentration of Mortgaged Properties
Securing Mortgage Loans in Excess of 5% of the
Aggregate Unpaid Principal Balance(2): California 35.93%
New York 9.58%
New Jersey 7.52%
Maximum Five-Digit Zip Code Concentration(1): 0.97%
</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
</TABLE>
S-14
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<PAGE>
<TABLE>
<S> <C>
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 1996-1
Certificates (which is expected to occur on or about July
25, 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 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 1996-1 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 1996-1
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 1996-1
Certificates. See "Pooling and Servicing Agreement --
Optional Termination" in this Prospectus Supplement.
Underwriting Standards.......... Approximately 97.14% (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
</TABLE>
S-15
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<TABLE>
<S> <C>
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 0.04% and 0.89% (by Cut-Off
Date Aggregate Principal Balance) of the Mortgage Loans
were reviewed by General Electric Mortgage Insurance
Corporation ("GEMICO") and United Guaranty Residential
Insurance Company ("UGRIC"), respectively, to ensure
compliance with their respective credit, appraisal and
underwriting standards (the "Pool Certification
Underwritten Loans"). Neither the Series 1996-1
Certificates nor the Mortgage Loans are insured or
guaranteed under a mortgage pool insurance policy issued
by GEMICO or 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 1.93% (by Cut-Off
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
1996-1 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 August 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 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-7 PO Component Deferred
Amount, as defined on page S-47) before any distributions
are made to holders of the
</TABLE>
S-16
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<S> <C>
Class B Certificates on that Distribution Date. The Class
A-7 Certificates, with respect to Class A-7 PO Component,
will be entitled to receive the Class A-7 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-7 Certificates with
respect to the Class A-7 Accrual Component) and the
amounts required to be paid as a premium to Financial
Security and then, if the amount available for
distribution exceeds the amount of interest due holders of
the Class A Certificates and any such premium, to reduce
the outstanding principal balances of the Class A
Certificates. As described under "-- Interest
Distributions" below, unless the aggregate principal
balance of the Class B Certificates has been reduced to
zero, an amount equal to the amount accrued in respect of
interest on the Class A-7 Certificates with respect to the
Class A-7 Accrual Component will be distributed as a
reduction of the principal balances and component
principal balances of certain of the Group I Certificates
and Components as described herein under "Description of
the Certificates -- Principal (including Prepayments) --
Allocation of Amount to be Distributed," rather than as
interest to the holders of the Class A-7 Certificates with
respect to the Class A-7 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 and, in the
case of the Class A-17 Certificates, on the number of
requests for distribution of principal made on behalf of
deceased owners with respect to such Subclass, on the
number of requests for distributions of principal made by
living owners with respect to such Subclass and on the
random lot selection for distributions in reduction of the
principal balance of such Subclass.
After all amounts due on the Class A Certificates (other
than the Class A-7 PO Component Deferred Amount), together
with the premium payment due to Financial Security, have
been paid, the amount remaining will be distributed, in
the following order, to (i) pay any Class A-7 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-6
Certificates, then from amounts otherwise distributable as
principal on the Class B-5 Certificates, and so on) and
(ii) pay 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
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
Subclasses of Class B Certificates with higher numerical
designations receive any payments in respect of interest
or principal, provided that the principal due any such
Subclass will be reduced by any amount used to pay the
Class A-7 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 of Offered Certificates, other
than the Class A-18 Certificates, will be entitled each
month is calculated based on the outstanding principal
balance of such Subclass, as of the related Distribution
Date. Interest will accrue each month on each such
Subclass according to the following formula: 1/12th of the
Pass-Through Rate for such Subclass multiplied by the
outstanding principal balance of such Subclass as of the
related Distribution Date. Holders of the Class A-18
Certificates will not be entitled to receive distributions
of interest. The "Pass-Through Rate" for each Subclass of
Offered Certificates is the percentage set forth on the
cover of this Prospectus Supplement.
Interest will accrue on the Class A-7 Certificates each
month in an amount equal to the sum of the interest
accrued on the Class A-7 Accrual Component, the Class A-7
IO A Component and the Class A-7 IO B Component. Interest
will accrue on the Class A-7 Accrual 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-7 IO A Component at
the rate of 1/12th of the Component Rate for such
component on the Class A-7 IO A Component Notional Amount
for such component. The "Class A-7 IO A Component Notional
Amount" for the Class A-7 IO A Component on any date is
equal to the product of (i) (a) the excess of 7.50% over
the weighted average of the Pass-Through Rates of the
Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5
Certificates divided by (b) 7.50% and (ii) the sum of the
principal balances of the Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 Certificates. Interest will accrue
on the Class A-7 IO B Component as described on page S-37
herein.
Holders of each Subclass of Certificates (other than the
Class A-18 Certificates) will be entitled to receive
distributions of interest on each Distribution Date.
Holders of the Class A-7 Certificates (i) will not be
entitled to receive distributions of
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interest with respect to the Class A-7 PO Component and
(ii) will not be entitled to receive distributions of
interest with respect to the Class A-7 Accrual Component
until the aggregate principal balance of the Class B
Certificates has been reduced to zero. See "Description of
the Certificates -- Interest" in this Prospectus
Supplement. Until the aggregate principal balance of the
Class B Certificates has been reduced to zero, the amount
of interest to which the holders of the Class A-7
Certificates with respect to the Class A-7 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-7 Accrual Component. An
amount equal to the amount of interest that has accrued
but is not currently distributable on the Class A-7
Certificates with respect to the Class A-7 Accrual
Component will instead be distributed in reduction of the
principal balances and component principal balances of
certain of the Group I Certificates and Components as
described under the heading "Description of the
Certificates -- Principal (Including Prepayments) --
Allocation of Amount to be Distributed" in this Prospectus
Supplement.
On each Distribution Date, Financial Security will be
entitled to receive, as payment of the premium for the
financial guaranty insurance policy, an amount equal to
(A) the product of (i) 1/12th of 0.08% and (ii) the
outstanding principal balances of the Class A-17
Certificates, less (B) a pro rata portion of the Non-
Supported Interest Shortfalls and other losses
attributable to interest allocable to such amount as
described below for each such Distribution Date.
When mortgagors prepay principal or when principal is
recovered 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 between the Classes of the
Series 1996-1 Certificates based on their then-outstanding
principal balances (after subtracting, with respect to the
Class A Certificates, the component principal balance of
the Class A-7 PO Component). The amount allocated
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to the Class A Certificates will be allocated pro rata
among the Subclasses of Class A Certificates and Financial
Security, based on interest accrued in the case of the
Subclasses of Class A Certificates and the premium payment
described above in the case of Financial Security. The
Policy will not cover Non-Supported Interest Shortfalls
allocated to the Class A-17 Certificates that are covered
by the Reserve Fund. Once the Reserve Fund has been
reduced to zero, Non-Supported Interest Shortfalls
allocated to the Class A-17 Certificates will be covered
by the Policy. See "Description of the Certificates --
Interest" herein.
Interest shortfalls resulting from partial principal
prepayments will not be covered by the Master Servicer,
but instead will be borne first by the Class B
Certificates and then, pro rata by the Class A
Certificates and the premium otherwise payable to Finan-
cial Security. See "Description of the Certificates --
Subordination of the Class B Certificates" in this
Prospectus Supplement.
In order to provide protection to the holders of the Class
A-17 Certificates against Non-Supported Interest
Shortfalls, the Reserve Fund will be established for the
Class A-17 Certificates at the time of issuance of such
Certificates. At such time, approximately $ will be
deposited into the Reserve Fund. No additional amounts
will be deposited into the Reserve Fund after the initial
deposit. If any Non-Supported Interest Shortfall is
allocated to the Class A-17 Certificates, the amount of
such shortfall, to the extent funds are available
therefor, will be withdrawn from the Reserve Fund and
distributed to the holders of the Class A-17 Certificates
on such Distribution Date. The Reserve Fund will be
beneficially owned by Lehman Brothers Inc. ("Lehman
Brothers") and will not be an asset of the Trust Estate or
the Upper-Tier or Lower-Tier REMIC. The balance of any
amount remaining in the Reserve Fund on the Distribution
Date on which the principal balance of each of the Class
A-17 Certificates is reduced to zero will be distributed
to Lehman Brothers.
In addition, the amount of interest required to be
distributed to holders of the Series 1996-1 Certificates
and the premium payment required to be paid to Financial
Security 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 balance of the Class A-7
Accrual Component) and to make the required premium
payment to Financial Security (net of any Non-Supported
Interest Shortfall, other shortfalls and losses allocable
to the Class A Certificates and the premium payment as
described above), the amount of interest to be distributed
will
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be allocated among the outstanding Subclasses of Class A
Certificates and the premium payment required to be paid
to Financial Security pro rata in accordance with their
respective entitlements to interest and the amount of the
premium payment. The amount of any deficiency will be
added to the amount of interest and premium payment that
the Class A Certificates and Financial Security,
respectively, are entitled to receive on subsequent
Distribution Dates. No interest will accrue on such
deficiencies. The Policy will cover any such deficiencies
allocated to the Class-17 Certificates.
Interest on the Class A 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-7 Certificates with
respect to the Class A-7 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 lesser of
(a) 1.0 and (b) the Net Mortgage Interest Rate for such
Mortgage Loan divided by 7.50%. 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 (after subtracting the component
principal balance of the Class A-7 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 Class B Certificates. As a result, the
percentage of certain unscheduled principal payments
otherwise distributable to the holders of the Class B
Certificates that is instead distributable to the holders
of the Class A Certificates 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 it is equal to zero. On each Distribution Date,
the Class B 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
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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-7 Certificates are entitled each month with
respect to the Class A-7 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. In addition, the Class A-7 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-7 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-7 Certificates will also be
entitled each month to an amount equal to the Class A-7 PO
Component Deferred Amount. The Class A-7 PO Component
Deferred Amount will be paid to holders of the Class A-7
Certificates only from amounts otherwise distributable as
principal to the Subclasses of Class B Certificates. No
interest will accrue on any Class A-7 PO Component
Deferred Amount.
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-7 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-7 Accrual Component) and the premium required to
be paid to Financial Security from the total amount
collected that is available to be distributed to holders
of the Series 1996-1 Certificates on such Distribution
Date and (ii) the amount of interest, if any, added to the
component principal balance of the Class A-7 Accrual
Component with respect to such Distribution Date.
Accordingly, even though the Class A Certificates may not
receive all accrued interest and Financial Security may
not receive the entire premium payment to which they are
entitled on a given Distribution Date, certain of the
Group I Certificates and Components 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"
and "-- Distributions in Reduction of the Class A Subclass
Principal Balance of the Class A-17 Certificates" in this
Prospectus Supplement.
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Distributions of Principal with
Respect to the Class A-17
Certificates................... The receipt by any beneficial owner of a Class A-17
Certificate of distributions in reduction of principal
balance is not only dependent upon such Subclass's
entitlement to receive principal payments relative to that
of other Subclasses, and upon the rate and timing of
principal payments (including prepayments) made on the
Mortgage Loans, but also upon a special procedure for
allocation of principal distributions to which the Class
A-17 Certificates are subject.
Authorized representatives of Deceased Holders (as defined
on page S-59 of this Prospectus Supplement) of the Class
A-17 Certificates and Living Holders (as defined on page
S-59 of this Prospectus Supplement) of the Class A-17
Certificates have the right to request distributions of
principal on their Certificates, in minimum amounts of
$1,000 and integral multiples thereof. Such requests for
distribution of principal will be honored, with respect to
such Subclass, to the extent the amount available for
distribution with respect to such Subclass is sufficient
therefor, in accordance with the following priorities: (i)
any request by a Deceased Holder, in an amount up to but
not exceeding an aggregate principal balance of $100,000
per request; and (ii) any request by a Living Holder, in
an amount up to but not exceeding an aggregate principal
balance of $10,000 per request. Thereafter, distributions
will be made as provided in clauses (i) and (ii) above up
to a second $100,000 and $10,000, respectively. This
sequence of priorities will be repeated for each request
for principal distributions made by the beneficial owners
of the Class A-17 Certificates until all such requests
have been honored. If amounts available for distribution
on any Distribution Date with respect to such Subclass are
insufficient to fulfill the requests for distributions of
principal on the Class A-17 Certificates, or if any
requests are not timely received, the unsatisfied requests
will be treated as requests for distribution on the next
succeeding Distribution Date and on each succeeding
Distribution Date thereafter, until all requests with
respect to such Subclass are either honored or withdrawn.
To the extent that the amount available for distribution
in respect of principal of the Class A-17 Certificates on
any Distribution Date exceeds all requests for
distribution of principal on such Subclass, certain
holders of Class A-17 Certificates will receive mandatory
distributions of principal. Such mandatory distributions
of principal will be made in $1,000 lots, rounded as
necessary, to beneficial owners selected in accordance
with specified random lot procedures.
Notwithstanding the foregoing procedures, on each
Distribution Date following the first Distribution Date on
which any principal losses are allocated to Class A
Certificateholders, principal distributions on the Class
A-17 Certificates (including amounts paid in respect of
such losses under the Policy) will be made pro rata among
the holders of the Class A-17 Certificates.
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There can be no assurance that funds will be available to
make distributions of principal on any particular
Distribution Date to those Deceased Holders on whose
behalf requests have been submitted or to those Living
Holders who have submitted requests or, even if funds are
available to make such distributions, that such
distributions will be made with respect to the Class A-17
Certificates held by any particular beneficial owner.
Accordingly, such requests may not be honored immediately
upon submission and may, in fact, remain outstanding for
some period of time. In addition, because of the random
lot procedure, there is also no assurance that beneficial
owners of Class A-17 Certificates who have not requested a
distribution of principal on their Certificates will
receive distributions of principal on any particular
Distribution Date on which the amount available for
distribution in respect of principal to such Subclass
exceeds the aggregate amount requested for distribution of
principal on the Class A-17 Certificates.
For a further discussion of the procedures, priorities and
limitations applicable to the distribution of principal to
the Class A-17 Certificates, see "Description of the
Certificates -- Distributions in Reduction of the Class A
Subclass Principal Balance of the Class A-17 Certificates"
in this Prospectus Supplement.
THE CLASS A-17 CERTIFICATES MAY NOT BE APPROPRIATE
INVESTMENTS FOR ANY INVESTOR WHO REQUIRES A SINGLE LUMP
SUM PAYMENT ON A PREDETERMINED DATE OR AN OTHERWISE
PREDICTABLE STREAM OF PRINCIPAL PAYMENTS. THERE IS NO
ASSURANCE THAT ANY INVESTOR IN A CLASS A-17 CERTIFICATE
WILL RECEIVE A DISTRIBUTION IN REDUCTION OF ITS PRINCIPAL
BALANCE ON A PARTICULAR DISTRIBUTION DATE.
Credit Enhancement.............. DESCRIPTION OF "SHIFTING-INTEREST" SUBORDINATION. The
rights of the holders of the Class B Certificates to
receive distributions will be subordinated to the rights
of the holders of the Class A Certificates and Financial
Security 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 B Certifi-
cates) 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 B Certificates, the amounts of
interest and principal due the holders of the Class A
Certificates 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 the Class B Certificates, until the
principal balance thereof has been reduced to zero, of
certain losses resulting from the liquidation of
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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 addition, in order to increase the period during which
the principal balance of the Class B Certificates remains
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. This allocation has the effect of
accelerating the amortization of the Class A Certificates
(other than the Class A-7 Certificates with respect to the
Class A-7 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 B Certificates.
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 B Certificates (which
aggregate balance is expected initially to be
approximately $33,291,970) has been reduced to zero. Such
losses will be allocated among the Subclasses of Class B
Certificates, in reverse numerical order (that is, to the
Class B-6, Class B-5, Class B-4, Class B-3, Class B-2 and
Class B-1 Certificates, respectively). The Policy will
cover any losses of principal allocated to the Class A-17
Certificates.
With respect to any Distribution Date subsequent to the
first Distribution Date, the availability of the credit
enhancement provided by the Class B Certificates will be
affected by the prior reduction of the principal balance
of the Class B Certificates. Reduction of the principal
balance of the 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 1996-1
Certificates, the amount of losses attributable to special
hazards, fraud and bankruptcy that will be absorbed solely
by the holders of the Class B Certificates will be
approximately 1.00%, 2.00% and 0.04%, respectively, of the
Cut-Off Date Aggregate Principal
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Balance of the Mortgage Loans (approximately $5,548,517,
$11,097,033 and $206,884, respectively). If losses due to
special hazards, fraud or bankruptcy exceed any of such
amounts prior to the principal balance of the 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-7
Certificates with respect to the Class A-7 PO Component)
and the Class B Certificates and (ii) to the extent such
losses arise with respect to Discount Mortgage Loans, the
Class A-7 PO Component, 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 and Class B Certificates and Financial Security
based on their respective interest accrual amounts and by
the premium otherwise payable to Financial Security. The
Policy will cover any such losses allocated to the Class
A-17 Certificates. Under certain circumstances, the limits
set forth above may be reduced as described under
"Description of the Certificates -- Subordination of Class
B Certificates -- Allocation of Losses" in this Prospectus
Supplement.
After the principal balance of the Class B Certificates
has been reduced to zero, the principal portion of all
losses (other than the portion attributable to the Class
A-7 PO Component of the Class A-7 Certificates, if any)
will be allocated to the Class A Certificates (other than
the Class A-7 Certificates with respect to the Class A-7
PO Component). To the extent such losses arise with
respect to Discount Mortgage Loans, such losses will be
shared among the Class A Certificates, according to their
respective interests in such Mortgage Loans, and the
interest portion of such losses will be borne by the Class
A Certificates and the premium otherwise payable to
Financial Security. The principal portion of any losses
borne by the Class A Certificates (other than losses borne
by the Class A-7 Certificates with respect to the Class
A-7 PO Component) will be shared pro rata by the
Subclasses of Class A Certificates based on their
then-outstanding principal balances or, in the case of the
Class A-7 Certificates, the sum of the then-outstanding
component principal balances of the Class A-7 Components
(other than the Class A-7 PO Component) or, with respect
to the Class A-7 Accrual Component, the initial component
principal balance of the Class A-7 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 Certificates -- Interest"
and "-- Subordination of Class B Certificates --
Allocation of Losses" in this Prospectus Supplement. The
Policy will cover any such losses allocated to the Class
A-17 Certificates.
FINANCIAL GUARANTY INSURANCE POLICY. Financial Security
will issue the Policy as a means of providing additional
credit enhancement to the Class A-17 Certificates only.
Under the Policy, Financial Security will pay the Trust
Administrator, for the
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benefit of holders of Class A-17 Certificates, on each
Distribution Date, (i) the excess, if any, of the amount
of interest accrued with respect to each of the Class A-17
Certificates over the amount actually available for
distribution to such Subclass, net of any Non-Supported
Interest Shortfalls allocated to such Subclass that are
covered by the Reserve Fund, on such Distribution Date and
(ii) the portion of any losses of principal allocated to
such Subclass in respect of such Distribution Date. Once
the Reserve Fund has been reduced to zero, Financial
Security will also pay any Non-Supported Interest
Shortfalls allocated to the Class A-17 Certificates.
Financial Security is a New York insurance company engaged
in the business of writing financial guaranty insurance,
principally in respect of securities offered in the
domestic and foreign markets. Financial Security's
claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's") and "AAA" by each of S&P, Nippon
Investors Service, Inc. and Standard & Poor's (Australia)
Pty. Ltd. See "Description of the Certificates -- The
Financial Guaranty Insurance Policy" and "-- Financial
Security Assurance Inc." in this Prospectus Supplement.
Effects of Prepayments on In-
vestment 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 Class B
Certificates due to the disproportionate allocation of
such prepayments to investors in the Class A Certificates
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
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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. The yield experienced by an investor in the Class
A-18 Certificates, which do not bear interest, is solely a
function of the price paid by such investor, the rate and
timing of principal payments on the Mortgage Loans and
losses incurred on and after the Cross-Over Date. The
particular sensitivity of the Class A-18 Certificates is
displayed in a table appearing under the heading
"Prepayment and Yield Considerations" in this Prospectus
Supplement. AN INVESTOR THAT PURCHASES ANY OFFERED
CERTIFICATES AT A DISCOUNT, PARTICULARLY THE CLASS A-18
CERTIFICATES, 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 SHOULD CONSIDER THE
RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAY-
MENTS 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.
REINVESTMENT RISK. As stated above, if an Offered
Certificate is purchased at an amount equal to its unpaid
principal balance (that is, 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 or, in the case of
the Class A-18 Certificates, the expected yield, which is
based on the price paid by the investor and the rate of
prepayments anticipated by such investor. 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
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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 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. 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.
The principal payment priorities and principal payment
schedules for the Scheduled Certificates and Class A-6
Components set forth herein under the heading "Description
of the Certificates -- Principal (Including Prepayments)
-- Allocation of Amount to be Distributed" were designed
to provide a certain amount of protection to the holders
of the Scheduled Certificates and the Class A-6
Certificates against extension of the weighted average
lives thereof due to low rates of prepayment under certain
prepayment scenarios. No prediction can be made as to the
actual level of prepayments that will be experienced on
the Mortgage Loans and no assurance can be given that the
principal payment priorities and principal payment
schedules of the Scheduled Certificates and Class A-6
Components will provide protection against the extension
of the weighted average lives of such Subclasses and
Components. See "Description of the Certificates --
Principal (Including Prepayments) -- Allocation of Amount
to be Distributed" and "Prepayment and Yield
Considerations" herein.
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 CLASS A-8 CERTIFICATES
WILL BE PARTICULARLY SENSITIVE TO THE RATE OF PREPAYMENTS
ON THE MORTGAGE LOANS. SEE "DESCRIPTION OF THE
CERTIFICATES -- PRINCIPAL (INCLUDING PREPAYMENTS) --
ALLOCATION OF AMOUNT TO BE DISTRIBUTED" AND "PREPAYMENT
AND YIELD CONSIDERATIONS" HEREIN.
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 and Class A-6 Certificates, the Class A-7
Accrual Component, the
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Class A-7 IO A Component, the Class A-7 IO B Component,
the Class A-7 PO Component, the 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-18 and
Class A-19 Certificates and the Class B-1, Class B-2,
Class B-3, Class B-4, Class B-5 and Class B-6 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. The Class A-18 Certificates will be issued
with original issue discount in an amount equal to the
excess of the initial principal balance thereof over their
issue price. It is anticipated that the Class
Certificates will be issued with original issue discount
in an amount equal to the excess of their initial
principal balances over their respective issue prices. It
is also anticipated that the Class A- and Class A-
Certificates will be issued at a premium and that the
Class Certificates will be issued with DE MINIMIS
original issue discount for federal income tax purposes.
It is further anticipated that the Class B-1, Class B-2,
Class B-3, Class B-4, Class B-5 and Class B-6 Certificates
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 and Class A-LR 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
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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 per-
missible under ERISA, the Code or Similar Law. NEITHER THE
CLASS A-R CERTIFICATE NOR THE CLASS A-LR CERTIFICATE MAY
BE PURCHASED BY OR TRANSFERRED TO A PLAN. See "ERISA
Considerations" in this Prospectus Supplement and in the
Prospectus.
Legal Investment................ The Offered 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 Offered Certificates are legal
investments for certain entities to the extent provided in
such act. However, there are regulatory requirements and
considerations applicable to regulated financial
institutions and restrictions on the ability of such
institutions to invest in certain types of mortgage rated
securities. 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.
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RISK FACTORS
GENERAL
The rate of distributions in reduction of the principal balance of any
Subclass of Offered Certificates, the aggregate amount of distributions of
principal and interest on any Subclass of Offered Certificates and the yield to
maturity of any Subclass 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,
particularly the Class A-18 Certificates, 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 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. See "Prepayment and Yield Considerations" herein.
DISTRIBUTIONS IN REDUCTION OF THE CLASS A SUBCLASS PRINCIPAL BALANCE OF THE
CLASS A-17 CERTIFICATES
Although, as described herein, there can be no assurance as to the rate at
which principal distributions will be made on any Subclass of Offered
Certificates, the Class A-17 Certificates, in particular, would 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 is no assurance that funds available for distributions of
principal will be sufficient to permit the distributions requested by a
Beneficial Owner of a Class A-17 Certificate to be made within any specific
period of time after distribution is requested. During periods in which
prevailing interest rates are generally higher than the Pass-Through Rate for
the Class A-17 Certificates, greater numbers of Beneficial Owners of
Certificates of such Subclass may be expected to request distributions of
principal in respect of their Certificates in order to take advantage of such
prevailing interest rates. During such periods there may, however, be a
concurrent reduction in the rate of prepayments of the Mortgage Loans, thus
limiting the funds available for such distributions.
BOOK-ENTRY SYSTEM FOR CERTAIN CLASSES AND SUBCLASSES OF CERTIFICATES
Transactions in the 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 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 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.
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DESCRIPTION OF THE CERTIFICATES
DENOMINATIONS
The Offered Certificates, other than the Class A-6, Class A-8, Class A-9,
Class A-17, Class A-18, Class A-19, Class A-R and Class A-LR 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-9 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, except that one of the Class A-9 Certificates may be
issued in any denomination in excess of $25,000 initial principal balance. The
Class A-6, Class A-8, Class A-18 and Class A-19 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-17
Certificates will be issued in minimum denominations of $1,000 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-18, Class A-R, and
Class A-LR 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 the Class A and Class B Certificates will be made monthly, to the extent of
each Subclass' 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 August 1996. With respect to the Class A Certificates
(other than the Class A-7 Certificates with respect to the Class A-7 PO
Component), such distributions will be made, to the extent of each Subclass'
entitlement thereto, in an aggregate amount equal to the Class A Non-PO
Distribution Amount. With respect to the Class A-7 PO Component, such
distributions will be made, to the extent of the Class A-7 PO Component's
entitlement thereto, on each Distribution Date in an amount equal to the Class
A-7 PO Component Principal Distribution Amount after all the
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following amounts have been paid: interest due on the Class A Certificates for
such Distribution Date including all previously unpaid Class A Subclass Interest
Shortfall Amounts with respect to any Subclass of Class A Certificates, the
Premium Payment due to Financial Security and any unpaid Premium Shortfall
Amounts. See "Description of the Certificates -- Interest" herein. 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 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 and (ii) the Master
Servicing Fee;
(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 on or
following the Due Date in the month in which such Distribution Date occurs;
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(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
and the portion of net Liquidation Proceeds used to reimburse any
unreimbursed Periodic Advances;
(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
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 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 (other than the Class
A-18 Certificates) and to Financial Security, pro rata based on their respective
Class A Subclass Interest Accrual Amounts and the Premium Payment, as the case
may be, in an aggregate amount up to the sum of the Class A Subclass Interest
Accrual Amounts and the Premium Payment with respect to such Distribution Date;
provided, that prior to the Cross-Over Date, an amount equal to the amount that
would otherwise be distributable in respect of interest of the Class A-7
Certificates by virtue of the Class A-7 Accrual Component pursuant to this
provision will be distributed in reduction of the Class A Subclass Principal
Balances and Component Principal Balances of certain of the Group I Certificates
and Components as set forth below under "-- Principal (Including Prepayments) --
Allocation of Amount to be Distributed;"
SECOND, to the Subclasses of Class A Certificates (other than the Class
A-18 Certificates) and to Financial Security, pro rata based on their respective
unpaid Class A Subclass Interest Shortfall Amounts and unpaid Premium Shortfall
Amounts, in an aggregate amount up to the sum of the previously unpaid Class A
Subclass Interest Shortfall Amounts and unpaid Premium Shortfall
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Amounts; provided, that prior to the Cross-Over Date, an amount equal to the
amount that would otherwise be distributable in respect of interest shortfalls
to the Class A-7 Certificates by virtue of the Class A-7 Accrual Component
pursuant to this provision will be distributed in reduction of the Class A
Subclass Principal Balances and Component Principal Balances of certain of the
Group I Certificates and Components as set forth below under "-- Principal
(Including Prepayments) -- Allocation of Amount to be Distributed;"
THIRD, concurrently, to the Class A Certificates (other than the Class A-7
Certificates with respect to the Class A-7 PO Component) and the Class A-7
Certificates with respect to the Class A-7 PO Component, pro rata, based on the
Class A Non-PO Optimal Principal Amount and the Class A-7 PO Component Optimal
Principal Amount, (A) to the Subclasses of Class A Certificates, (other than the
Class A-7 Certificates with respect to the Class A-7 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-7 Certificates
with respect to the Class A-7 PO Component in an amount up to the Class A-7 PO
Component Optimal Principal Amount;
FOURTH, to the Class A-7 Certificates with respect to the Class A-7 PO
Component in an amount up to the Class A-7 PO Component Deferred Amount, but
only from amounts otherwise distributable (without regard to this priority) to
the Subclasses of Class B Certificates pursuant to priority FIFTH clause (C) of
this Pool Distribution Amount Allocation; and
FIFTH, sequentially, to the Class B-1, Class B-2, Class B-3, Class B-4,
Class B-5 and Class B-6 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 interest
shortfall amount and (C) finally, an amount up to its 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 priority FIFTH 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-7 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 undivided percentage interest (the "Percentage Interest") represented by
any Offered Certificate of a Subclass in distributions to such Subclass will be
equal to the percentage obtained by dividing the initial principal balance of
such Certificate by the aggregate initial principal balance of all Certificates
of such Subclass.
INTEREST
The amount of interest that will accrue on each Subclass of Class A
Certificates, other than the Class A-18 Certificates, during each month, 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-7 and Class A-18 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 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,
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allocable to such Subclass on or after the Cross-Over Date. The pass-through
rate for each Subclass of Offered Certificates (the "Pass-Through Rate") is the
percentage set forth on the cover of this Prospectus Supplement.
No interest will accrue on the Class A-18 Certificates.
On each Distribution Date an amount equal to any Non-Supported Interest
Shortfall allocable to the Class A-17 Certificates will be distributed from the
Reserve Fund to the holders of the Class A-17 Certificates to the extent
described below. The interest portion of any Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses allocable to the Class A-17
Certificates will be covered by the Policy, together with any Non-Supported
Interest Shortfall allocable to the Class A-17 Certificates once the Reserve
Fund has been reduced to zero. See "-- The Financial Guaranty Insurance Policy"
below.
The Class A Subclass Interest Accrual Amount for the Class A-7 Certificates
will equal the sum of the Component Interest Accrual Amounts for the Class A-7
Accrual Component, Class A-7 IO A Component and Class A-7 IO B 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 Interest Accrual Amount for the Class A-7 Accrual Component
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 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-7 Certificates, (ii) the interest portion of any Excess Special Hazard
Losses, Excess Fraud Losses and Excess Bankruptcy Losses allocable to the Class
A-7 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-7 Certificates on
or after the Cross-Over Date.
The Component Interest Accrual Amount for the Class A-7 IO A Component will
equal the difference between (a) the product of (i) 1/12th of the Component Rate
for such Component and (ii) the Class A-7 IO A Component 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-7 Certificates, (ii)
the interest portion of any Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses allocable to the Class A-7 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-7 Certificates on or after the Cross-Over Date.
The Component Interest Accrual Amount for the Class A-7 IO B Component will
equal the difference between (a) the product of (i) 1/12th of the difference
between (A) the weighted average of the Net Mortgage Interest Rates of the
Mortgage Loans that have Net Mortgage Interest Rates (as defined on page S-40)
greater than 7.50% (the "Premium Mortgage Loans") as of the first day of the
month preceding the month in which the applicable Distribution Date occurs and
(B) 7.50% and (ii) the Class A-7 IO B Component Notional Amount and (b) the sum
of such Component's pro rata share based upon interest accrued of (i) any
Non-Supported Interest Shortfall allocable to the Class A-7 Certificates, (ii)
the interest portion of any Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses allocable to the Class A-7 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-7 Certificates on or after the Cross-Over Date.
The "Component Rate" for each of the Class A-7 Components (other than the
Class A-7 IO B Component and the Class A-7 PO Component) is 7.50%.
S-37
<PAGE>
The Class A-7 IO A Component is an interest-only Component and has no
principal balance. The "Class A-7 IO A Component Notional Amount" with respect
to each Distribution Date will be equal to the product of (i)(a) the excess of
7.50% over the weighted average of the Pass-Through Rates of the Class A-1,
Class A-2, Class A-3, Class A-4 and Class A-5 Certificates divided by (b) 7.50%
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-5 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-1, Class A-2, Class A-3, Class A-4 or Class A-5 Certificates will result in a
reduction in the Class A-7 IO A Component Notional Amount. See "-- Principal
(Including Prepayments)" and "-- Subordination of Class B Certificates --
Allocation of Losses" herein. The Class A-7 IO A Component Notional Amount with
respect to the first Distribution Date will be approximately $6,928,733.
The Class A-7 IO B Component is an interest-only Component and has no
principal balance. The "Class A-7 IO B Component Notional Amount" with respect
to each Distribution Date will be equal to the aggregate Scheduled Principal
Balance of the Premium Mortgage Loans as of such Distribution Date. The Class
A-7 IO B Component Notional Amount with respect to the first Distribution Date
will be approximately $351,638,280.
No interest will accrue on the Class A-7 PO Component of the Class A-7
Certificates.
On each Distribution Date, Financial Security will be entitled to receive an
amount (the "Premium Payment") equal to (A) the product of (i) 1/12th of 0.08%
and (ii) the outstanding Class A Subclass Principal Balance of the Class A-17
Certificates, less (B) the sum of the pro rata portions of (i) any Non-Supported
Interest Shortfall, (ii) the interest portion of Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses for such Distribution Date and
(iii) on or after the Cross-Over Date, 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.
The amount of interest that will accrue on each Subclass of Class B
Certificates during each month, 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 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 7.50% 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-6, Class A-7 and Class A-8 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' pro rata share
of the principal portion of Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses previously allocated to the holders of Class A
Certificates (other than the Class A-7 Certificates with respect to the Class
A-7 PO Component) in the manner described herein under "-- Subordination of
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' 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-6, Class A-7 and Class A-8 Certificates), the Class A-6
Components, the Class A-7 Accrual Component and the Class A-8 Components on the
basis of their then-outstanding Class A Subclass Principal Balances or Component
Principal Balances or in the case of the Class A-7 Accrual Component its initial
Component Principal Balance, if lower, immediately prior to the preceding
Distribution Date.
S-38
<PAGE>
The Class A Subclass Principal Balance of the Class A-6 or Class A-8
Certificates as of any Determination Date will be equal to the sum of the
Component Principal Balances of their Components and the Class A Subclass
Principal Balance of the Class A-7 Certificates as of any Determination Date
will be the sum of the Component Principal Balances of the Class A-7 Accrual
Component and the Class A-7 PO Component.
The "Component Principal Balance" of each Component (other than the Class
A-7 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-7 Accrual Component, the Class A-7 Accrual Component
Distribution Amount, as described under "-- Principal (Including Prepayments)"
below, previously added to the Component Principal Balance of the Class A-7
Accrual Component, less (i) all amounts previously distributed to holders of
such Subclass in reduction of the principal balance of such Component and (ii)
such Components's pro rata share of the principal portion of Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses previously
allocated to the Class A Certificates (other than the Class A-7 Certificates
with respect to the Class A-7 PO Component) in the manner described herein under
"-- Subordination of 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-6, Class A-7 and Class A-8 Certificates), the Class A-6 Components, the Class
A-7 Accrual Component and the Class A-8 Components on the basis of their
then-outstanding Class A Subclass Principal Balances or Component Principal
Balances or, in the case of the Class A-7 Accrual Component, its initial
Component Principal Balance, if lower, immediately prior to the preceding
Distribution Date.
The "Component Principal Balance" of the Class A-7 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-7 Certificates in respect of the Class
A-7 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 previously
allocated to the Class A-7 PO Component in the manner described herein under "--
Subordination of Class B Certificates -- Allocation of Losses." After the
Cross-Over Date, the Component Principal Balance of the Class A-7 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-7 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-7 Certificates) and the Component
Principal Balance of the Class A-7 Accrual Component as of such 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 Hazard Losses, Excess Fraud Losses and Excess
Bankruptcy Losses previously allocated to the holders of such Subclass in the
manner described under "-- Subordination of Class B Certificates -- Allocation
of Losses" and (b) the Adjusted Pool Amount as of the preceding Distribution
Date less the sum of (i) Class A Non-PO Principal Balance, (ii) the Component
Principal Balance of the Class A-7 PO Component, and (iii) the Class B Subclass
Principal Balances of the Subclasses of Class B Certificates with lower
numerical designations, each as of such Determination Date.
S-39
<PAGE>
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 1996-1 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 1996-1 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 and (ii) the
Master Servicing Fee Rate as set forth in the Pooling and Servicing Agreement
for such Mortgage Loan. See "Servicing of the Mortgage Loans -- 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 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.
S-40
<PAGE>
"Month End Interest" for each Distribution Date with respect to the Mortgage
Loans serviced by each Other Servicer 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 Funding Corporation). 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 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 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 and
the Premium Payment 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 and Class B Principal Balance and
(ii) the Subclasses of Class B Certificates according to the percentage obtained
by dividing the then-outstanding Class B Subclass Principal Balance of each such
Subclass by the sum of the then-outstanding Class A Non-PO 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-7 Certificates with respect to the Class A-7
Accrual Component prior to the Cross-Over Date, will reduce the amount of
interest accrued on and 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 B Certificates.
Any such reduction in respect of interest allocable to the Class A Certificates
and Financial Security will be allocated among the Subclasses of Class A
Certificates and the Premium Payment pro rata on the basis of their respective
Class A Subclass Interest Accrual Amounts and the amount of such Premium
Payment, as the case may be, without regard to any reduction pursuant to this
paragraph, for such Distribution Date. Any Non-Supported Interest Shortfall
allocated to the Class A-7 Certificates will be allocated among the Class A-7
Components (other than the Class A-7 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,
other than 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 Principal
Receipts with respect to the Mortgage Loans will not be offset by Compensating
Interest, but instead will be borne first by the Class B Certificates, and then,
pro rata by the Class A Certificates and Financial Security. See "Description of
the Certificates -- Subordination of 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 and the Premium
Payment payable to Financial Security. However, such shortfalls allocated to the
S-41
<PAGE>
Class A-17 Certificates will be offset to the extent funds are available
therefor, from amounts on deposit in Reserve Fund. Once the Reserve Fund has
been reduced to zero, such shortfalls will be covered by the Policy.
A reserve fund will be established at the time of the issuance of the Class
A-17 Certificates (the "Reserve Fund") by an initial deposit into a separate
account maintained by the Trust Administrator of approximately $ . No
additional amounts will be deposited into the Reserve Fund after the initial
deposit. The Reserve Fund will be beneficially owned by Lehman Brothers and will
not be an asset of the Trust Estate or the Upper-Tier or Lower-Tier REMIC.
A withdrawal will be made on each Distribution Date from the amount on
deposit in the Reserve Fund, to the extent available, to cover any Non-Supported
Interest Shortfalls allocated to the Class A-17 Certificates. A withdrawal from
the Reserve Fund may only be made, to the extent funds are available therein, to
cover any Non-Supported Interest Shortfall allocated to such Subclass and may
not be made to cover any Non-Supported Interest Shortfall allocated to any other
Subclass. Once the Reserve Fund has been reduced to zero, the Policy will cover
any Non-Supported Interest Shortfalls allocated to the Class A-17 Certificates.
The balance of any amount remaining in the Reserve Fund on the Distribution
Date on which the Class A Subclass Principal Balance of the Class A-17
Certificates are reduced to zero will be distributed to Lehman Brothers.
The interest portion of any Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses will be allocated among the Class A and Class
B Certificates and the Premium Payment pro rata based on the interest accrued on
each such Class or the amount of such Premium Payment and among the Subclasses
of Class A Certificates pro rata on the basis of their respective Class A
Subclass Interest Accrual Amounts, without regard to any reduction pursuant to
this paragraph, for such Distribution Date. Any amount allocated to the Class
A-7 Certificates will be allocated among the Class A-7 Components (other than
the Class A-7 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. The Policy will cover any such losses
allocated to the Class A-17 Certificates. See "-- The Financial Guaranty
Insurance Policy" below.
Allocations of the interest portion of Realized Losses (other than Excess
Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses) first to
the Class B Certificates will result from the priority of distributions first to
the holders of the Class A Certificates and Financial Security of the Pool
Distribution Amount as described above under "Description of the Certificates --
Distributions." The Policy will cover any such losses which, after the
Cross-Over Date, are allocated to the Class A-17 Certificates.
On each Distribution Date on which the Pool Distribution Amount equals or
exceeds the sum of the Class A Subclass Interest Accrual Amounts and the Premium
Payment, distributions in respect of interest to each Subclass of Class A
Certificates will equal such Subclass' Class A Subclass Interest Accrual Amount
and the amount distributable to Financial Security will equal the Premium
Payment. On each Distribution Date, interest in an amount equal to the Component
Interest Accrual Amount of the Class A-7 Accrual Component will accrue thereon,
but such amount will not be distributed as interest to the Class A-7
Certificates until the Cross-Over Date. Prior to such time, an amount equal to
the Component Interest Accrual Amount for the Class A-7 Accrual Component will
instead be distributed in reduction of the Class A Subclass Principal Balances
and Component Principal Balances of certain of the Group I Certificates and
Components as described under "-- Principal (Including Prepayments)" below, and
the Component Principal Balance of the Class A-7 Accrual Component will be
increased by a corresponding amount.
If, on any Distribution Date, the Pool Distribution Amount is less than the
sum of the Class A Subclass Interest Accrual Amounts and the Premium Payment,
the amount of interest currently distributed on the Class A Certificates and the
amount of the Premium Payment currently distributed to Financial Security will
equal the Pool Distribution Amount and will be allocated among the
S-42
<PAGE>
Subclasses of Class A Certificates and Financial Security pro rata in accordance
with each such Subclass' Class A Subclass Interest Accrual Amount and Financial
Security's Premium Payment. Amounts so allocated will be distributed in respect
of interest to each Subclass of Class A Certificates (other than the Class A-18
Certificates and the Class A-7 Certificates in respect of the Class A-7 Accrual
Component prior to the Cross-Over Date) and to Financial Security with respect
to its Premium Payment. Any difference between the portion of the Pool
Distribution Amount distributed in respect of current interest to each such
Subclass of Class A Certificates or, in the case of the Class A-7 Certificates
with respect to the Class A-7 Accrual Component prior to the Cross-Over Date,
accrued on and added to the Component Principal Balance thereof, and to
Financial Security in respect of the Premium Payment and the Class A Subclass
Interest Accrual Amount for such Subclass and the Premium Payment, as the case
may be, with respect to the related Distribution Date net, in the case of the
Class A-17 Certificates, of any amounts paid pursuant to the Policy in respect
of interest for such Distribution Date (as to each Subclass, the "Class A
Subclass Interest Shortfall Amount" and as to Financial Security, the "Premium
Shortfall Amount") will be added to the amount to be distributed on subsequent
Distribution Dates to the extent that the Pool Distribution Amount is sufficient
therefor. The Policy will cover any Class A Subclass Interest Shortfall Amounts
which may be allocated to the Class A-17 Certificates. See "-- The Financial
Guaranty Insurance Policy" below. No interest will accrue on the unpaid Class A
Subclass Interest Shortfall Amounts or unpaid Premium Shortfall Amounts. The
Class A Subclass Interest Shortfall Amount of the Class A-7 Certificates with
respect to any Distribution Date will be allocated among the Class A-7
Components (other than the Class A-7 PO Component) based on their Component
Interest Accrual Amounts (such shortfall allocated to any Component, the
"Component Interest Shortfall Amount"). In the event that on any Distribution
Date prior to the Cross-Over Date the Pool Distribution Amount is less than the
sum of the Class A Subclass Interest Accrual Amounts and the Premium Payment,
resulting in Class A Subclass Interest Shortfall Amounts and Premium Shortfall
Amounts, as described above, an amount equal to the Class A-7 Accrual Component
Distribution Amount would be distributed to certain of the Group I Certificates
and Components, notwithstanding that the holders of the Class A Certificates of
the Subclasses then entitled to receive distributions of interest and Financial
Security have received less than their respective Class A Subclass Interest
Accrual Amounts and Premium Payment 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 and Premium Payment, any
excess will then be allocated first to pay previously unpaid Class A Subclass
Interest Shortfall Amounts and unpaid Premium Shortfall Amounts. Such amounts
will be allocated among the Subclasses of Class A Certificates and the amount
due Financial Security pro rata in accordance with the respective unpaid Class A
Subclass Interest Shortfall Amounts and unpaid Premium Shortfall Amounts
immediately prior to such Distribution Date. Any amount allocated to the Class
A-7 Certificates will be allocated among the Class A-7 Components (other than
the Class A-7 PO Component) based on their unpaid Component Interest Shortfall
Amounts. Prior to the Cross-Over Date, the amount so allocated to the Class A-7
Accrual Component will not be distributed as interest to the holders of the
Class A-7 Certificates, but will instead be distributed in reduction of the
Class A Subclass Principal Balances and Component Principal Balances of certain
of the Group I Certificates and Components as described under "-- Principal
(Including Prepayments) -- Allocation of Amount to be Distributed" below, and
the Component Principal Balance of the Class A-7 Accrual Component will be
increased by a corresponding amount.
Subject to the payment of any Class A-7 PO Component Deferred 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 each Subclass of Class A
Certificates and the Premium Payment, (ii) the sum of the unpaid Class A
Subclass Interest Shortfall Amounts with respect to each Subclass of Class A
Certificates and the unpaid Premium Shortfall Amounts 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") and (B) the
S-43
<PAGE>
Class A-7 PO Component Optimal Principal Amount (collectively with the amount
described in clause (A), the "Senior Optimal Amount"), any excess will be
allocated to make distributions in respect of interest and then principal on the
Subclasses of Class B Certificates.
On any Distribution Date on which the Pool Distribution Amount is less than
the Senior Optimal Amount, the Subclasses of Class B Certificates will not be
entitled to any distributions of interest or principal.
PRINCIPAL (INCLUDING PREPAYMENTS)
The principal balance of a Class A Certificate of any Subclass at any time
is equal to the product of the Class A Subclass Principal Balance of such
Subclass, 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-7 Accrual Component and (ii) in the case of the Class A-R
and Class A-LR Certificates, any additional amounts to which the holders of such
Certificates may be entitled as described below under "-- Additional Rights of
the Class A-R and Class A-LR Certificateholders") 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 of each Subclass of Offered Certificates is set forth
on the cover of this Prospectus Supplement. The initial Class A Subclass
Principal Balance of the Class A-7 Certificates will be approximately
$148,342,682.
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-7 Certificates with respect to the Class
A-7 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 Principal Distribution Amount. The "Class A
Principal Distribution Amount" with respect to any Distribution Date will be
equal to the sum of (i) the Class A-7 Accrual Component Distribution Amount, if
any, with respect to such Distribution Date and (ii) the Class A Principal
Amount with respect to such Distribution Date. The "Class A-7 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-7 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-7
Accrual Component on such Distribution Date in accordance with priority SECOND
of the Pool Distribution Amount Allocation. The "Class A 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,
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<PAGE>
(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 (other than the Class A-7 Certificates) or the Class A-7 Accrual
Component, each Subclass of Class A Certificates or Component then outstanding
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 or
Component Principal Balance of such Component 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 7.50% but shall not be
greater than 1.0.
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 and to the payment of
principal due on such Due Date, and irrespective of any delinquency in payment
by the mortgagor and any net Partial Liquidation Proceeds applied as of such Due
Date and any principal prepayments in full received prior to the Determination
Date in the month of such Due 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 loss attributable to certain actions which may be taken by a
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<PAGE>
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. 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 93.91%. 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 to the Class A Certificates (other than the
Class A-7 Certificates with respect to the Class A-7 PO Component) and will
increase as a result of the allocation of Realized Losses to the 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>
August 1996 through July 2001.......... 100%;
August 2001 through July 2002.......... the Class A Percentage, plus 70% of the Class B Percentage;
August 2002 through July 2003.......... the Class A Percentage, plus 60% of the Class B Percentage;
August 2003 through July 2004.......... the Class A Percentage, plus 40% of the Class B Percentage;
August 2004 through July 2005.......... the Class A Percentage, plus 20% of the Class B Percentage; and
August 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 then-outstanding Class B Principal Balance, or (ii)
cumulative Realized Losses with respect to the Mortgage Loans exceed (a) 30% of
the principal balance of the Class B Certificates as of the Cut-Off Date (the
"Original Subordinated Principal Balance") if such Distribution Date occurs
between and including August 2001 and July 2002, (b) 35% of the Original
Subordinated Principal Balance if such Distribution Date occurs between and
including August 2002 and July 2003, (c) 40% of the Original Subordinated
Principal Balance if such Distribution Date occurs between and including August
2003 and July 2004, (d) 45% of the Original Subordinated Principal Balance if
such Distribution Date occurs between and including August 2004 and July 2005,
and (e) 50% of the Original Subordinated Principal Balance if such Distribution
Date occurs during or after August 2005. 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-7 Certificates with respect to the
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<PAGE>
Class A-7 PO Component) while, in the absence of Realized Losses, increasing the
interest in the principal balance of the Mortgage Loans evidenced by the Class B
Certificates. Increasing the interest of the Class B Certificates relative to
that of the Class A Certificates (other than the Class A-7 Certificates with
respect to the Class A-7 PO Component) is intended to preserve the availability
of the subordination provided by the Class B Certificates. See "-- Subordination
of Class B Certificates" below. The "Class B Percentage" for any Distribution
Date will be calculated as the difference between 100% and the Class A
Percentage for such date. The "Class B 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 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-7 PO COMPONENT
Distributions in reduction of the Component Principal Balance of the Class
A-7 PO Component will be made on each Distribution Date in an aggregate amount
equal to the Class A-7 PO Component Principal Distribution Amount. The "Class
A-7 PO Component Principal 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-7 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-7 PO Component Deferred
Amount.
The "Class A-7 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-7 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-7 PO Component Optimal Principal Amount for all
prior Distribution Dates exceeds the amounts distributed to the Class A-7
Certificates in respect of the Class A-7 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-7 PO Component
S-47
<PAGE>
as described in "-- Subordination of Class B Certificates -- Allocation of
Losses" below and (ii) the sum of the product for each Discount Mortgage Loan
which became a Liquidated Loan in any month preceding the month of 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-7
PO Component on prior Distribution Dates pursuant to priority FOURTH of the Pool
Distribution Amount Allocation. On or after the Cross-Over Date, the Class A-7
PO Component Deferred Amount will be zero. No interest will accrue on any Class
A-7 PO Component Deferred Amount.
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-7 PO Component, such Component if outstanding will be entitled to its share of
such recovery in an amount up to the amount by which the Component Principal
Balance of the Class A-7 PO Component was reduced as a result of such Realized
Loss.
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 Mortgage Loan and the
PO Fraction for such Mortgage Loan.
ALLOCATION OF AMOUNT TO BE DISTRIBUTED
On each Distribution Date prior to the Cross-Over Date, the sum of (a) the
product of (A) the Group I Percentage and (B) the Class A Principal Amount and
(b) the Class A-7 Accrual Component Distribution Amount (such sum, the "Group I
Principal Distribution Amount") will be allocated among and distributed in
reduction of the Class A Subclass Principal Balances and Component Principal
Balances of the Group I Certificates and Components as follows:
FIRST, (A) if the Pool Scheduled Principal Balance for such Distribution
Date is less than the 400% SPA Targeted Balance for such Distribution Date, the
Group I Principal Distribution Amount will be allocated sequentially as follows:
(i)concurrently, to the Class A-1 Certificates and the Class A-6 A Scheduled
Component, pro rata, up to their respective Scheduled Amounts with
respect to such Distribution Date;
(ii)
sequentially to the Class A-2, Class A-3, Class A-4 and Class A-5
Certificates, up to their respective Scheduled Amounts with respect to
such Distribution Date;
(iii)
to the Class A-6 B Scheduled Component, up to its Scheduled Amount for
such Distribution Date determined in accordance with Schedule I;
(iv)
to the Class A-7 Accrual Component, up to its Scheduled Amount for such
Distribution Date;
(v)sequentially to the Class A-8 A Component, the Class A-8 B Component and
the Class A-6 B Scheduled Component, without regard, in the case of the
Class A-6 B Scheduled Component, to its applicable Scheduled Amount for
such Distribution Date, until the Component Principal Balance of each
such Component has been reduced to zero;
(vi)
concurrently, to the Class A-1 Certificates and the Class A-6 A Scheduled
Component, pro rata, without regard to their respective Scheduled 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;
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<PAGE>
(vii)
sequentially to the Class A-2, Class A-3, Class A-4 and Class A-5
Certificates, without regard to their respective Scheduled Amounts for
such Distribution Date, until the Class A Subclass Principal Balance of
each such Subclass has been reduced to zero; and
(viii)
to the Class A-7 Accrual Component, without regard to its Scheduled
Amount, until its Component Principal Balance has been reduced to zero.
(B) if the Pool Scheduled Principal Balance for such Distribution Date is
greater than or equal to the 400% SPA Targeted Balance but less than the
175% SPA Targeted Balance for such Distribution Date, the Group I Principal
Distribution Amount will be allocated sequentially as follows:
(i)concurrently, to the Class A-1 Certificates and the Class A-6 A Scheduled
Component, pro rata, up to their respective Scheduled Amounts with
respect to such Distribution Date;
(ii)
sequentially to the Class A-2, Class A-3, Class A-4 and Class A-5
Certificates, up to their respective Scheduled Amounts with respect to
such Distribution Date;
(iii)
to the Class A-6 B Scheduled Component, up to its Scheduled Amount for
such Distribution Date determined in accordance with Schedule I;
(iv)
to the Class A-7 Accrual Component, up to its Scheduled Amount for such
Distribution Date;
(v)sequentially to the Class A-8 A Component and the Class A-6 B Scheduled
Component, without regard, in the case of the Class A-6 B Scheduled
Component, to its applicable Scheduled Amount for such Distribution Date,
until the Component Principal Balance of each such Component has been
reduced to zero;
(vi)
concurrently, to the Class A-1 Certificates and the Class A-6 A Scheduled
Component, pro rata, without regard to their respective Scheduled 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;
(vii)
sequentially to the Class A-2, Class A-3, Class A-4 and Class A-5
Certificates, without regard to their respective Scheduled Amounts for
such Distribution Date, until the Class A Subclass Principal Balance of
each such Subclass has been reduced to zero;
(viii)
to the Class A-8 B Component, until its Component Principal Balance has
been reduced to zero; and
(ix)
to the Class A-7 Accrual Component, without regard to its Scheduled
Amount, until its Component Principal Balance has been reduced to zero.
(C) if the Pool Scheduled Principal Balance for such Distribution Date is
greater than or equal to the 175% SPA Targeted Balance for such Distribution
Date, the Group I Principal Distribution Amount will be allocated as
follows:
(a) FIRST, the Group I Principal Distribution Amount (other than the
Class A-7 Accrual Component Distribution Amount) will be allocated
sequentially as follows:
(i) concurrently, to the Class A-1 Certificates and the Class A-6 A
Scheduled Component, pro rata, up to their respective Scheduled
Amounts with respect to such Distribution Date;
(ii) sequentially to the Class A-2, Class A-3, Class A-4 and Class A-5
Certificates, up to their respective Scheduled Amounts with respect
to such Distribution Date;
(iii) to the Class A-6 B Scheduled Component, up to its Scheduled Amount
for such Distribution Date determined in accordance with Schedule I;
S-49
<PAGE>
(iv) to the Class A-7 Accrual Component, without regard to its Scheduled
Amount for such Distribution Date, until its Component Principal
Balance has been reduced to zero;
(v) sequentially to the Class A-8 A Component, the Class A-8 B Component
and the Class A-6 B Scheduled Component, without regard, in the case
of the Class A-6 B Scheduled Component, to its applicable Scheduled
Amount for such Distribution Date, until the Component Principal
Balance of each such Component has been reduced to zero;
(vi) concurrently, to the Class A-1 Certificates and the Class A-6 A
Scheduled Component, pro rata, without regard to their respective
Scheduled 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; and
(vii) sequentially to the Class A-2, Class A-3, Class A-4 and Class A-5
Certificates, without regard to their respective Scheduled Amounts
for such Distribution Date, until the Class A Subclass Principal
Balance of each such Subclass has been reduced to zero;
(b) SECOND, the Class A-7 Accrual Component Distribution Amount will be
allocated sequentially as follows:
(i) concurrently, to the Class A-1 Certificates and the Class A-6 A
Scheduled Component, pro rata, up to their respective Scheduled
Amounts with respect to such Distribution Date;
(ii) sequentially to the Class A-2, Class A-3, Class A-4 and Class A-5
Certificates, up to their respective Scheduled Amounts with respect
to such Distribution Date;
(iii) to the Class A-6 B Scheduled Component, up to its Scheduled Amount
for such Distribution Date determined in accordance with Schedule II;
and
(iv) to the Class A-7 Accrual Component, without regard to its Scheduled
Amount for such Distribution Date, until its Component Principal
Balance has been reduced to zero.
SECOND, to the Class A-9 Certificates, until the Class A Subclass Principal
Balance thereof has been reduced to zero; and
THIRD, 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.
On each Distribution Date prior to the Cross-Over Date, the product of (A)
the Group II Percentage and (B) the Class A Principal Amount will be allocated
among and distributed in reduction of the Class A Subclass Principal Balances of
the Group II Certificates as follows:
FIRST, to the Class A-19 Certificates, up to the Class A-19 Priority Amount;
SECOND, on each Distribution Date on and after the Distribution Date in
August 1999, concurrently, to the Class A-17 and Class A-18 Certificates, pro
rata, an amount up to the product of (i) 0.1% and (ii) the sum of the initial
Class A Subclass Principal Balances of the Class A-17 and Class A-18
Certificates, until the Class A Subclass Principal Balance of each such Subclass
has been reduced to zero;
THIRD, sequentially, to the Class A-10, Class A-11, Class A-12, Class A-13,
Class A-14, Class A-15 and Class A-16 Certificates, until the Class A Subclass
Principal Balance of each such Subclass has been reduced to zero;
FOURTH, concurrently, to the Class A-17 and Class A-18 Certificates, pro
rata, until the Class A Subclass Principal Balance of each such Subclass has
been reduced to zero; and
FIFTH, to the Class A-19 Certificates, until the Class A Subclass Principal
Balance hereof has been reduced to zero.
The "Group I Percentage" is equal to approximately 73.0143637625% and the
"Group II Percentage" is equal to approximately 26.9856362375%.
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<PAGE>
The "Class A-19 Priority Amount" for any Distribution Date means the lesser
of (i) the Class A Subclass Principal Balance of the Class A-19 Certificates and
(ii) the sum of (A) the product of (1) the Class A-19 Percentage, (2) the Class
A-19 Scheduled Percentage and (3) the Scheduled Principal Amount and (B) the
product of (1) the Class A-19 Percentage, (2) the Class A-19 Prepayment Shift
Percentage, and (3) the Unscheduled Principal Amount.
The "Class A-19 Percentage" means the Class A Subclass Principal Balance of
the Class A-19 Certificates divided by the Pool Balance (Non-PO Portion).
The "Class A-19 Scheduled Percentage" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURING IN: CLASS A-19 SCHEDULED PERCENTAGE
- ---------------------------------------------------------------------------------- ---------------------------------
<S> <C>
August 1996 through July 2001..................................................... 0%
August 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-44, 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-44, but
without that amount being multiplied by the Class A Prepayment Percentage.
The "Class A-19 Prepayment Shift Percentage" for any Distribution Date will
be the percentage indicated below:
<TABLE>
<CAPTION>
CLASS A-19 PREPAYMENT SHIFT
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
- ---------------------------------------------------------------------------- -------------------------------------
<S> <C>
August 1996 through July 2001............................................... 0%
August 2001 through July 2002............................................... 30%
August 2002 through July 2003............................................... 40%
August 2003 through July 2004............................................... 60%
August 2004 through July 2005............................................... 80%
August 2005 and thereafter.................................................. 100%
</TABLE>
As used above, the "Scheduled Amount" for any Distribution Date and for any
Subclass of Scheduled Certificates, the Class A-6 Components or the Class A-7
Accrual 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 initial Component Principal Balance shown in the tables beginning on
page S-52 for such Distribution Date.
As used above, the "400% SPA Targeted Balance" for any Distribution Date
means the amount equal to the percentage for such Distribution Date shown in the
following table of the Cut-Off Date Aggregate Principal Balance of the Mortgage
Loans. The percentages set forth in the table were derived using the assumptions
described in the last paragraph on page S-91 and assuming the Mortgage Loans
prepay at a constant rate of 400% SPA.
As used above, the "175% SPA Targeted Balance" for any Distribution Date
means the amount equal to the percentage for such Distribution Date shown in the
following table of the Cut-Off Date Aggregate Principal Balance of the Mortgage
Loans. The percentages set forth in the table were derived using the assumptions
described in the last paragraph on page S-91 and assuming the Mortgage Loans
prepay at a constant rate of 175% SPA.
Notwithstanding the foregoing, on each Distribution Date occurring on or
after the Cross-Over Date, the Class A Principal Distribution Amount will be
distributed among the Subclasses of Class A Certificates pro rata in accordance
with their respective outstanding Class A Subclass Principal Balances without
regard to either the proportions or the priorities set forth above.
S-51
<PAGE>
Except as described herein under "-- Distributions in Reduction of the Class
A Subclass Principal Balance of the Class A-17 Certificates" with respect to the
Class A-17 Certificates, any amounts distributed on a Distribution Date to the
holders of Class A Certificates 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.
The following table sets forth for each Distribution Date the 400% SPA
Targeted Balance and 175% SPA Targeted Balance, each expressed as a percentage
of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans.
TARGETED BALANCES
AS A PERCENTAGE OF CUT-OFF DATE AGGREGATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
DISTRIBUTION 400% SPA 175% SPA
DATE TARGETED BALANCE TARGETED BALANCE
- --------------------- ----------------% ----------------%
August 1996.......... 99.64072839 99.80514250
September 1996....... 99.21466044 99.58099664
October 1996......... 98.72204922 99.32764601
November 1996........ 98.16328597 99.04520055
December 1996........ 97.53890062 98.73379651
January 1997......... 96.84956180 98.39359647
February 1997........ 96.09607651 98.02478917
March 1997........... 95.27938917 97.62758948
April 1997........... 94.40058030 97.20223816
May 1997............. 93.46086470 96.74900168
June 1997............ 92.46158908 96.26817201
July 1997............ 91.40422937 95.76006630
August 1997.......... 90.29038736 95.22502657
September 1997....... 89.12178706 94.66341939
October 1997......... 87.90027045 94.07563540
November 1997........ 86.62779290 93.46208897
December 1997........ 85.30641805 92.82321767
January 1998......... 83.93831240 92.15948177
February 1998........ 82.52573934 91.47136372
March 1998........... 81.07105298 90.75936755
April 1998........... 79.57669146 90.02401828
May 1998............. 78.04517001 89.26586125
June 1998............ 76.47907371 88.48546145
July 1998............ 74.88104992 87.68340283
August 1998.......... 73.25380053 86.86028755
September 1998....... 71.60007389 86.01673522
October 1998......... 69.92265668 85.15338208
November 1998........ 68.28344180 84.29785878
December 1998........ 66.68222320 83.45039416
January 1999......... 65.11812684 82.61091360
February 1999........ 63.59030444 81.77934582
March 1999........... 62.09792116 80.95561749
April 1999........... 60.64016128 80.13965597
May 1999............. 59.21622775 79.33138929
June 1999............ 57.82534178 78.53074615
July 1999............ 56.46674241 77.73765589
August 1999.......... 55.13968610 76.95204851
September 1999....... 53.84344635 76.17385467
October 1999......... 52.57731330 75.40300564
November 1999........ 51.34059335 74.63943335
December 1999........ 50.13260879 73.88307035
January 2000......... 48.95269744 73.13384981
February 2000........ 47.80021228 72.39170551
March 2000........... 46.67452113 71.65657185
April 2000........... 45.57500631 70.92838383
May 2000............. 44.50106427 70.20707705
June 2000............ 43.45210532 69.49258771
July 2000............ 42.42755326 68.78485259
August 2000.......... 41.42684514 68.08380906
September 2000....... 40.44943089 67.38939506
DISTRIBUTION 400% SPA 175% SPA
DATE TARGETED BALANCE TARGETED BALANCE
- --------------------- ---------------- ----------------
<S> <C> <C>
% %
October 2000......... 39.49477305 66.70154912
November 2000........ 38.56234651 66.02021030
December 2000........ 37.65163818 65.34531827
January 2001......... 36.76214675 64.67681321
February 2001........ 35.89338242 64.01463589
March 2001........... 35.04486661 63.35872761
April 2001........... 34.21613172 62.70903020
May 2001............. 33.40672090 62.06548605
June 2001............ 32.61618777 61.42803806
July 2001............ 31.84409620 60.79662968
August 2001.......... 31.09002007 60.17120485
September 2001....... 30.35354304 59.55170806
October 2001......... 29.63425832 58.93808429
November 2001........ 28.93176849 58.33027904
December 2001........ 28.24568523 57.72823830
January 2002......... 27.57562914 57.13190857
February 2002........ 26.92122955 56.54123684
March 2002........... 26.28212429 55.95617059
April 2002........... 25.65795952 55.37665777
May 2002............. 25.04838953 54.80264685
June 2002............ 24.45307654 54.23408672
July 2002............ 23.87169055 53.67092678
August 2002.......... 23.30390913 53.11311690
September 2002....... 22.74941728 52.56060739
October 2002......... 22.20790723 52.01334901
November 2002........ 21.67907828 51.47129302
December 2002........ 21.16263667 50.93439109
January 2003......... 20.65829536 50.40259535
February 2003........ 20.16577393 49.87585837
March 2003........... 19.68479843 49.35413315
April 2003........... 19.21510118 48.83737314
May 2003............. 18.75642067 48.32553220
June 2003............ 18.30850142 47.81856464
July 2003............ 17.87109381 47.31642518
August 2003.......... 17.44395398 46.81906893
September 2003....... 17.02684368 46.32645147
October 2003......... 16.61953015 45.83852874
November 2003........ 16.22178597 45.35525711
December 2003........ 15.83338899 44.87659336
January 2004......... 15.45412214 44.40249465
February 2004........ 15.08377337 43.93291855
March 2004........... 14.72213552 43.46782300
April 2004........... 14.36900620 43.00716635
May 2004............. 14.02418766 42.55090734
June 2004............ 13.68748675 42.09900507
July 2004............ 13.35871474 41.65141902
August 2004.......... 13.03768726 41.20810906
September 2004....... 12.72422418 40.76903541
October 2004......... 12.41814956 40.33415868
November 2004........ 12.11929147 39.90343983
</TABLE>
S-52
<PAGE>
TARGETED BALANCES
AS A PERCENTAGE OF CUT-OFF DATE AGGREGATE PRINCIPAL BALANCE (CONTINUED)
<TABLE>
<CAPTION>
DISTRIBUTION 400% SPA 175% SPA
DATE TARGETED BALANCE TARGETED BALANCE
- --------------------- ---------------- ----------------
% %
<S> <C> <C>
December 2004........ 11.82748198 39.47684017
January 2005......... 11.54255702 39.05432138
February 2005........ 11.26435631 38.63584551
March 2005........... 10.99272325 38.22137492
April 2005........... 10.72750489 37.81087236
May 2005............. 10.46855178 37.40430090
June 2005............ 10.21571794 37.00162394
July 2005............ 9.96886073 36.60280526
August 2005.......... 9.72784085 36.20780892
September 2005....... 9.49252218 35.81659936
October 2005......... 9.26277176 35.42914131
November 2005........ 9.03845969 35.04539986
December 2005........ 8.81945909 34.66534040
January 2006......... 8.60564600 34.28892865
February 2006........ 8.39689932 33.91613063
March 2006........... 8.19310077 33.54691269
April 2006........... 7.99413477 33.18124149
May 2006............. 7.79988845 32.81908399
June 2006............ 7.61025153 32.46040747
July 2006............ 7.42511629 32.10517949
August 2006.......... 7.24437749 31.75336792
September 2006....... 7.06793233 31.40494094
October 2006......... 6.89568040 31.05986701
November 2006........ 6.72752360 30.71811487
December 2006........ 6.56336611 30.37965357
January 2007......... 6.40311432 30.04445244
February 2007........ 6.24667680 29.71248109
March 2007........... 6.09396422 29.38370941
April 2007........... 5.94488934 29.05810756
May 2007............. 5.79936693 28.73564601
June 2007............ 5.65731373 28.41629546
July 2007............ 5.51864843 28.10002690
August 2007.......... 5.38329158 27.78681159
September 2007....... 5.25116558 27.47662105
October 2007......... 5.12219465 27.16942707
November 2007........ 4.99630473 26.86520169
December 2007........ 4.87342352 26.56391722
January 2008......... 4.75348036 26.26554622
February 2008........ 4.63640625 25.97006151
March 2008........... 4.52213379 25.67743614
April 2008........... 4.41059715 25.38764343
May 2008............. 4.30173200 25.10065694
June 2008............ 4.19547555 24.81645048
July 2008............ 4.09176644 24.53499809
August 2008.......... 3.99054472 24.25627406
September 2008....... 3.89175187 23.98025292
October 2008......... 3.79533071 23.70690942
November 2008........ 3.70122539 23.43621856
December 2008........ 3.60938136 23.16815555
January 2009......... 3.51974534 22.90269587
February 2009........ 3.43226529 22.63981517
March 2009........... 3.34689038 22.37948938
April 2009........... 3.26357096 22.12169461
May 2009............. 3.18225855 21.86640722
June 2009............ 3.10290577 21.61360377
July 2009............ 3.02546637 21.36326104
August 2009.......... 2.94989516 21.11535603
September 2009....... 2.87614802 20.86986596
October 2009......... 2.80418183 20.62676824
November 2009........ 2.73395452 20.38604051
December 2009........ 2.66542495 20.14766060
<CAPTION>
DISTRIBUTION 400% SPA 175% SPA
DATE TARGETED BALANCE TARGETED BALANCE
- --------------------- ---------------- ----------------
<S> <C> <C>
% %
January 2010......... 2.59855298 19.91160655
February 2010........ 2.53329938 19.67785661
March 2010........... 2.46962584 19.44638922
April 2010........... 2.40749496 19.21718303
May 2010............. 2.34687019 18.99021688
June 2010............ 2.28771584 18.76546982
July 2010............ 2.22999708 18.54292106
August 2010.......... 2.17367985 18.32255004
September 2010....... 2.11873091 18.10433637
October 2010......... 2.06511779 17.88825986
November 2010........ 2.01280880 17.67430049
December 2010........ 1.96177295 17.46243844
January 2011......... 1.91198001 17.25265406
February 2011........ 1.86340044 17.04492790
March 2011........... 1.81600539 16.83924068
April 2011........... 1.76976670 16.63557329
May 2011............. 1.72465685 16.43390681
June 2011............ 1.68064898 16.23422249
July 2011............ 1.63771685 16.03650176
August 2011.......... 1.59583484 15.84072620
September 2011....... 1.55497792 15.64687758
October 2011......... 1.51512166 15.45493785
November 2011........ 1.47624219 15.26488909
December 2011........ 1.43831622 15.07671358
January 2012......... 1.40132098 14.89039375
February 2012........ 1.36523424 14.70591219
March 2012........... 1.33003432 14.52325166
April 2012........... 1.29570000 14.34239507
May 2012............. 1.26221061 14.16332549
June 2012............ 1.22954593 13.98602615
July 2012............ 1.19768622 13.81048044
August 2012.......... 1.16661222 13.63667189
September 2012....... 1.13630511 13.46458420
October 2012......... 1.10674651 13.29420120
November 2012........ 1.07791847 13.12550690
December 2012........ 1.04980349 12.95848541
January 2013......... 1.02238445 12.79312105
February 2013........ 0.99564464 12.62939822
March 2013........... 0.96956775 12.46730152
April 2013........... 0.94413785 12.30681565
May 2013............. 0.91933940 12.14792548
June 2013............ 0.89515719 11.99061601
July 2013............ 0.87157642 11.83487238
August 2013.......... 0.84858259 11.68067986
September 2013....... 0.82616156 11.52802387
October 2013......... 0.80429955 11.37688995
November 2013........ 0.78298306 11.22726379
December 2013........ 0.76219894 11.07913120
January 2014......... 0.74193434 10.93247812
February 2014........ 0.72217671 10.78729064
March 2014........... 0.70291381 10.64355496
April 2014........... 0.68413368 10.50125741
May 2014............. 0.66582464 10.36038444
June 2014............ 0.64797528 10.22092265
July 2014............ 0.63057449 10.08285875
August 2014.......... 0.61361140 9.94617956
September 2014....... 0.59707539 9.81087204
October 2014......... 0.58095610 9.67692326
November 2014........ 0.56524344 9.54432042
December 2014........ 0.54992751 9.41305084
January 2015......... 0.53499869 9.28310194
</TABLE>
S-53
<PAGE>
TARGETED BALANCES
AS A PERCENTAGE OF CUT-OFF DATE AGGREGATE PRINCIPAL BALANCE (CONTINUED)
<TABLE>
<CAPTION>
DISTRIBUTION 400% SPA 175% SPA
DATE TARGETED BALANCE TARGETED BALANCE
- --------------------- ---------------- ----------------
% %
<S> <C> <C>
February 2015........ 0.52044757 9.15446128
March 2015........... 0.50626495 9.02711650
April 2015........... 0.49244187 8.90105540
May 2015............. 0.47896958 8.77626586
June 2015............ 0.46583953 8.65273589
July 2015............ 0.45304337 8.53045359
August 2015.......... 0.44057296 8.40940720
September 2015....... 0.42842034 8.28958504
October 2015......... 0.41657776 8.17097556
November 2015........ 0.40503763 8.05356731
December 2015........ 0.39379257 7.93734894
January 2016......... 0.38283534 7.82230921
February 2016........ 0.37215890 7.70843698
March 2016........... 0.36175637 7.59572123
April 2016........... 0.35162103 7.48415101
May 2016............. 0.34174633 7.37371552
June 2016............ 0.33215995 7.26513969
July 2016............ 0.32282023 7.15766837
August 2016.......... 0.31372112 7.05129112
September 2016....... 0.30485669 6.94599759
October 2016......... 0.29622118 6.84177754
November 2016........ 0.28780896 6.73862080
December 2016........ 0.27961451 6.63651732
January 2017......... 0.27163248 6.53545713
February 2017........ 0.26385763 6.43543035
March 2017........... 0.25628484 6.33642721
April 2017........... 0.24890912 6.23843800
May 2017............. 0.24172560 6.14145312
June 2017............ 0.23472952 6.04546306
July 2017............ 0.22791624 5.95045840
August 2017.......... 0.22128124 5.85642980
September 2017....... 0.21482008 5.76336800
October 2017......... 0.20852847 5.67126384
November 2017........ 0.20240218 5.58010824
December 2017........ 0.19643711 5.48989220
January 2018......... 0.19062925 5.40060681
February 2018........ 0.18497468 5.31224325
March 2018........... 0.17946959 5.22479275
April 2018........... 0.17411024 5.13824666
May 2018............. 0.16889299 5.05259639
June 2018............ 0.16381431 4.96783344
July 2018............ 0.15887072 4.88394937
August 2018.......... 0.15405885 4.80093583
September 2018....... 0.14937538 4.71878456
October 2018......... 0.14481712 4.63748736
November 2018........ 0.14038091 4.55703611
December 2018........ 0.13606368 4.47742276
January 2019......... 0.13186246 4.39863935
February 2019........ 0.12777431 4.32067799
March 2019........... 0.12379639 4.24353085
April 2019........... 0.11992593 4.16719018
May 2019............. 0.11616021 4.09164831
June 2019............ 0.11249658 4.01689763
July 2019............ 0.10893247 3.94293061
August 2019.......... 0.10546536 3.86973978
September 2019....... 0.10209278 3.79731775
October 2019......... 0.09881235 3.72565718
November 2019........ 0.09562172 3.65475083
December 2019........ 0.09251861 3.58459150
January 2020......... 0.08950388 3.51531609
February 2020........ 0.08657215 3.44677179
<CAPTION>
DISTRIBUTION 400% SPA 175% SPA
DATE TARGETED BALANCE TARGETED BALANCE
- --------------------- ---------------- ----------------
<S> <C> <C>
% %
March 2020........... 0.08372131 3.37895162
April 2020........... 0.08094929 3.31184866
May 2020............. 0.07825409 3.24545608
June 2020............ 0.07563373 3.17976708
July 2020............ 0.07308629 3.11477496
August 2020.......... 0.07060992 3.05047305
September 2020....... 0.06820279 2.98685476
October 2020......... 0.06586311 2.92391355
November 2020........ 0.06358916 2.86164295
December 2020........ 0.06137924 2.80003656
January 2021......... 0.05923170 2.73908801
February 2021........ 0.05714493 2.67879102
March 2021........... 0.05511736 2.61913934
April 2021........... 0.05314746 2.56012680
May 2021............. 0.05123373 2.50174729
June 2021............ 0.04937472 2.44399473
July 2021............ 0.04756901 2.38686313
August 2021.......... 0.04581520 2.33034652
September 2021....... 0.04411195 2.27443902
October 2021......... 0.04246352 2.21948101
November 2021........ 0.04086283 2.16511643
December 2021........ 0.03930862 2.11133957
January 2022......... 0.03779969 2.05814480
February 2022........ 0.03633484 2.00552654
March 2022........... 0.03491292 1.95347924
April 2022........... 0.03353281 1.90199743
May 2022............. 0.03219339 1.85107567
June 2022............ 0.03089360 1.80070859
July 2022............ 0.02963240 1.75089085
August 2022.......... 0.02840875 1.70161716
September 2022....... 0.02722167 1.65288230
October 2022......... 0.02607019 1.60468109
November 2022........ 0.02495336 1.55700838
December 2022........ 0.02387025 1.50985908
January 2023......... 0.02281998 1.46322817
February 2023........ 0.02180166 1.41711065
March 2023........... 0.02081444 1.37150156
April 2023........... 0.01985748 1.32639601
May 2023............. 0.01892998 1.28178915
June 2023............ 0.01803114 1.23767616
July 2023............ 0.01716019 1.19405228
August 2023.......... 0.01631637 1.15091279
September 2023....... 0.01549897 1.10825302
October 2023......... 0.01470725 1.06606832
November 2023........ 0.01394053 1.02435411
December 2023........ 0.01319812 0.98310585
January 2024......... 0.01247936 0.94231903
February 2024........ 0.01178360 0.90198919
March 2024........... 0.01111023 0.86211191
April 2024........... 0.01045862 0.82268280
May 2024............. 0.00982818 0.78369754
June 2024............ 0.00921833 0.74515181
July 2024............ 0.00862849 0.70704137
August 2024.......... 0.00805812 0.66936200
September 2024....... 0.00750667 0.63210952
October 2024......... 0.00697363 0.59527978
November 2024........ 0.00645848 0.55886869
December 2024........ 0.00596072 0.52287219
January 2025......... 0.00547987 0.48728625
February 2025........ 0.00501545 0.45210688
March 2025........... 0.00456700 0.41733013
</TABLE>
S-54
<PAGE>
TARGETED BALANCES
AS A PERCENTAGE OF CUT-OFF DATE AGGREGATE PRINCIPAL BALANCE (CONTINUED)
<TABLE>
<CAPTION>
DISTRIBUTION 400% SPA 175% SPA
DATE TARGETED BALANCE TARGETED BALANCE
- --------------------- ---------------- ----------------
% %
<S> <C> <C>
April 2025........... 0.00413408 0.38295209
May 2025............. 0.00371624 0.34896889
June 2025............ 0.00331306 0.31537668
July 2025............ 0.00292412 0.28217167
August 2025.......... 0.00254903 0.24935007
September 2025....... 0.00218738 0.21690816
October 2025......... 0.00183879 0.18484224
November 2025........ 0.00150290 0.15314865
December 2025........ 0.00117932 0.12182375
<CAPTION>
DISTRIBUTION 400% SPA 175% SPA
DATE TARGETED BALANCE TARGETED BALANCE
- --------------------- ---------------- ----------------
<S> <C> <C>
% %
January 2026......... 0.00086771 0.09086395
February 2026........ 0.00056773 0.06026569
March 2026........... 0.00027903 0.03002544
April 2026........... 0.00000130 0.00013971
May 2026............. 0.00000006 0.00000658
June 2026............ 0.00000003 0.00000327
July 2026
and thereafter...... 0.00000000 0.00000000
</TABLE>
The following tables set forth for each Distribution Date the scheduled
Class A Subclass Principal Balance for each Subclass of the Scheduled
Certificates and the Scheduled Component Principal Balance of each Class A-6
Component and the Class A-7 Accrual Component, each expressed as a percentage of
the initial Class A Subclass Principal Balance or Component Principal Balance,
as the case may be.
SCHEDULED CLASS A SUBCLASS PRINCIPAL BALANCES
AS PERCENTAGE OF THE INITIAL CLASS A SUBCLASS PRINCIPAL BALANCE
CLASS A-1 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
BALANCE
----------------%
98.23882317
DISTRIBUTION DATE 96.26034158
- --------------------- 94.06508247
91.65368555
August 1996.......... 89.02690300
September 1996....... 86.18559904
October 1996......... 83.13074981
November 1996........ 79.86344272
December 1996........ 76.38487616
January 1997......... PERCENTAGE OF
February 1997........ INITIAL CLASS A
March 1997........... SUBCLASS
April 1997........... PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
May 1997............. 72.69635869
June 1997............ 68.79930842
July 1997............ 64.69525213
August 1997.......... 60.38582446
September 1997....... 55.87276682
October 1997......... 51.15792631
November 1997........ 46.24325462
December 1997........ 41.13080657
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
DISTRIBUTION DATE BALANCE
- --------------------- ----------------
<S> <C>
%
January 1998......... 35.82273892
February 1998........ 30.32130880
March 1998........... 24.62887219
April 1998........... 18.74788223
May 1998............. 12.68088769
June 1998............ 6.43053081
July 1998
and thereafter...... 0.00000000
</TABLE>
CLASS A-2 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
BALANCE
DISTRIBUTION ----------------%
DATE
- --------------------- 100.00000000
99.99939835
Up to and including 91.24534621
June 1998............ 82.25963014
July 1998............ 73.04622041
August 1998.......... PERCENTAGE OF
September 1998....... INITIAL CLASS A
October 1998......... SUBCLASS
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
November 1998........ 63.87630604
December 1998........ 54.75262783
January 1999......... 45.67495188
February 1999........ 36.64307233
March 1999........... 27.65675739
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
April 1999........... 18.71577672
May 1999............. 9.81990107
June 1999............ 0.96890243
July 1999
and thereafter...... 0.00000000
</TABLE>
S-55
<PAGE>
SCHEDULED CLASS A SUBCLASS PRINCIPAL BALANCES
AS PERCENTAGE OF THE INITIAL CLASS A SUBCLASS PRINCIPAL BALANCE (CONTINUED)
CLASS A-3 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
BALANCE
DISTRIBUTION ----------------%
DATE
- --------------------- 100.00000000
92.94828933
Up to and including 85.06478352
June 1999............ 77.22104676
July 1999............ 69.41687819
August 1999.......... PERCENTAGE OF
September 1999....... INITIAL CLASS A
October 1999......... SUBCLASS
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
November 1999........ 61.65207820
December 1999........ 53.92644801
January 2000......... 46.23979010
February 2000........ 38.59190790
March 2000........... 30.98260591
April 2000........... 23.41168969
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
May 2000............. 15.87896583
June 2000............ 8.38424196
July 2000............ 0.92732674
August 2000
and thereafter...... 0.00000000
</TABLE>
CLASS A-4 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
BALANCE
DISTRIBUTION ----------------%
DATE
- --------------------- 100.00000000
91.61218477
Up to and including 82.07459569
July 2000............ 72.58512272
August 2000.......... PERCENTAGE OF
September 2000....... INITIAL CLASS A
October 2000......... SUBCLASS
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
November 2000........ 63.14352399
December 2000........ 53.74955880
January 2001......... 44.40298777
February 2001........ 35.10357282
March 2001........... 25.85107717
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
April 2001........... 16.64526533
May 2001............. 7.48590299
June 2001
and thereafter...... 0.00000000
</TABLE>
CLASS A-5 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
PRINCIPAL
BALANCE
DISTRIBUTION ----------------%
DATE
- --------------------- 100.00000000
99.25369487
Up to and including 95.09520741
May 2001............. 91.03876449
June 2001............ 87.00289715
July 2001............ 82.98749966
August 2001.......... 78.99246682
September 2001....... 75.01769400
October 2001......... 71.06307710
November 2001........ PERCENTAGE OF
December 2001........ INITIAL CLASS A
January 2002......... SUBCLASS
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
February 2002........ 67.12851261
March 2002........... 63.21389749
April 2002........... 59.31912930
May 2002............. 55.44410609
June 2002............ 51.58872650
July 2002............ 47.75288965
August 2002.......... 43.96265521
September 2002....... 40.19160600
October 2002......... 36.43964269
November 2002........ 32.70666650
<CAPTION>
PERCENTAGE OF
INITIAL CLASS A
SUBCLASS
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
December 2002........ 28.99257918
January 2003......... 25.29728292
February 2003........ 21.62068048
March 2003........... 17.96267512
April 2003........... 14.32317060
May 2003............. 10.70207117
June 2003............ 7.09928162
July 2003............ 3.51470716
August 2003
and thereafter...... 0.00000000
</TABLE>
S-56
<PAGE>
SCHEDULED COMPONENT PRINCIPAL BALANCES
AS PERCENTAGE OF INITIAL COMPONENT PRINCIPAL BALANCE
CLASS A-6 A SCHEDULED COMPONENT
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
PRINCIPAL
BALANCE
----------------%
DISTRIBUTION
DATE 98.23882317
- --------------------- 96.26034158
94.06508247
August 1996.......... 91.65368555
September 1996....... 89.02690300
October 1996......... 86.18559904
November 1996........ 83.13074981
December 1996........ 79.86344272
January 1997......... 76.38487616
February 1997........ PERCENTAGE OF
March 1997........... INITIAL
April 1997........... COMPONENT
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
May 1997............. 72.69635869
June 1997............ 68.79930842
July 1997............ 64.69525213
August 1997.......... 60.38582446
September 1997....... 55.87276682
October 1997......... 51.15792631
November 1997........ 46.24325462
December 1997........ 41.13080657
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
January 1998......... 35.82273892
February 1998........ 30.32130880
March 1998........... 24.62887219
April 1998........... 18.74788223
May 1998............. 12.68088769
June 1998............ 6.43053081
July 1998
and thereafter...... 0.00000000
</TABLE>
CLASS A-6 B SCHEDULED COMPONENT
SCHEDULE I
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
PRINCIPAL
BALANCE
----------------%
DISTRIBUTION
DATE 99.69244414
- --------------------- 99.31407109
98.86510999
August 1996.......... 98.34587258
September 1996....... 97.75675295
October 1996......... 97.09822764
November 1996........ 96.37085511
December 1996........ 95.57527567
January 1997......... 94.71221056
February 1997........ 93.78246170
March 1997........... 92.78691075
April 1997........... 91.72651816
May 1997............. 90.60232236
June 1997............ 89.41543863
July 1997............ 88.16705775
August 1997.......... 86.85844475
September 1997....... 85.49093739
October 1997......... 84.06594479
November 1997........ 82.58494552
December 1997........ 81.04948593
January 1998......... 79.46117824
February 1998........ 77.82169860
March 1998........... 76.13278496
April 1998........... 74.39623492
May 1998............. 72.61390339
June 1998............ 70.78770036
July 1998............ 68.91958830
August 1998.......... 67.07707019
September 1998....... 65.26065888
October 1998......... PERCENTAGE OF
November 1998........ INITIAL
December 1998........ COMPONENT
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
January 1999......... 63.47012708
February 1999........ 61.70525566
March 1999........... 59.96582077
April 1999........... 58.25160009
May 1999............. 56.56237331
June 1999............ 54.89792164
July 1999............ 53.25802819
August 1999.......... 51.64247767
September 1999....... 50.05105663
October 1999......... 48.48355315
November 1999........ 46.93975708
December 1999........ 45.41945998
January 2000......... 43.92245499
February 2000........ 42.44853692
March 2000........... 40.99750228
April 2000........... 39.56914902
May 2000............. 38.16327696
June 2000............ 36.77968724
July 2000............ 35.41818280
August 2000.......... 34.07856804
September 2000....... 32.76064894
October 2000......... 31.46423307
November 2000........ 30.18912949
December 2000........ 28.93514881
January 2001......... 27.70210315
February 2001........ 26.48980614
March 2001........... 25.29807290
April 2001........... 24.12671998
May 2001............. 22.97556550
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
June 2001............ 21.84442900
July 2001............ 20.73313142
August 2001.......... 19.68113284
September 2001....... 18.64839414
October 2001......... 17.63474047
November 2001........ 16.63999841
December 2001........ 15.66399604
January 2002......... 14.70656270
February 2002........ 13.76752913
March 2002........... 12.84672752
April 2002........... 11.94399131
May 2002............. 11.05915526
June 2002............ 10.19205556
July 2002............ 9.34252961
August 2002.......... 8.52291032
September 2002....... 7.72041084
October 2002......... 6.93487314
November 2002........ 6.16614037
December 2002........ 5.41405698
January 2003......... 4.67846872
February 2003........ 3.95922252
March 2003........... 3.25616667
April 2003........... 2.56915053
May 2003............. 1.89802479
June 2003............ 1.24264136
July 2003............ 0.60285326
August 2003
and thereafter...... 0.00000000
</TABLE>
CLASS A-6 B SCHEDULED COMPONENT
SCHEDULE II
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
PRINCIPAL
BALANCE
DISTRIBUTION ----------------%
DATE
- --------------------- 100.0000000
99.99722128
Up to and including 93.39548352
July 2003............ 86.82684852
August 2003.......... 80.29114253
September 2003....... 73.78819266
October 2003......... PERCENTAGE OF
November 2003........ INITIAL
December 2003........ COMPONENT
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
January 2004......... 67.31782705
February 2004........ 60.87987460
March 2004........... 54.47416516
April 2004........... 48.10052943
May 2004............. 41.75879908
June 2004............ 35.44880652
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
July 2004............ 29.17038515
August 2004.......... 23.01326762
September 2004....... 16.88648081
October 2004......... 10.78986436
November 2004........ 4.72325876
December 2004........ 0.00000000
</TABLE>
S-57
<PAGE>
SCHEDULED COMPONENT PRINCIPAL BALANCES
AS PERCENTAGE OF INITIAL COMPONENT PRINCIPAL BALANCE (CONTINUED)
CLASS A-7 ACCRUAL COMPONENT
<TABLE>
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
PRINCIPAL
BALANCE
----------------%
DISTRIBUTION
DATE 99.89747921
- --------------------- 99.77139690
99.62183676
August 1996.......... 99.44891897
September 1996....... 99.25280021
October 1996......... 99.03367359
November 1996........ 98.79176860
December 1996........ 98.52735082
January 1997......... 98.24072174
February 1997........ 97.93221840
March 1997........... 97.60221294
April 1997........... 97.25111220
May 1997............. 96.87935714
June 1997............ 96.48742220
July 1997............ 96.07581467
August 1997.......... 95.64507390
September 1997....... 95.19577049
October 1997......... 94.72850542
November 1997........ 94.24390912
December 1997........ 93.74264040
January 1998......... 93.22538544
February 1998........ 92.69285666
March 1998........... 92.14579152
April 1998........... 91.58495129
May 1998............. 91.01111976
June 1998............ 90.42510194
July 1998............ 89.82772264
August 1998.......... 89.24123889
September 1998....... 88.66575923
October 1998......... 88.10114845
November 1998........ 87.54727496
December 1998........ 87.00400638
January 1999......... 86.47121174
February 1999........ 85.94876153
March 1999........... 85.43652761
April 1999........... 84.93438323
May 1999............. 84.44220302
June 1999............ 83.95986296
July 1999............ 83.48724040
August 1999.......... 83.02421399
September 1999....... 82.57066373
October 1999......... 82.12647090
November 1999........ 81.69151808
December 1999........ 81.26568912
January 2000......... 80.84886916
February 2000........ 80.44094456
March 2000........... 80.04180296
April 2000........... 79.65133318
May 2000............. 79.26942529
June 2000............ 78.89597053
July 2000............ 78.53086138
August 2000.......... 78.17399145
September 2000....... 77.82525554
October 2000......... 77.48454959
November 2000........ 77.15177070
December 2000........ 76.82681707
January 2001......... PERCENTAGE OF
February 2001........ INITIAL
March 2001........... COMPONENT
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
April 2001........... 76.50958805
May 2001............. 76.19998409
June 2001............ 75.89790671
July 2001............ 75.60325856
August 2001.......... 75.32939897
September 2001....... 75.06268419
October 2001......... 74.80302018
November 2001........ 74.55031394
December 2001........ 74.30447347
January 2002......... 74.06540782
February 2002........ 73.83302704
March 2002........... 73.60724217
April 2002........... 73.38796524
May 2002............. 73.17510925
June 2002............ 72.96858818
July 2002............ 72.76831696
August 2002.......... 72.57839035
September 2002....... 72.39448970
October 2002......... 72.21653314
November 2002........ 72.04443968
December 2002........ 71.87812925
January 2003......... 71.71752266
February 2003........ 71.56254163
March 2003........... 71.41310874
April 2003........... 71.26914746
May 2003............. 71.13058210
June 2003............ 70.99733784
July 2003............ 70.86934069
August 2003.......... 70.75396938
September 2003....... 69.45080421
October 2003......... 68.16048126
November 2003........ 66.88287920
December 2003........ 65.61787783
January 2004......... 64.36535805
February 2004........ 63.12520189
March 2004........... 61.89729247
April 2004........... 60.68151401
May 2004............. 59.47775180
June 2004............ 58.28589219
July 2004............ 57.10582262
August 2004.......... 55.96248302
September 2004....... 54.83031580
October 2004......... 53.70921532
November 2004........ 52.59907694
December 2004........ 51.49979698
January 2005......... 50.41127276
February 2005........ 49.33340252
March 2005........... 48.26608550
April 2005........... 47.20922182
May 2005............. 46.16271260
June 2005............ 45.12645983
July 2005............ 44.10036645
August 2005.......... 43.10684421
September 2005....... 42.12284501
October 2005......... 41.14828021
November 2005........ 40.18306198
<CAPTION>
PERCENTAGE OF
INITIAL
COMPONENT
DISTRIBUTION PRINCIPAL
DATE BALANCE
- --------------------- ----------------
<S> <C>
%
December 2005........ 39.22710331
January 2006......... 38.28031798
February 2006........ 37.34262057
March 2006........... 36.41392647
April 2006........... 35.49415182
May 2006............. 34.58321354
June 2006............ 33.68102935
July 2006............ 32.78751770
August 2006.......... 31.90259778
September 2006....... 31.02618957
October 2006......... 30.15821375
November 2006........ 29.29859175
December 2006........ 28.44724572
January 2007......... 27.60409852
February 2007........ 26.76907376
March 2007........... 25.94209571
April 2007........... 25.12308937
May 2007............. 24.31198040
June 2007............ 23.50869520
July 2007............ 22.71316080
August 2007.......... 21.92530492
September 2007....... 21.14505595
October 2007......... 20.37234295
November 2007........ 19.60709562
December 2007........ 18.84924432
January 2008......... 18.09872006
February 2008........ 17.35545445
March 2008........... 16.61937978
April 2008........... 15.89042893
May 2008............. 15.16853543
June 2008............ 14.45363341
July 2008............ 13.74565759
August 2008.......... 13.04454333
September 2008....... 12.35022655
October 2008......... 11.66264378
November 2008........ 10.98173216
December 2008........ 10.30742936
January 2009......... 9.63967368
February 2009........ 8.97840395
March 2009........... 8.32355957
April 2009........... 7.67508052
May 2009............. 7.03290733
June 2009............ 6.39698107
July 2009............ 5.76724335
August 2009.......... 5.14363633
September 2009....... 4.52610271
October 2009......... 3.91458571
November 2009........ 3.30902907
December 2009........ 2.70937708
January 2010......... 2.11557449
February 2010........ 1.52756662
March 2010........... 0.94529926
April 2010........... 0.36871871
May 2010
and thereafter...... 0.00000000
</TABLE>
S-58
<PAGE>
DISTRIBUTIONS IN REDUCTION OF THE CLASS A SUBCLASS PRINCIPAL BALANCE OF THE
CLASS A-17 CERTIFICATES
GENERAL. As to distributions of principal among holders of Class A-17
Certificates, Deceased Holders((1)) of such Subclass will be entitled to first
priority and Beneficial Owners other than Deceased Holders (the "Living
Holders") of such Subclass will be entitled to a second priority. Beneficial
Owners of the Class A-17 Certificates have the right to request that
distributions in reduction of principal balance be made with respect to their
Certificates on each Distribution Date on which distributions in reduction of
the Class A Subclass Principal Balance are made with respect to the Class A-17
Certificates. All such requested distributions with respect to such Subclass are
subject to the priorities described below under "-- Priority of Requested
Distributions" and are further subject to the limitations that they be made (i)
only in lots equal to integral multiples of $1,000 of initial principal balance
(each $1,000 initial principal balance, an "Individual Class A-17 Certificate")
and (ii) only to the extent that the portion of the Class A Principal
Distribution Amount allocated to such Subclass on the applicable Distribution
Date (plus any amounts available from the Rounding Account for such Subclass)
provides sufficient funds for such requested distributions. To the extent that
amounts available for distributions in respect of principal of the Class A-17
Certificates on any Distribution Date exceed the aggregate requests by Deceased
Holders and Living Holders for principal distributions applicable to such
Distribution Date, such excess amounts will be distributed to the Beneficial
Owners of Class A-17 Certificates by random lot, as described below under "--
Mandatory Distributions of Principal on Class A-17 Certificates."
On each Distribution Date on which amounts are available for distributions
in reduction of the principal balance of the Class A-17 Certificates, the
aggregate amount allocable to such distributions will be rounded, as necessary,
to an amount equal to an integral multiple of $1,000, except as provided below,
in accordance with the priorities and limitations set forth herein. Such
rounding will be accomplished on the first Distribution Date on which
distributions in reduction of the principal balance of the Class A-17
Certificates are made by withdrawing, from a non-interest bearing account to be
established on the Closing Date for such Subclass with a $999.99 deposit by
Lehman Brothers (the "Rounding Account"), the amount of funds, if any, needed to
round the amount otherwise available for such distribution with respect to such
Subclass upward to the next higher integral multiple of $1,000. On each
succeeding Distribution Date on which distributions in reduction of the
principal balance of the Class A-17 Certificates are to be made, the aggregate
amount allocable to such Subclass will be applied first to repay any funds
withdrawn from the Rounding Account on the prior Distribution Date, and then the
remainder of such allocable amount, if any, will be similarly rounded
- ------------------------
((1)) A "Deceased Holder" is a Beneficial Owner of a Class A-17 Certificate who
was living at the time such interest was acquired and whose executor or
other authorized representative causes to be furnished to DTC evidence of
death satisfactory to the Trust Administrator and any tax waivers
requested by the Trust Administrator. Class A-17 Certificates beneficially
owned by tenants by the entirety, joint tenants or tenants in common will
be considered to be beneficially owned by a single owner. The death of a
tenant by the entirety, joint tenant or tenant in common will be deemed to
be the death of the Beneficial Owner, and the Class A-17 Certificates so
beneficially owned will be eligible for priority with respect to
distributions in reduction of principal balance, subject to the
limitations stated herein. The Class A-17 Certificates beneficially owned
by a trust will be considered to be beneficially owned by each beneficiary
of the trust to the extent of such beneficiary's beneficial interest
therein, but in no event will a trust's beneficiaries collectively be
deemed to be Beneficial Owners of a number of Individual Class A-17
Certificates greater than the number of Individual Class A-17 Certificates
of which such trust is the owner. The death of a beneficiary of a trust
will be deemed to be the death of a Beneficial Owner of the Class A-17
Certificates beneficially owned by the trust to the extent of such
beneficiary's beneficial interest in such trust. The death of an
individual who was a tenant by the entirety, joint tenant or tenant in
common in a tenancy which is the beneficiary of a trust will be deemed to
be the death of the beneficiary of the trust. The death of a person who,
during his or her lifetime, was entitled to substantially all of the
beneficial ownership interests in Class A-17 Certificates will be deemed
to be the death of the Beneficial Owner of such Certificates regardless of
the registration of ownership, if such beneficial interest can be
established to the satisfaction of the Trust Administrator. Such
beneficial interest will be deemed to exist in typical cases of street
name or nominee ownership, ownership by a trustee, ownership under the
Uniform Gifts to Minors Act and community property or other joint
ownership arrangements between a husband and wife. Beneficial interest
shall include the power to sell, transfer or otherwise dispose of a Class
A-17 Certificate and the right to receive the proceeds therefrom, as well
as interest and distributions in reduction of principal balance payable
with respect thereto. As used in this Prospectus Supplement, a request for
a distribution in reduction of the principal balance of a Class A-17
Certificate by a Deceased Holder shall mean a request by the personal
representative, surviving tenant by the entirety, surviving joint tenant
or a surviving tenant in common of the Deceased Holder.
S-59
<PAGE>
upward through another withdrawal from the Rounding Account and distributed in
reduction of the principal balance of such Subclass. This process will continue
on succeeding Distribution Dates until the outstanding principal balance of the
Class A-17 Certificates has been reduced to zero. Thus, the aggregate
distribution made in reduction of the principal balance of the Class A-17
Certificates on each Distribution Date may be slightly more or less than would
be the case in the absence of such rounding procedures, but such difference will
be no more than $999.99 for such Subclass on such Distribution Date. Under no
circumstances will the sum of all distributions made in reduction of the
principal balance of the Class A-17 Certificates, through any Distribution Date,
be less than the sum for such Subclass that would have resulted in the absence
of such rounding procedures.
There is no assurance that a Beneficial Owner of a Class A-17 Certificate
who has submitted a request for such distribution will receive such distribution
at any particular time after such distribution is requested, since there can be
no assurance that funds will be available for making such distributions on any
particular Distribution Date, or, even if funds are available for making such
distributions in reduction of the Class A Subclass Principal Balance of such
Subclass, that such distributions with respect to Class A-17 Certificates owned
by any particular Beneficial Owner will be made. Also, due to the procedure for
mandatory distributions described below, there can be no assurance that on any
Distribution Date on which the funds available for distribution in respect of
principal of the Class A-17 Certificates exceed the aggregate amount of
distributions requested by Beneficial Owners of Class A-17 Certificates, any
particular Beneficial Owner will receive a principal distribution from such
excess funds. Thus, the timing of distributions in reduction of the principal
balance with respect to any particular Class A-17 Certificate is highly
uncertain and may be made earlier or later than the date that may be desired by
a Beneficial Owner of such Certificate.
Notwithstanding any provisions herein to the contrary, on each Distribution
Date following the first Distribution Date on which any principal losses are
allocated to the Class A Certificateholders occurring on or after the earliest
to occur of (i) the Cross-Over Date, (ii) the date on which Special Hazard
Losses exceed the Special Hazard Loss Amount, (iii) the date on which Fraud
Losses exceed the Fraud Loss Amount and (iv) the date on which Bankruptcy Losses
exceed the Bankruptcy Loss Amount, distributions in reduction of the principal
balance of the Class A-17 Certificates (including amounts paid in respect of
such losses under the Policy) will be made pro rata among the holders of Class
A-17 Certificates and will not be made in integral multiples of $1,000 or
pursuant to requested distributions or mandatory distributions by random lot.
PRIORITY OF REQUESTED DISTRIBUTIONS. Subject to the limitations described
herein, including the order of the receipt of the request for distributions as
described below under "-- Procedure for Requested Distributions." Beneficial
Owners of the Class A-17 Certificates have the right to request that
distributions be made in reduction of the principal balances of their
Certificates. On each Distribution Date on which distributions in reduction of
the Class A Subclass Principal Balance of the Class A-17 Certificates are made,
such distributions will be made in the following order of priority: (i) any
request by a Deceased Holder, in an amount up to but not exceeding an aggregate
principal balance of $100,000 per request; and (ii) any request by a Living
Holder, in an amount up to but not exceeding an aggregate principal balance of
$10,000 per request. Thereafter, distributions will be made as provided in
clauses (i) and (ii) above up to a second $100,000 and $10,000, respectively.
This sequence of priorities will be repeated for each request for principal
distributions made by the Beneficial Owners of Class A-17 Certificates until all
such requests have been honored.
PROCEDURE FOR REQUESTED DISTRIBUTIONS. A Beneficial Owner may request that
distributions in reduction of the principal balance of its Class A-17
Certificates be made on a Distribution Date by delivering a written request
therefor, to the Participant or Indirect Participant that maintains its account
in the Class A-17 Certificates such that the request for such distribution is
received by the Trust Administrator on or before the Record Date for such
Distribution Date. In the case of a request on behalf of a Deceased Holder,
appropriate evidence of death and any tax waivers are required to be forwarded
to the Trust Administrator under separate cover. Furthermore, such requests of
Deceased Holders which are incomplete may not be honored by the Trust
Administrator. The Participant should
S-60
<PAGE>
in turn make the request of DTC (or, in the case of an Indirect Participant,
such firm must notify the related Participant of such request, which Participant
should make the request of DTC) on a form required by DTC and provided to the
Participant. Upon receipt of such request, DTC will date and time stamp such
request and forward such request to the Trust Administrator. DTC may establish
such procedures as it deems fair and equitable to establish the order of receipt
of requests for such distributions received by it on the same day. Neither the
Master Servicer, the Trustee nor the Trust Administrator shall be liable for any
delay by DTC, any Participant or any Indirect Participant in the delivery of
requests for distributions to the Trust Administrator. The Master Servicer will
instruct the Trust Administrator that requests for distributions are to be
honored in the order of their receipt (subject to the priorities described
above). The exact procedures to be followed by the Trust Administrator for
purposes of determining the order of receipt of such requests will be those
established from time to time by the Trust Administrator, acting in conjunction
with DTC. Requests for distributions in reduction of principal balance received
by DTC and forwarded to the Trust Administrator after the Record Date for such
Distribution Date and requests for distributions received in a timely manner but
not accepted with respect to a given Distribution Date, will be treated as
requests for distributions on the next succeeding Distribution Date and each
succeeding Distribution Date thereafter until each request is accepted or is
withdrawn as described below. Each request for distributions in reduction of the
principal balance of a Class A-17 Certificate submitted by a Beneficial Owner of
such Certificate will be held by the Trust Administrator until such request has
been accepted or has been withdrawn in writing. Each Individual Class A-17
Certificate Certificate covered by such request will continue to bear interest
at the related Pass-Through Rate through the Record Date for such Distribution
Date.
With respect to Class A-17 Certificates as to which Beneficial Owners have
requested distributions on a particular Distribution Date on which distributions
in reduction of the Class A Subclass Principal Balance of such Subclass are
being made, DTC and its Participants will be notified prior to such Distribution
Date whether, and the extent to which, such Certificates have been accepted for
distributions. Participants and Indirect Participants holding Class A-17
Certificates are required to forward such notices to the Beneficial Owners of
such Certificates. Individual Class A-17 Certificates or Certificates which have
been accepted for a distribution will be due and payable on the applicable
Distribution Date and will cease to bear interest after the Record Date for such
Distribution Date.
Any Beneficial Owner of a Class A-17 Certificate which has requested a
distribution may withdraw its request by so notifying in writing the Participant
or Indirect Participant that maintains such Beneficial Owner's account. In the
event that such account is maintained by an Indirect Participant, such Indirect
Participant must notify the related Participant which in turn must forward the
withdrawal of such request, on a form required by DTC, to the Trust
Administrator. If such notice of withdrawal of a request for distribution has
not been received by the Trust Administrator on or before the Record Date for
such Distribution Date, the previously made request for distribution will be
irrevocable with respect to the making of distributions in reduction of the
principal balance of such Subclass on the applicable Distribution Date.
MANDATORY DISTRIBUTIONS OF PRINCIPAL ON CLASS A-17 CERTIFICATES. To the
extent, if any, that distributions in reduction of the Class A Subclass
Principal Balance of the Class A-17 Certificates on a Distribution Date exceed
the outstanding principal balance of such Subclass with respect to which
distribution requests have been received by the applicable date, additional
Class A-17 Certificates in lots equal to Individual Class A-17 Certificates will
be selected to receive principal distributions in accordance with the
then-applicable established random lot procedures of DTC, and the
then-applicable established procedures of the Participants and Indirect
Participants, which may or may not be by random lot. Investors may ask such
Participants or Indirect Participants what allocation procedures they use.
Participants and Indirect Participants holding Class A-17 Certificates selected
for mandatory distributions in reduction of the principal balance are required
to provide notice of such mandatory distributions to the affected Beneficial
Owners.
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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 1996-1 Certificates, after distributions in respect of any
accrued but unpaid interest on the Series 1996-1 Certificates and after
distributions in reduction of principal balance have reduced the principal
balances of the Series 1996-1 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 1996-1 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 1996-1 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 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.
THE FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the provisions of the financial guaranty insurance
policy covering the Class A-17 Certificates to be issued by Financial Security
(the "Policy") does not purport to be complete and is qualified in its entirety
by reference to the Policy, a copy of which may be obtained from the Trust
Administrator upon request.
Simultaneously with the issuance of the Series 1996-1 Certificates,
Financial Security will deliver the Policy to the Trustee for the benefit of
each holder of Class A-17 Certificates. Under the Policy, Financial Security
unconditionally and irrevocably guarantees to the Trustee for the benefit of
each holder of Class A-17 Certificates the full and complete payment of (i) the
Class A Subclass Interest Accrual Amount determined without regard to clause (b)
of the definition thereof for such Subclass,
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net of any Non-Supported Interest Shortfalls allocated to such Subclass that are
covered by the Reserve Fund and (ii) any losses of principal allocated to such
Subclass (clauses (i) and (ii) collectively, the "Guaranteed Distributions") and
(iii) the amount of any distribution of principal or interest to any holder of a
Class A-17 Certificate which distribution subsequently is avoided in whole or in
part as a preference payment under applicable law.
If, on the second Business Day preceding any Distribution Date, the Trust
Administrator determines that funds expected to be in the Certificate Account on
such Distribution Date will be insufficient to make the Guaranteed Distributions
on the Class A-17 Certificates for that Distribution Date, the Trust
Administrator is required to make a claim under the Policy in the amount of such
deficiency. Payment of claims under the Policy will be made by Financial
Security following Receipt by Financial Security of the appropriate notice for
payment on the later to occur of (a) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment and (b) 12:00
noon, New York City time, on the date on which such Guaranteed Distribution is
due to be distributed on the Class A-17 Certificates.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, Financial Security shall cause such payment to be made on the latter
of (a) the date when due to be paid pursuant to the Order referred to below or
(b) the first to occur of (i) the fourth Business Day following Receipt by
Financial Security from the Trust Administrator of (A) a certified copy of the
order (the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the relevant Class A-17 Certificateholders are
required to return principal or interest distributed with respect to such
Subclass during the term of the Policy because such distributions were avoidable
preferences under applicable bankruptcy law, (B) a certificate of each relevant
Class A-17 Certificateholder that the Order has been entered and is not subject
to any stay and (C) an assignment duly executed and delivered by each relevant
Certificateholder, in such form as is reasonably required by Financial Security
and provided to the relevant Class A-17 Certificateholders by Financial
Security, irrevocably assigning to Financial Security all rights and claims of
the Certificateholder relating to or arising under the Class A-17 Certificates
held by such Certificateholder against the debtor which made such preference
payment or otherwise with respect to such preference payment or (ii) the date of
Receipt by Financial Security from the Trust Administrator of the items referred
to in clauses (A), (B) and (C) above if, at least four Business Days prior to
such date of Receipt, Financial Security shall have Received written notice from
the Trust Administrator that such items were to be delivered on such date and
such date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order and not to the Trustee, the Trust Administrator or any Class A-17
Certificateholder directly (unless such Certificateholder has previously paid
such amount to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order, in which case such payment shall be disbursed to
the Trust Administrator for distribution to such Certificateholder upon proof of
such payment reasonably satisfactory to Financial Security). In connection with
the foregoing, Financial Security shall have certain rights of subrogation as
described in the Pooling and Servicing Agreement.
The terms "Receipt" and "Received," with respect to the Policy, mean actual
delivery to Financial Security and to Financial Security's fiscal agent, if any,
prior to 12:00 noon, New York City time, on a Business Day; delivery either on a
day that is not a Business Day or after 12:00 noon, New York City time, will be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Policy by the Trust Administrator is not in proper
form or is not properly completed, executed or delivered, it will be deemed not
to have been Received, and Financial Security or its fiscal agent will promptly
so advise the Trust Administrator and the Trust Administrator may submit an
amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of New York, New
York or St. Paul, Minnesota are authorized or obligated by law or executive
order to be closed.
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"Term of the Policy" means the period from and including the date of
issuance of the Policy to and including the date on which (i) the Class A
Subclass Principal Balance of the Class A-17 Certificates is reduced to zero,
(ii) any period during which any payment on the Class A-17 Certificates could
have been avoided in whole or in part as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law has expired, and (iii) if
any proceedings requisite to avoidance as a preference payment have been
commenced prior to the occurrence of (i) and (ii), a final and nonappealable
order in resolution of each such proceeding has been entered.
Financial Security's obligations under the Policy in respect of Guaranteed
Distributions will be discharged to the extent funds are transferred to the
Trust Administrator as provided in the Policy whether or not such funds are
properly applied by the Trust Administrator.
Financial Security will be subrogated to the rights of each holder of a
Class A-17 Certificate to receive distributions on the Class A-17 Certificates,
as applicable, to the extent of any payment by Financial Security under the
Policy.
Claims under the Policy will rank equally with any other unsecured and
unsubordinated obligations of Financial Security except for certain obligations
in respect of tax and other payments to which preference is or may become
afforded by statute. The terms of the Policy cannot be modified or altered by
any other agreement or instrument, or by the merger, consolidation or
dissolution of the Seller. The Policy may not be cancelled or revoked prior to
payment in full of the Class A-17 Certificates. The Policy is not covered by the
property/casualty insurance security fund specified in Article 76 of the New
York Insurance Law. The Policy is governed by the laws of the State of New York.
FINANCIAL SECURITY ASSURANCE INC.
GENERAL. Financial Security Assurance Inc. ("Financial Security") is a
monoline insurance company incorporated in 1984 under the laws of the State of
New York. Financial Security is licensed to engage in financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities -- thereby enhancing the credit rating of those securities
- -- in consideration for the payment of a premium to the insurer. Financial
Security and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
U.S. WEST Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd.
No shareholder of Holdings is obligated to pay any debt of Financial Security or
any claim under any insurance policy issued by Financial Security or to make any
additional contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that location
is (212) 826-0100.
REINSURANCE. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by
Financial Security or any of its domestic operating insurance company
subsidiaries are reinsured among such companies on an agreed-upon percentage
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substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, Financial
Security reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is utilized
by Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance policy.
RATING OF CLAIMS-PAYING ABILITY. Financial Security's claims-paying ability
is rated "Aaa" by Moody's Investors Services, Inc. and "AAA" by S&P, Nippon
Investors Service Inc. and Standard & Poor's (Australia) Pty. Ltd. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
CAPITALIZATION. The following table sets forth the capitalization of
Financial Security and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------
(UNAUDITED)
<S> <C>
Unearned Premium Reserve (net of prepaid reinsurance
premiums).................................................. $340,226
------------------
Shareholder's Equity:
Common Stock.............................................. 15,000
Additional Paid-In Capital................................ 681,470
Unrealized Loss on Investments (net of deferred income
taxes)................................................... (737)
Accumulated Earnings...................................... 83,444
------------------
Total Shareholder's Equity.................................. $779,177
------------------
Total Unearned Premium Reserve and Shareholder's Equity..... 1$,119,403
------------------
------------------
</TABLE>
For further information concerning Financial Security, see the Consolidated
Financial Statements of Financial Security and Subsidiaries, and the notes
thereto, incorporated by reference herein. Copies of the statutory quarterly and
annual statements filed with the State of New York Insurance Department by
Financial Security are available upon request to the State of New York Insurance
Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. The consolidated financial
statements of Financial Security and its subsidiaries for the year ended
December 31, 1995 included as an exhibit to the Annual Report on Form 10-K for
the year ended December 31, 1995 and the unaudited financial statements of
Financial Security for the three month period ended March 31, 1996 included as
an exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, each of which has been filed with the Securities and Exchange Commission
by Holdings, are hereby incorporated by reference in this Prospectus Supplement.
All financial statements of Financial Security and subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Certificates shall be deemed to be incorporated by reference
into this Prospectus Supplement and to be a part hereof from the respective
dates of filing such documents.
INSURANCE REGULATION. Financial Security is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, Financial Security and
its insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, Financial Security is subject to Article 69 of the New York Insurance
Law which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each insurer
maintain a
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minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R AND CLASS A-LR 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 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, or an
estate or trust that is subject to U.S. 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
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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.
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 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
Certificates, any Class A Subclass Interest Shortfall Amount arising with
respect to each Subclass on such Distribution Date, any remaining unpaid Class A
Subclass Interest Shortfall Amount with respect to each Subclass, after giving
effect to such distribution and any Non-Supported Interest Shortfall or the
interest portion of Realized Losses allocable to such Subclass 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
Balances of the Class A-6 A Scheduled Component, the Class A-6 B Scheduled
Component, the Class A-7 Accrual Component, the Class A-7 PO Component, the
Class A-8 A Component and the Class A-8 B Component, the Class A Subclass
Principal Balance of each Subclass of Class A Certificates after giving effect
to the distribution of principal and the allocation of the principal portion of
Realized Losses to such Subclass 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 for the following Distribution Date (without
giving effect to partial prepayments and net Partial Liquidation Proceeds
received after the Determination Date in the current month that are applied as
of the Due Date occurring in such month), 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. 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 -- Trustee" herein.
SUBORDINATION OF CLASS B 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
Financial Security, 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 B Certificates)
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 B Certificates) protection against Realized Losses,
as more fully described below. If Realized Losses exceed the credit support
provided through subordination to the Class A 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 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 and Financial Security to receive, prior to any distribution being made
on a Distribution Date in respect of the Class B Certificates, the amounts of
principal and interest due the Class A Certificateholders and the Premium
Payment due Financial Security on each Distribution Date out of the Pool
Distribution Amount with respect to such date and, if necessary, by the right of
such holders and Financial Security to receive future distributions on the
Mortgage Loans that would otherwise have been payable to the
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holders of 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 Subclasses 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 Senior Optimal Amount and the Class
A-7 PO Component Deferred Amount 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 Class B Certificates are entitled
has been reduced to zero as a result of the allocation of losses to the Class B
Certificates, i.e., the date on which the Class B Percentage has been reduced 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.
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 Subclass of Class B Certificates then-
outstanding in such amount as is necessary to cause the sum of the Class A
Subclass Principal Balances and the Class B Subclass Principal Balances to equal
the Adjusted Pool Amount.
Allocations to the 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 partial principal prepayments and net Partial
Liquidation Proceeds 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 as described above under "-- Distributions."
Solely for the purpose of allocating the interest portion of any Realized
Loss, including any Excess Special Hazard Losses, Excess Fraud Losses and Excess
Bankruptcy Losses, to the Class A Certificates as described herein, the Premium
Payment will be treated as though it represented the interest accrued on an
additional Subclass of Class A Certificates. Accordingly, the Premium Payment
will be reduced by its pro rata portion of any such loss allocated to the Class
A Certificates.
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-7 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-7 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-6, Class A-7 and Class A-8 Certificates) the Class A-6
Components, the Class A-7 Accrual Component and the Class A-8 Components 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
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case of the Class A-7 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-7 Certificates will be
allocated among the Class A-7 Components (other than the Class A-7 PO Component)
pro rata in accordance with their 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-7 Certificates with respect to the Class A-7 PO Component) and 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-7 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 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-7 Certificates with respect to the Class A-7 PO
Component) will be allocated among the outstanding Subclasses of Class A
Certificates (other than the Class A-6, Class A-7 and Class A-8 Certificates)
the Class A-6 Components, the Class A-7 Accrual Component and the Class A-8
Components 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-7 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-7 and Class A-18
Certificates) and the Class A-7 Components (other than the Class A-7 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 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 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-7 Certificates) and the Class A-7 Certificates to the extent of the
Class A-7 Accrual 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 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 Class B Certificates until the the Class B Principal
Balance has been reduced to zero. 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-7 PO Component) and Class B Certificates and (ii) to the extent such
Excess Special Hazard Losses arise with respect to Discount Mortgage Loans, the
Class A-7 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
S-69
<PAGE>
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-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 1996-1 Certificates, the "Special Hazard Loss Amount" with respect
thereto will be equal to approximately 1.00% (approximately $5,548,517) 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 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
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 Class B Certificates until the Class B Principal Balance has been reduced to
zero. 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-7 PO Component) and Class B Certificates and (ii) to the extent
such Excess Fraud Losses arise with respect to Discount Mortgage Loans, the
Class A-7 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 1996-1
Certificates, the "Fraud Loss Amount" with respect thereto will be equal to
approximately 2.00% (approximately $11,097,033) 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 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 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 Class B Certificates until the Class B Principal Balance has been
reduced to zero. 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-7 PO Component) and Class B
Certificates and (ii) to the extent such Excess Bankruptcy Losses arise with
respect to Discount Mortgage Loans, the Class A-7 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 Amount, no Bankruptcy
Losses
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<PAGE>
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 1996-1 Certificates, the "Bankruptcy Loss Amount" with
respect thereto will be equal to approximately 0.04% (approximately $206,884) 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
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 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 Certificates by Fitch and S&P. 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 initial principal balance of the Class B Certificates in the
aggregate will be approximately $33,291,970, the risk of Special Hazard Losses,
Fraud Losses and Bankruptcy Losses will be separately borne by the Class B
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 they will bear to the full extent of their
initial principal balance. 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.
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<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 2,042
promissory notes, to have an aggregate unpaid principal balance as of the
Cut-Off Date (the "Cut-Off Date Aggregate Principal Balance") of approximately
$554,851,652 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 one of the Mortgage Loans in the
Trust Estate, representing approximately 0.04% of the Cut-Off Date Aggregate
Principal Balance of the Mortgage Loans will be secured by Co-op Shares and that
12 of the Mortgage Loans, representing approximately 0.66% of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans, will be Buy-Down 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 $19,957 or more than
approximately $1,951,167, and the average unpaid principal balance of the
Mortgage Loans is expected to be approximately $271,720. The latest stated
maturity date of any of the Mortgage Loans is expected to be July 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, 1,950 of the Mortgaged Properties, which secure
approximately 95.91% of the Cut-Off Date Aggregate Principal Balance of the
Mortgage Loans, are expected to be owner occupied primary residences, 91 of the
Mortgaged Properties, which secure approximately 4.08% of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans, are expected to be non-
- ------------------------
(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 1996-1 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
1996-1 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-72
<PAGE>
owner occupied or second homes and one of the Mortgaged Properties, which
secures approximately 0.01% of the Cut-Off Date Aggregate Principal Balance of
the Mortgage Loans, is expected to be an investor property. See "The Mortgage
Loan Programs -- Mortgage Loan Underwriting" in the Prospectus.
It is expected that eight of the Mortgage Loans representing approximately
0.46% of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans will
be subject to subsidy agreements, which, except under certain limited
circumstances, require the employers of the related mortgagors to make a portion
of the payments on the related Mortgage Loans (each, a "Subsidy Loan") for
specified periods. The Subsidy Loans were underwritten by PHMC. The subsidy
agreements relating to the Subsidy Loans generally will provide that 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 payments being provided by the employer of the mortgagors in
advance, generally on an annual basis. Subsidy Loans are offered by employers
generally through either a graduated or fixed subsidy loan program, or a
combination thereof. The effective subsidized rates under the various programs
offered generally range from one to five percentage points below the interest
rate specified in the related mortgage note. These subsidized rates are used to
calculate the applicable debt-to-income ratios that are used to evaluate the
creditworthiness of prospective borrowers. This procedure may enable certain
mortgagors who otherwise would not meet the Underwriting Guidelines to obtain
mortgage loans. See "Prepayment and Yield Considerations" herein.
Subsidy amounts paid by the employer will be deposited by Norwest Mortgage
in an account (the "Subsidy Account") maintained by Norwest Mortgage, which will
not be part of the Trust Estate or the REMIC. Funds in the Subsidy Account with
respect to each Subsidy Loan will be withdrawn by Norwest Mortgage and deposited
in the Servicer Custodial Account on the business day following the receipt by
Norwest Mortgage of the mortgagor's monthly payment to which such funds relate.
Funds in the Subsidy Account with respect to a Subsidy Loan will not be
withdrawn by Norwest Mortgage, and are not permitted to be applied under the
related subsidy agreement, during any period in which such Subsidy Loan is in
default. Despite the existence of the subsidy agreement, the mortgagor remains
liable for making all scheduled payments on a Subsidy Loan. From time to time,
the amount of a subsidy payment or the term of a subsidy agreement may, upon the
request of a corporate employer, be modified.
As of the Cut-Off Date, there were 692 Discount Mortgage Loans having an
aggregate unpaid principal balance of approximately $203,213,372, a range of
unpaid principal balances of approximately $19,957 to approximately $647,958, an
average unpaid principal balance of approximately $293,661, a range of interest
rates from 6.250% to 7.750% per annum, a weighted average interest rate of
approximately 7.463% per annum, a range of remaining terms to stated maturity of
237 months to 359 months, a weighted average remaining term to stated maturity
of approximately 355 months, a range of original Loan-to-Value Ratios of 9.17%
to 95.00%, a weighted average original Loan-to-Value Ratio of approximately
74.38% 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 32.39% in California,
9.48% in New York and 8.24% in New Jersey.
As of the Cut-Off Date, there were 1,350 Premium Mortgage Loans having an
aggregate unpaid principal balance of approximately $351,638,280, a range of
unpaid principal balances of approximately $29,961 to approximately $1,951,167,
an average unpaid principal balance of approximately $260,473, a range of
interest rates from 7.875% to 9.750% per annum, a weighted average interest rate
of approximately 8.324% per annum, a range of remaining terms to stated maturity
of 227 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 26.67% to 95.00%, a weighted average original Loan-to-Value Ratio of
approximately 76.85% and the following geographic concentration of Mortgaged
Properties securing Mortgage Loans in excess of 5.00% of the aggregate unpaid
principal balance of the Mortgage Loans other than Discount Mortgage Loans:
approximately 37.97% in California, 9.64% in New York, 7.09% in New Jersey and
5.55% in Florida.
S-73
<PAGE>
The Mortgage Loans 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 97.14% (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") and 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 0.04% and 0.89% (by Cut-Off Date Aggregate Principal Balance) of
the Mortgage Loans (the "Pool Certification Underwritten Loans") will have been
reviewed by GEMICO and UGRIC, respectively, to ensure compliance with such
company's credit, appraisal and underwriting standards. Neither the Series
1996-1 Certificates nor any of the Mortgage Loans are insured or guaranteed
under a mortgage pool insurance policy issued by GEMICO and 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 1.93% (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 73.19% (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 GEMICO or UGRIC. Approximately
26.81% (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 "-- Mortgage Underwriting Standards" below and "The
Mortgage Loan Programs -- Mortgage Loan Underwriting" in the Prospectus.
S-74
<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>
6.250%............................. 1 $ 295,163.25 0.05 %
6.500%............................. 3 815,573.48 0.15
6.875%............................. 15 3,626,481.50 0.65
7.000%............................. 22 6,038,560.71 1.09
7.125%............................. 53 14,825,623.40 2.67
7.250%............................. 87 27,624,855.96 4.98
7.375%............................. 109 31,737,981.19 5.72
7.500%............................. 138 41,326,355.90 7.45
7.625%............................. 106 31,098,179.46 5.60
7.750%............................. 158 45,824,596.67 8.26
7.875%............................. 193 58,871,531.70 10.61
8.000%............................. 151 40,250,135.83 7.25
8.125%............................. 115 31,880,853.95 5.75
8.250%............................. 192 51,185,788.59 9.23
8.375%............................. 158 42,102,371.85 7.59
8.500%............................. 167 42,870,043.84 7.73
8.625%............................. 125 31,404,665.99 5.66
8.750%............................. 99 24,112,985.99 4.35
8.875%............................. 67 13,323,759.32 2.40
9.000%............................. 40 7,979,825.74 1.44
9.125%............................. 16 2,632,230.38 0.47
9.250%............................. 14 2,894,705.63 0.52
9.375%............................. 7 1,061,440.07 0.19
9.500%............................. 5 573,172.45 0.10
9.750%............................. 1 494,769.06 0.09
----- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Interest Rate of the
Mortgage Loans is expected to be approximately 8.008% 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 as set forth in the
Pooling and Servicing Agreement, 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 7.738% per annum.
S-75
<PAGE>
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>
227................................ 1 $ 148,660.98 0.03 %
237................................ 4 1,126,609.54 0.20
238................................ 5 1,400,957.66 0.25
239................................ 5 1,339,132.27 0.24
269................................ 1 206,043.38 0.04
271................................ 1 386,807.63 0.07
272................................ 3 894,375.12 0.16
273................................ 3 827,635.16 0.15
277................................ 1 188,597.51 0.03
278................................ 1 232,313.83 0.04
280................................ 1 342,590.89 0.06
298................................ 1 220,706.85 0.04
316................................ 1 249,546.22 0.04
326................................ 1 203,144.32 0.04
328................................ 1 1,951,166.86 0.35
339................................ 1 187,529.05 0.03
342................................ 1 107,055.06 0.02
344................................ 3 726,500.16 0.13
346................................ 2 316,279.70 0.06
347................................ 3 488,203.48 0.09
348................................ 7 1,861,346.90 0.34
349................................ 6 1,061,167.47 0.19
350................................ 14 4,395,823.94 0.79
351................................ 9 2,408,242.72 0.43
352................................ 27 7,305,352.74 1.32
353................................ 15 3,674,934.76 0.66
354................................ 57 12,787,047.01 2.30
355................................ 61 15,788,289.23 2.85
356................................ 185 49,444,215.60 8.91
357................................ 626 165,467,245.35 29.82
358................................ 698 196,787,461.75 35.48
359................................ 296 82,273,668.77 14.83
360................................ 1 53,000.00 0.01
----- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans is expected to be approximately 356 months.
S-76
<PAGE>
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>
1988............................... 1 $ 206,043.38 0.04 %
1989............................... 10 2,872,320.14 0.52
1992............................... 1 249,546.22 0.04
1993............................... 2 2,154,311.18 0.39
1994............................... 3 617,149.22 0.11
1995............................... 143 34,701,235.23 6.25
1996............................... 1,882 514,051,046.54 92.65
----- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
It is expected that the earliest month and year of origination of any
Mortgage Loan was November 1988 and the latest month and year of origination was
May 1996.
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........................ 88 $ 25,790,091.28 4.65 %
50.01- 55.00%...................... 44 11,558,948.57 2.08
55.01- 60.00%...................... 68 18,916,974.95 3.41
60.01- 65.00%...................... 95 27,610,978.76 4.98
65.01- 70.00%...................... 177 52,576,450.14 9.48
70.01- 75.00%...................... 266 73,591,270.64 13.26
75.01- 80.00%...................... 854 226,363,041.52 40.79
80.01- 85.00%...................... 56 15,792,474.72 2.85
85.01- 90.00%...................... 303 80,597,923.09 14.53
90.01- 95.00%...................... 91 22,053,498.24 3.97
----- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----- --------------- -------
----- --------------- -------
</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 9.17% and 95.00%,
respectively, and the weighted average Loan-to-Value Ratio at origination of the
Mortgage Loans is expected to be approximately 75.94%. 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 120 of the Mortgage
Loans having Loan-to-Value Ratios at origination in excess of 80%, representing
approximately 5.94% (by Cut-Off Date Aggregate Principal Balance) of the
Mortgage Loans, were originated without primary mortgage insurance.
S-77
<PAGE>
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................. 1,295 $392,821,228.02 70.80 %
Asset and Mortgage Verification.... 443 74,254,252.73 13.38
Income and Mortgage Verification... 81 22,952,927.26 4.14
Asset Verification................. 28 8,698,054.02 1.57
Income Verification................ 0 0.00 0.00
Mortgage Verification.............. 181 53,288,480.05 9.60
Preferred Processing............... 14 2,836,709.83 0.51
----- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----- --------------- -------
----- --------------- -------
</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."
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..... 362 $ 41,469,990.30 7.47 %
$200,001-$250,000.................. 541 124,747,859.89 22.48
$250,001-$300,000.................. 510 139,152,155.64 25.09
$300,001-$350,000.................. 259 84,092,032.25 15.16
$350,001-$400,000.................. 165 61,776,359.75 11.13
$400,001-$450,000.................. 75 31,917,526.29 5.75
$450,001-$500,000.................. 66 31,784,740.12 5.73
$500,001-$550,000.................. 24 12,643,940.81 2.28
$550,001-$600,000.................. 24 13,758,948.07 2.48
$600,001-$650,000.................. 8 5,066,987.07 0.91
$700,001-$750,000.................. 1 749,533.83 0.14
$850,001-$900,000.................. 2 1,746,123.79 0.31
$950,001-$1,000,000................ 4 3,994,287.24 0.72
Over $ 1 Million................... 1 1,951,166.86 0.35
----- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans is expected to be approximately $271,720. 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 60.51%
and 80.00%, respectively. See "The Trust Estates -- Mortgage Loans" in the
Prospectus.
S-78
<PAGE>
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............. 1,922 $529,296,731.31 95.39 %
Two- to four-family units.......... 7 1,971,383.78 0.36
Condominiums
High-rise (greater than four
stories)........................ 20 4,844,498.58 0.87
Low-rise (four stories or
less)........................... 64 11,496,761.86 2.07
Planned unit developments.......... 24 6,006,466.94 1.08
Townhouses......................... 4 1,028,959.27 0.19
Cooperative Units.................. 1 206,850.17 0.04
----- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
S-79
<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............................ 5 $ 1,372,149.96 0.25 %
Arizona............................ 47 11,935,920.24 2.15
Arkansas........................... 3 1,002,152.09 0.18
California......................... 687 199,334,130.83 35.93
Colorado........................... 64 15,509,892.14 2.80
Connecticut........................ 49 13,305,134.52 2.40
Delaware........................... 7 1,849,168.73 0.33
District of Columbia............... 7 1,905,129.31 0.34
Florida............................ 108 24,751,301.83 4.46
Georgia............................ 44 10,641,474.85 1.92
Hawaii............................. 27 11,528,193.06 2.08
Idaho.............................. 8 1,726,246.55 0.31
Illinois........................... 34 10,641,411.59 1.92
Indiana............................ 4 1,232,771.08 0.22
Iowa............................... 4 1,304,871.26 0.24
Kansas............................. 1 238,090.98 0.04
Kentucky........................... 2 567,826.88 0.10
Louisiana.......................... 7 2,198,588.49 0.40
Maine.............................. 2 499,015.14 0.09
Maryland........................... 59 16,771,718.03 3.02
Massachusetts...................... 66 16,256,224.35 2.93
Michigan........................... 12 3,849,783.05 0.69
Minnesota.......................... 50 13,599,997.41 2.45
Mississippi........................ 3 721,515.86 0.13
Missouri........................... 2 493,558.67 0.09
Montana............................ 4 1,133,740.60 0.20
Nebraska........................... 5 1,000,478.42 0.18
Nevada............................. 26 6,722,673.88 1.21
New Hampshire...................... 2 452,356.68 0.08
New Jersey......................... 156 41,702,331.61 7.52
New Mexico......................... 12 3,190,276.26 0.57
New York........................... 217 53,174,911.02 9.58
North Carolina..................... 19 5,001,301.55 0.90
North Dakota....................... 1 141,655.00 0.03
Ohio............................... 13 3,444,517.13 0.62
Oklahoma........................... 7 1,708,651.06 0.31
Oregon............................. 33 8,877,959.06 1.60
Pennsylvania....................... 45 10,372,640.59 1.87
Rhode Island....................... 9 2,205,573.43 0.40
South Carolina..................... 5 1,111,779.24 0.20
South Dakota....................... 1 284,653.46 0.05
Tennessee.......................... 16 4,966,834.96 0.90
Texas.............................. 65 17,524,817.37 3.16
Utah............................... 21 5,630,375.63 1.01
Vermont............................ 3 831,968.38 0.15
Virginia........................... 52 14,597,808.37 2.63
Washington......................... 23 6,472,898.80 1.17
Wisconsin.......................... 3 542,065.93 0.10
Wyoming............................ 2 523,116.58 0.09
----------- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----------- --------------- -------
----------- --------------- -------
</TABLE>
No more than approximately 0.97% 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.
S-80
<PAGE>
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 Affiliates............ 1,122 $317,447,250.57 57.21 %
Other Originators.................. 920 237,404,401.34 42.79
----- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----- --------------- -------
----- --------------- -------
</TABLE>
No single "Other Originator" is expected to have accounted for more than
5.00% of the Mortgage Loan 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........................... 1,154 $291,431,033.69 52.52 %
Equity Take Out Refinance.......... 174 47,695,414.96 8.60
Rate/Term Refinance................ 714 215,725,203.26 38.88
----- --------------- -------
Total...................... 2,042 $554,851,651.91 100.00 %
----- --------------- -------
----- --------------- -------
</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.
SUBSIDY LOAN PROGRAMS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
PROGRAM AND TERM LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
Fixed (five years or longer)....... 0 $ 0.00 0.00 %
(less than five years)........... 0 0.00 0.00
Graduated (five years or longer)... 3 992,678.47 0.18
(less than five years)........... 5 1,538,856.79 0.28
Combination (five years or
longer)........................... 0 0.00 0.00
(less than five years)........... 0 0.00 0.00
-
--------------- ---
Total...................... 8 $ 2,531,535.26 0.46 %
-
-
--------------- ---
--------------- ---
</TABLE>
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 1996-1
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
S-81
<PAGE>
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
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.
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 Norwest Mortgage's mortgage loan servicing portfolio
which were originated by Norwest Mortgage for its own account or the account of
an affiliate, which were acquired by Norwest Mortgage for its own account or for
the account of an affiliate or as to which Norwest Mortgage acquired the
servicing rights (other than from PHMC) (the "NMI Portfolio Loans"), (ii)
conventional mortgage loans included in PHMC's mortgage loan servicing portfolio
prior to the PHMC Acquisition (the "PHMC Portfolio Loans"), (iii) the PHMC
Portfolio Loans which are fixed interest rate mortgage loans ("Fixed PHMC
Portfolio Loans"), including, in both cases, mortgage loans originated in
connection with the purchases of residences by relocated employees ("Relocation
Mortgage Loans") and (iv) the Fixed PHMC Portfolio Loans other than the
Relocation Mortgage Loans ("Fixed Non-relocation PHMC Portfolio Loans"). As a
consequence of the PHMC Acquisition, all of the PHMC Portfolio Loans became
serviced or subserviced by Norwest Mortgage on May 7, 1996. 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 PHMC. There
can be no assurance that the delinquency, foreclosure and loan loss experience
set forth with respect to the PHMC Portfolio Loans or NMI 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 PHMC Portfolio Loans or
Fixed Non-relocation PHMC 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. Furthermore,
there can be no assurance that the future experience on the Mortgage Loans
generally or the Mortgage Loans serviced by Norwest Mortgage, all of which are
fixed interest rate mortgage loans having original terms to stated maturity of
ranging from approximately 20 to approximately 30 years.
Historically, Relocation Mortgage Loans, which constitute a significant
percentage of the PHMC Portfolio Loans, have experienced a significantly lower
rate of delinquency and foreclosure than other mortgage loans included in the
PHMC Portfolio Loans and Fixed PHMC 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
S-82
<PAGE>
approximately 20 to approximately 30 years and none of which are Relocation
Mortgage Loans, will be comparable to that of the NMI Portfolio Loans, the PHMC
Portfolio Loans, the Fixed PHMC Portfolio Loans or the Fixed Non-relocation PHMC
Portfolio Loans.
The following tables reflect rapid growth during recent periods in Norwest
Mortgage's mortgage loan servicing portfolio as a result of the substantially
higher volume of new loan originations and acquisitions of recently originated
mortgage 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
NMI Portfolio Loans could rise significantly above the rates indicated in the
following tables. In addition, because PHMC ceased the mortgage loan origination
and acquisition business subsequent to the PHMC Acquisition, the levels of
delinquencies, foreclosures and loan losses as percentages of the portfolios of
PHMC Portfolio Loans, Fixed PHMC Portfolio Loans and Fixed Non-relocation PHMC
Portfolio Loans could rise significantly above the rates indicated in the
following tables.
S-83
<PAGE>
TOTAL NMI PORTFOLIO LOANS
<TABLE>
<CAPTION>
BY NO. BY NO. BY NO.
OF LOANS OF LOANS OF LOANS
----------- ----------- -----------
AS OF AS OF AS OF
DECEMBER DECEMBER MARCH 31
31, 1994 31, 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Total NMI Portfolio Loans.......................... 391,838 555,855 594,028
----------- ----------- -----------
----------- ----------- -----------
Period of Delinquency (1)
30 to 59 days.................................... 5,271 8,397 7,076
60 to 89 days.................................... 924 1,653 1,459
90 days or more.................................. 778 1,476 1,303
----------- ----------- -----------
Total Delinquent Loans............................. 6,973 11,526 9,838
----------- ----------- -----------
----------- ----------- -----------
Percent of NMI Portfolio Loans..................... 1.78% 2.07% 1.66%
<CAPTION>
AS OF AS OF AS OF
DECEMBER DECEMBER MARCH 31,
31, 1994 31, 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Foreclosures (2)................................... 1,717 2,312 2,656
Foreclosure Ratio (3).............................. 0.44% 0.42% 0.45%
<CAPTION>
THREE
MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER DECEMBER MARCH 31,
31, 1994 31, 1995 1996
----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss) (4)................................ $ 2,693 $ 4,699 $ 975
Net Gain (Loss) Ratio (5).......................... (0.008)% (0.009)% (0.002)%
</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-84
<PAGE>
TOTAL PHMC 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 MARCH 31 1996
---------------------- ---------------------- ----------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total PHMC
Portfolio
Loans............ 379,075 $62,175,544 423,895 $65,496,977 428,254 $65,575,478
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Period of
Delinquency (1)
30 to 59 days... 3,548 $ 548,524 5,103 $ 710,246 4,013 $ 566,761
60 to 89 days... 797 128,053 959 141,847 825 123,728
90 days or
more........... 1,418 308,124 729 122,554 604 103,732
--------- ----------- --------- ----------- --------- -----------
Total Delinquent
Loans............ 5,763 $ 984,701 6,791 $ 974,647 5,442 $ 794,221
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Percent of PHMC
Portfolio
Loans............ 1.52% 1.58% 1.60% 1.49% 1.27% 1.21%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures (2)........................ $ 354,028 $ 360,645 $ 365,839
Foreclosure Ratio (3)................... 0.57% 0.55% 0.56%
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss) (4)..................... $ (194,481) $ (228,953) $ (48,376)
Net Gain (Loss) Ratio (5)............... (0.31)% (0.35)% (0.07)%
</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-85
<PAGE>
FIXED PHMC 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 MARCH 31, 1996
---------------------- ---------------------- ----------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Fixed PHMC
Portfolio
Loans............ 307,975 $48,602,956 358,021 $53,576,591 365,459 $54,375,836
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Period of
Delinquency (1)
30 to 59 days... 2,708 $ 389,236 4,101 $ 528,824 3,259 $ 430,156
60 to 89 days... 591 87,687 743 98,269 647 87,053
90 days or
more........... 965 188,414 545 82,595 446 70,081
--------- ----------- --------- ----------- --------- -----------
Total Delinquent
Loans............ 4,264 $ 665,337 5,389 $ 709,688 4,352 $ 587,290
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Percent of Fixed
PHMC Portfolio
Loans............ 1.38% 1.37% 1.51% 1.32% 1.19% 1.08%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures (2)........................ $ 208,253 $ 218,951 $ 222,949
Foreclosure Ratio (3)................... 0.43% 0.41% 0.41%
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss) (4)..................... $ (133,071) $ (164,753) $ (34,015)
Net Gain (Loss) Ratio (5)............... (0.27)% (0.31)% (0.06)%
</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-86
<PAGE>
FIXED NON-RELOCATION PHMC 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 MARCH 31, 1996
---------------------- ---------------------- ----------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Fixed Non-
relocation PHMC
Portfolio
Loans............ 262,159 $41,589,441 303,943 $45,251,942 310,267 $45,839,965
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Period of
Delinquency (1)
30 to 59 days... 2,424 $ 350,629 3,658 $ 470,877 2,956 $ 391,228
60 to 89 days... 539 80,843 679 89,665 606 81,541
90 days or
more........... 903 179,493 498 76,452 414 65,790
--------- ----------- --------- ----------- --------- -----------
Total Delinquent
Loans............ 3,866 $ 610,965 4,835 $ 636,994 3,976 $ 538,559
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Percent of Fixed
Non-relocation
PHMC Portfolio
Loans............ 1.47% 1.47% 1.59% 1.41% 1.28% 1.17%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures (2)........................ $ 199,379 $ 208,865 $ 214,724
Foreclosure Ratio (3)................... 0.48% 0.46% 0.47%
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss) (4)..................... $ (131,339) $ (161,830) $ (32,140)
Net Gain (Loss) Ratio (5)............... (0.32)% (0.36)% (0.07)%
</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-87
<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 and
PHMC'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 of the Offered Certificates, the aggregate amount of distributions on
any Subclass of the Offered Certificates and the yield to maturity of any
Subclass 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-7 Certificates with respect to the Class A-7 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-7 Certificates in proportion to the interest of the Class A-7 PO
Component in such Discount Mortgage Loan represented by the PO Fraction.
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
S-88
<PAGE>
under "Prepayment and Yield Considerations"), no assurance can be given as to
such rate or the rate of principal payments on any Subclass of the Offered
Certificates or the aggregate amount of distributions on any Subclass 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.
The effect of subsidy agreements on the rate of prepayment of Subsidy Loans
is uncertain. The rate of prepayment on Subsidy Loans may be affected by such
factors as the relationship between prevailing mortgage rates and the effective
interest rates on such Subsidy Loans, the remaining term of the subsidy
agreements, and requests by the related employers for refinance or modification.
The subsidy agreement relating to a Subsidy Loan generally provides that if
prevailing market rates of interest on mortgage loans similar to such Subsidy
Loan decline relative to the Mortgage Interest Rate of such Subsidy Loan by the
percentage set forth in the subsidy agreement, the employer may request that the
mortgagor refinance such Subsidy Loan. In the event the mortgagor refinances
such Subsidy Loan, the Subsidy Loan will be prepaid, and the new loan will not
be included in the Trust Estate. If the mortgagor fails to refinance such
Subsidy Loan, the employer may terminate the related subsidy agreement. In
addition, the termination of the subsidy agreement relating to a Subsidy Loan
for any reason (whether due to the mortgagor's failure to refinance or
otherwise) may increase the financial burden of the mortgagor, who may not have
otherwise qualified for a mortgage under Norwest Mortgage's mortgage loan
underwriting guidelines, and may consequently increase the risk of default with
respect to the related Mortgage Loan. See "The Trust Estates -- Mortgage Loans"
and "The Mortgage Loan Programs -- Mortgage Loan Underwriting" in the
Prospectus. From time to time, the amount of the subsidy payment or the term of
the subsidy agreement may, upon the request of the corporate employer, be
modified.
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,
S-89
<PAGE>
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 1996-1
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 THE CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT,
PARTICULARLY THE CLASS A-18 CERTIFICATES, 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. 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 FOR INVESTORS PURCHASING OFFERED CERTIFICATES AT
A PREMIUM. 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 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 the Class B
Certificates. See "Description of the Certificate -- Interest" and "Servicing of
the Mortgage Loans -- Anticipated Changes in Servicing."
The yield to maturity on the Offered 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 and floods, which may adversely affect property values.
Any deterioration in housing prices in California, as well as in New York, New
Jersey 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.
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 of Offered
Certificates. An investor is urged to make an investment decision with respect
to any Subclass of Offered Certificates based on the anticipated yield to
maturity of such Subclass 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. The extent to which any Subclass
of Offered Certificates are purchased at a discount or a premium and the degree
to which such Subclass is sensitive to the timing of prepayments will determine
the extent to which the yield to maturity of such Subclass may vary from the
anticipated yield. An investor should
S-90
<PAGE>
carefully consider the associated risks, including, in the case of any Subclass
of Offered Certificates purchased at a discount, particularly the Class A-18
Certificates, 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 of Offered
Certificates purchased at a premium 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 or, in the case of the Class A-18 Certificates,
the anticipated yield thereon. 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.
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
CERTIFICATE WERE TAXED AS DEBT INSTRUMENTS, OR MAY BE NEGATIVE.
As referred to herein, the weighted average life of a Subclass of the
Offered Certificates refers to the average amount of time that will elapse from
the date of issuance of such Subclass until each dollar in reduction of the
principal balance of such Subclass is distributed to the investor. The weighted
average life of each Subclass 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.
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 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, "175% SPA" assumes
prepayment rates equal to 175% 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,
that (i) that the Trust Estate consists of 11 Mortgage Loans 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
S-91
<PAGE>
on the Mortgage Loans will be timely received on the first day of each month
(with no defaults), commencing in August 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
July 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 1996-1 Certificates will be issued on July 25, 1996,
(vii) distributions to Certificateholders will be made on the 25th day of each
month, commencing in August 1996 and (viii) distributions on the Class A-17
Certificates on each Distribution Date will be made pro rata to the holders of
the Class A-17 Certificates based on their respective Percentage Interests in
such Subclass and without rounding or the benefit of the Rounding Account.
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
REMAINING ORIGINAL
TERM TO TERM TO
PRINCIPAL BALANCE MASTER STATED STATED
AS OF THE CUT-OFF MORTGAGE SERVICING SERVICING MATURITY MATURITY
DATE INTEREST RATE FEE FEE (IN MONTHS) (IN MONTHS)
------------------ --------------- ----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loan 1............. $ 1,842,869.43 7.3459550000% 0.25% 0.02% 238 240
Mortgage Loan 2............. 2,172,491.02 8.0401834141 0.25 0.02 238 240
Mortgage Loan 3............. 52,432,362.39 7.1446005788 0.25 0.02 357 360
Mortgage Loan 4............. 147,529,251.45 7.5751067821 0.25 0.02 357 360
Mortgage Loan 5............. 1,408,888.25 7.6972202506 0.25 0.02 281 360
Mortgage Loan 6............. 177,205,365.10 8.0554491718 0.25 0.02 357 360
Mortgage Loan 7............. 4,073,332.67 8.0920924803 0.25 0.02 302 360
Mortgage Loan 8............. 139,666,391.65 8.5330893772 0.25 0.02 357 360
Mortgage Loan 9............. 26,391,318.37 8.9788618225 0.25 0.02 357 360
Mortgage Loan 10............ 53,000.00 9.3750000000 0.25 0.02 360 360
Mortgage Loan 11............ 2,076,381.58 9.4988620860 0.25 0.02 358 360
</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 Offered Certificates, the actual weighted average lives of the
Subclasses of Offered Certificates and the date on which the Class A Subclass
Principal Balance of any Subclass of Offered Certificates is reduced to zero.
Based upon the foregoing assumptions, the following tables indicate the
weighted average life of each Subclass of Offered Certificates, and set forth
the percentages of the initial Class A Subclass Principal Balance of each such
Subclass that would be outstanding after each of the dates shown at constant
percentages of SPA presented.
S-92
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
DISTRIBUTION --------------------------------------------------------------- ------------------------
DATE 0% 100% 175% 300% 500% 0% 100%
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ --------------------------------------------------------------- ------------------------
Initial............................. 100 100 100 100 100
100 100
July 1997........................... 65 65 65 65 65
100 100
July 1998........................... 17 0 0 0 0
100 100
July 1999........................... 0 0 0 0 0
53 0
July 2000........................... 0 0 0 0 0
0 0
July 2001........................... 0 0 0 0 0
0 0
July 2002........................... 0 0 0 0 0
0 0
July 2003........................... 0 0 0 0 0
0 0
July 2004........................... 0 0 0 0 0
0 0
July 2005........................... 0 0 0 0 0
0 0
July 2006........................... 0 0 0 0 0
0 0
July 2007........................... 0 0 0 0 0
0 0
July 2008........................... 0 0 0 0 0
0 0
July 2009........................... 0 0 0 0 0
0 0
July 2010........................... 0 0 0 0 0
0 0
July 2011........................... 0 0 0 0 0
0 0
July 2012........................... 0 0 0 0 0
0 0
July 2013........................... 0 0 0 0 0
0 0
July 2014........................... 0 0 0 0 0
0 0
July 2015........................... 0 0 0 0 0
0 0
July 2016........................... 0 0 0 0 0
0 0
July 2017........................... 0 0 0 0 0
0 0
July 2018........................... 0 0 0 0 0
0 0
July 2019........................... 0 0 0 0 0
0 0
July 2020........................... 0 0 0 0 0
0 0
July 2021........................... 0 0 0 0 0
0 0
July 2022........................... 0 0 0 0 0
0 0
July 2023........................... 0 0 0 0 0
0 0
July 2024........................... 0 0 0 0 0
0 0
July 2025........................... 0 0 0 0 0
0 0
July 2026........................... 0 0 0 0 0
0 0
Weighted Average
Life (years) (1).................. 1.33 1.24 1.24 1.24 1.22 3.08 2.50
<CAPTION>
CLASS A-3
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION --------------------------------------------------
DATE 175% 300% 500% 0% 100% 175% 300%
<S> <C>
- ------------------------------------ --------------------------------------------------
Initial.............................
100 100 100
100 100 100 100
July 1997...........................
100 100 100
100 100 100 100
July 1998...........................
100 100 34
100 100 100 100
July 1999...........................
0 0 0
100 93 93 29
July 2000...........................
0 0 0
80 1 1 0
July 2001...........................
0 0 0
8 0 0 0
July 2002...........................
0 0 0
0 0 0 0
July 2003...........................
0 0 0
0 0 0 0
July 2004...........................
0 0 0
0 0 0 0
July 2005...........................
0 0 0
0 0 0 0
July 2006...........................
0 0 0
0 0 0 0
July 2007...........................
0 0 0
0 0 0 0
July 2008...........................
0 0 0
0 0 0 0
July 2009...........................
0 0 0
0 0 0 0
July 2010...........................
0 0 0
0 0 0 0
July 2011...........................
0 0 0
0 0 0 0
July 2012...........................
0 0 0
0 0 0 0
July 2013...........................
0 0 0
0 0 0 0
July 2014...........................
0 0 0
0 0 0 0
July 2015...........................
0 0 0
0 0 0 0
July 2016...........................
0 0 0
0 0 0 0
July 2017...........................
0 0 0
0 0 0 0
July 2018...........................
0 0 0
0 0 0 0
July 2019...........................
0 0 0
0 0 0 0
July 2020...........................
0 0 0
0 0 0 0
July 2021...........................
0 0 0
0 0 0 0
July 2022...........................
0 0 0
0 0 0 0
July 2023...........................
0 0 0
0 0 0 0
July 2024...........................
0 0 0
0 0 0 0
July 2025...........................
0 0 0
0 0 0 0
July 2026...........................
0 0 0
0 0 0 0
Weighted Average
Life (years) (1).................. 2.50 2.40 2.00 4.47 3.50 3.50 2.92
<CAPTION>
DISTRIBUTION
DATE 500%
- ------------------------------------
Initial.............................
100
July 1997...........................
100
July 1998...........................
100
July 1999...........................
0
July 2000...........................
0
July 2001...........................
0
July 2002...........................
0
July 2003...........................
0
July 2004...........................
0
July 2005...........................
0
July 2006...........................
0
July 2007...........................
0
July 2008...........................
0
July 2009...........................
0
July 2010...........................
0
July 2011...........................
0
July 2012...........................
0
July 2013...........................
0
July 2014...........................
0
July 2015...........................
0
July 2016...........................
0
July 2017...........................
0
July 2018...........................
0
July 2019...........................
0
July 2020...........................
0
July 2021...........................
0
July 2022...........................
0
July 2023...........................
0
July 2024...........................
0
July 2025...........................
0
July 2026...........................
0
Weighted Average
Life (years) (1).................. 2.29
</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).
S-93
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-4 CLASS A-5
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
DISTRIBUTION --------------------------------------------------------------- ----------------------
DATE 0% 100% 175% 300% 500% 0% 100%
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ --------------------------------------------------------------- ----------------------
Initial............................. 100 100 100 100 100
100 100
July 1997........................... 100 100 100 100 100
100 100
July 1998........................... 100 100 100 100 100
100 100
July 1999........................... 100 100 100 100 0
100 100
July 2000........................... 100 100 100 0 0
100 100
July 2001........................... 100 0 0 0 0
100 95
July 2002........................... 9 0 0 0 0
100 48
July 2003........................... 0 0 0 0 0
54 4
July 2004........................... 0 0 0 0 0
1 0
July 2005........................... 0 0 0 0 0
0 0
July 2006........................... 0 0 0 0 0
0 0
July 2007........................... 0 0 0 0 0
0 0
July 2008........................... 0 0 0 0 0
0 0
July 2009........................... 0 0 0 0 0
0 0
July 2010........................... 0 0 0 0 0
0 0
July 2011........................... 0 0 0 0 0
0 0
July 2012........................... 0 0 0 0 0
0 0
July 2013........................... 0 0 0 0 0
0 0
July 2014........................... 0 0 0 0 0
0 0
July 2015........................... 0 0 0 0 0
0 0
July 2016........................... 0 0 0 0 0
0 0
July 2017........................... 0 0 0 0 0
0 0
July 2018........................... 0 0 0 0 0
0 0
July 2019........................... 0 0 0 0 0
0 0
July 2020........................... 0 0 0 0 0
0 0
July 2021........................... 0 0 0 0 0
0 0
July 2022........................... 0 0 0 0 0
0 0
July 2023........................... 0 0 0 0 0
0 0
July 2024........................... 0 0 0 0 0
0 0
July 2025........................... 0 0 0 0 0
0 0
July 2026........................... 0 0 0 0 0
0 0
Weighted Average
Life (years) (1).................. 5.65 4.49 4.49 3.44 2.59 7.11 6.01
<CAPTION>
CLASS A-6
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION ----------------------------------------------
DATE 175% 300% 500% 0% 100% 175% 300%
<S> <C>
- ------------------------------------ ----------------------------------------------
Initial.............................
100 100 100
100 100 100 100
July 1997...........................
100 100 100
97 97 89 89
July 1998...........................
100 100 100
92 90 67 33
July 1999...........................
100 100 53
90 90 48 0
July 2000...........................
100 68 0
90 90 32 0
July 2001...........................
95 0 0
90 90 19 0
July 2002...........................
48 0 0
90 90 8 0
July 2003...........................
4 0 0
90 90 1 0
July 2004...........................
0 0 0
90 26 0 0
July 2005...........................
0 0 0
0 0 0 0
July 2006...........................
0 0 0
0 0 0 0
July 2007...........................
0 0 0
0 0 0 0
July 2008...........................
0 0 0
0 0 0 0
July 2009...........................
0 0 0
0 0 0 0
July 2010...........................
0 0 0
0 0 0 0
July 2011...........................
0 0 0
0 0 0 0
July 2012...........................
0 0 0
0 0 0 0
July 2013...........................
0 0 0
0 0 0 0
July 2014...........................
0 0 0
0 0 0 0
July 2015...........................
0 0 0
0 0 0 0
July 2016...........................
0 0 0
0 0 0 0
July 2017...........................
0 0 0
0 0 0 0
July 2018...........................
0 0 0
0 0 0 0
July 2019...........................
0 0 0
0 0 0 0
July 2020...........................
0 0 0
0 0 0 0
July 2021...........................
0 0 0
0 0 0 0
July 2022...........................
0 0 0
0 0 0 0
July 2023...........................
0 0 0
0 0 0 0
July 2024...........................
0 0 0
0 0 0 0
July 2025...........................
0 0 0
0 0 0 0
July 2026...........................
0 0 0
0 0 0 0
Weighted Average
Life (years) (1).................. 6.01 4.26 3.07 7.82 7.14 3.19 1.77
<CAPTION>
DISTRIBUTION
DATE 500%
- ------------------------------------
Initial.............................
100
July 1997...........................
89
July 1998...........................
0
July 1999...........................
0
July 2000...........................
0
July 2001...........................
0
July 2002...........................
0
July 2003...........................
0
July 2004...........................
0
July 2005...........................
0
July 2006...........................
0
July 2007...........................
0
July 2008...........................
0
July 2009...........................
0
July 2010...........................
0
July 2011...........................
0
July 2012...........................
0
July 2013...........................
0
July 2014...........................
0
July 2015...........................
0
July 2016...........................
0
July 2017...........................
0
July 2018...........................
0
July 2019...........................
0
July 2020...........................
0
July 2021...........................
0
July 2022...........................
0
July 2023...........................
0
July 2024...........................
0
July 2025...........................
0
July 2026...........................
0
Weighted Average
Life (years) (1).................. 1.46
</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).
S-94
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-8 CLASS A-9
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
DISTRIBUTION --------------------------------------------------------- -------------------------------
DATE 0% 100% 175% 300% 500% 0% 100% 175%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ --------------------------------------------------------- -------------------------------
Initial............................. 100 100 100 100 100
100 100 100
July 1997........................... 100 100 100 76 37
100 100 100
July 1998........................... 100 100 100 50 0
100 100 100
July 1999........................... 100 100 100 50 0
100 100 100
July 2000........................... 100 100 100 50 0
100 100 100
July 2001........................... 100 100 100 39 0
100 100 100
July 2002........................... 100 100 100 0 0
100 100 100
July 2003........................... 100 100 100 0 0
100 100 100
July 2004........................... 100 100 100 0 0
100 100 100
July 2005........................... 100 100 100 0 0
100 100 100
July 2006........................... 100 100 100 0 0
100 100 100
July 2007........................... 100 100 100 0 0
100 100 100
July 2008........................... 100 100 100 0 0
100 100 100
July 2009........................... 100 100 100 0 0
100 100 100
July 2010........................... 100 100 95 0 0
100 100 100
July 2011........................... 100 100 73 0 0
100 100 100
July 2012........................... 100 100 54 0 0
100 100 100
July 2013........................... 100 100 37 0 0
100 100 100
July 2014........................... 100 100 21 0 0
100 100 100
July 2015........................... 100 100 8 0 0
100 100 100
July 2016........................... 100 98 0 0 0
100 100 93
July 2017........................... 100 77 0 0 0
100 100 78
July 2018........................... 100 57 0 0 0
100 100 64
July 2019........................... 100 38 0 0 0
100 100 51
July 2020........................... 100 20 0 0 0
100 100 41
July 2021........................... 100 3 0 0 0
100 100 31
July 2022........................... 100 0 0 0 0
100 80 23
July 2023........................... 100 0 0 0 0
100 58 16
July 2024........................... 65 0 0 0 0
100 36 9
July 2025........................... 0 0 0 0 0
88 15 4
July 2026........................... 0 0 0 0 0
0 0 0
Weighted Average
Life (years) (1).................. 28.24 22.45 16.42 3.12 0.86 29.37 27.43 23.64
<CAPTION>
CLASS A-10
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION ---------------------------------------------------------------
DATE 300% 500% 0% 100% 175% 300% 500%
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ ---------------------------------------------------------------
Initial.............................
100 100
100 100 100 100 100
July 1997...........................
100 100
91 69 52 25 0
July 1998...........................
100 100
81 12 0 0 0
July 1999...........................
100 100
70 0 0 0 0
July 2000...........................
100 100
60 0 0 0 0
July 2001...........................
100 100
49 0 0 0 0
July 2002...........................
100 100
39 0 0 0 0
July 2003...........................
100 98
28 0 0 0 0
July 2004...........................
100 60
16 0 0 0 0
July 2005...........................
100 39
3 0 0 0 0
July 2006...........................
100 27
0 0 0 0 0
July 2007...........................
100 18
0 0 0 0 0
July 2008...........................
100 12
0 0 0 0 0
July 2009...........................
89 8
0 0 0 0 0
July 2010...........................
71 6
0 0 0 0 0
July 2011...........................
56 4
0 0 0 0 0
July 2012...........................
44 3
0 0 0 0 0
July 2013...........................
35 2
0 0 0 0 0
July 2014...........................
27 1
0 0 0 0 0
July 2015...........................
21 1
0 0 0 0 0
July 2016...........................
16 1
0 0 0 0 0
July 2017...........................
12 *
0 0 0 0 0
July 2018...........................
9 *
0 0 0 0 0
July 2019...........................
7 *
0 0 0 0 0
July 2020...........................
5 *
0 0 0 0 0
July 2021...........................
3 *
0 0 0 0 0
July 2022...........................
2 *
0 0 0 0 0
July 2023...........................
1 *
0 0 0 0 0
July 2024...........................
1 *
0 0 0 0 0
July 2025...........................
* *
0 0 0 0 0
July 2026...........................
0 0
0 0 0 0 0
Weighted Average
Life (years) (1).................. 16.56 9.32 4.90 1.34 1.01 0.76 0.56
</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.
S-95
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-11 CLASS A-12
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
DISTRIBUTION ------------------------------------------------------------- ----------------------
DATE 0% 100% 175% 300% 500% 0% 100%
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ ------------------------------------------------------------- ----------------------
Initial............................. 100 100 100 100 100
100 100
July 1997........................... 100 100 100 100 80
100 100
July 1998........................... 100 100 59 0 0
100 100
July 1999........................... 100 37 0 0 0
100 100
July 2000........................... 100 0 0 0 0
100 76
July 2001........................... 100 0 0 0 0
100 25
July 2002........................... 100 0 0 0 0
100 0
July 2003........................... 100 0 0 0 0
100 0
July 2004........................... 100 0 0 0 0
100 0
July 2005........................... 100 0 0 0 0
100 0
July 2006........................... 87 0 0 0 0
100 0
July 2007........................... 71 0 0 0 0
100 0
July 2008........................... 52 0 0 0 0
100 0
July 2009........................... 32 0 0 0 0
100 0
July 2010........................... 10 0 0 0 0
100 0
July 2011........................... 0 0 0 0 0
90 0
July 2012........................... 0 0 0 0 0
69 0
July 2013........................... 0 0 0 0 0
47 0
July 2014........................... 0 0 0 0 0
23 0
July 2015........................... 0 0 0 0 0
0 0
July 2016........................... 0 0 0 0 0
0 0
July 2017........................... 0 0 0 0 0
0 0
July 2018........................... 0 0 0 0 0
0 0
July 2019........................... 0 0 0 0 0
0 0
July 2020........................... 0 0 0 0 0
0 0
July 2021........................... 0 0 0 0 0
0 0
July 2022........................... 0 0 0 0 0
0 0
July 2023........................... 0 0 0 0 0
0 0
July 2024........................... 0 0 0 0 0
0 0
July 2025........................... 0 0 0 0 0
0 0
July 2026........................... 0 0 0 0 0
0 0
Weighted Average
Life (years) (1).................. 12.06 2.88 2.11 1.58 1.19 16.86 4.56
<CAPTION>
CLASS A-13
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION ------------------------------------------------
DATE 175% 300% 500% 0% 100% 175% 300%
<S> <C>
- ------------------------------------ ------------------------------------------------
Initial.............................
100 100 100
100 100 100 100
July 1997...........................
100 100 100
100 100 100 100
July 1998...........................
100 80 0
100 100 100 100
July 1999...........................
55 0 0
100 100 100 22
July 2000...........................
0 0 0
100 100 67 0
July 2001...........................
0 0 0
100 100 0 0
July 2002...........................
0 0 0
100 76 0 0
July 2003...........................
0 0 0
100 23 0 0
July 2004...........................
0 0 0
100 0 0 0
July 2005...........................
0 0 0
100 0 0 0
July 2006...........................
0 0 0
100 0 0 0
July 2007...........................
0 0 0
100 0 0 0
July 2008...........................
0 0 0
100 0 0 0
July 2009...........................
0 0 0
100 0 0 0
July 2010...........................
0 0 0
100 0 0 0
July 2011...........................
0 0 0
100 0 0 0
July 2012...........................
0 0 0
100 0 0 0
July 2013...........................
0 0 0
100 0 0 0
July 2014...........................
0 0 0
100 0 0 0
July 2015...........................
0 0 0
96 0 0 0
July 2016...........................
0 0 0
58 0 0 0
July 2017...........................
0 0 0
17 0 0 0
July 2018...........................
0 0 0
0 0 0 0
July 2019...........................
0 0 0
0 0 0 0
July 2020...........................
0 0 0
0 0 0 0
July 2021...........................
0 0 0
0 0 0 0
July 2022...........................
0 0 0
0 0 0 0
July 2023...........................
0 0 0
0 0 0 0
July 2024...........................
0 0 0
0 0 0 0
July 2025...........................
0 0 0
0 0 0 0
July 2026...........................
0 0 0
0 0 0 0
Weighted Average
Life (years) (1).................. 3.11 2.25 1.69 20.23 6.54 4.21 2.88
<CAPTION>
DISTRIBUTION
DATE 500%
- ------------------------------------
Initial.............................
100
July 1997...........................
100
July 1998...........................
71
July 1999...........................
0
July 2000...........................
0
July 2001...........................
0
July 2002...........................
0
July 2003...........................
0
July 2004...........................
0
July 2005...........................
0
July 2006...........................
0
July 2007...........................
0
July 2008...........................
0
July 2009...........................
0
July 2010...........................
0
July 2011...........................
0
July 2012...........................
0
July 2013...........................
0
July 2014...........................
0
July 2015...........................
0
July 2016...........................
0
July 2017...........................
0
July 2018...........................
0
July 2019...........................
0
July 2020...........................
0
July 2021...........................
0
July 2022...........................
0
July 2023...........................
0
July 2024...........................
0
July 2025...........................
0
July 2026...........................
0
Weighted Average
Life (years) (1).................. 2.11
</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).
S-96
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-15
CLASS A-14 CERTIFICATES AT THE
CERTIFICATES AT THE FOLLOWING
FOLLOWING PERCENTAGES PERCENTAGES
OF SPA OF SPA
DISTRIBUTION ------------------------------------------------------------- --------------------
DATE 0% 100% 175% 300% 500% 0% 100%
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ ------------------------------------------------------------- --------------------
Initial............................. 100 100 100 100 100
100 100
July 1997........................... 100 100 100 100 100
100 100
July 1998........................... 100 100 100 100 100
100 100
July 1999........................... 100 100 100 100 0
100 100
July 2000........................... 100 100 100 0 0
100 100
July 2001........................... 100 100 68 0 0
100 100
July 2002........................... 100 100 0 0 0
100 100
July 2003........................... 100 100 0 0 0
100 100
July 2004........................... 100 73 0 0 0
100 100
July 2005........................... 100 27 0 0 0
100 100
July 2006........................... 100 0 0 0 0
100 93
July 2007........................... 100 0 0 0 0
100 74
July 2008........................... 100 0 0 0 0
100 56
July 2009........................... 100 0 0 0 0
100 39
July 2010........................... 100 0 0 0 0
100 23
July 2011........................... 100 0 0 0 0
100 8
July 2012........................... 100 0 0 0 0
100 0
July 2013........................... 100 0 0 0 0
100 0
July 2014........................... 100 0 0 0 0
100 0
July 2015........................... 100 0 0 0 0
100 0
July 2016........................... 100 0 0 0 0
100 0
July 2017........................... 100 0 0 0 0
100 0
July 2018........................... 70 0 0 0 0
100 0
July 2019........................... 18 0 0 0 0
100 0
July 2020........................... 0 0 0 0 0
80 0
July 2021........................... 0 0 0 0 0
49 0
July 2022........................... 0 0 0 0 0
16 0
July 2023........................... 0 0 0 0 0
0 0
July 2024........................... 0 0 0 0 0
0 0
July 2025........................... 0 0 0 0 0
0 0
July 2026........................... 0 0 0 0 0
0 0
Weighted Average
Life (years) (1).................. 22.42 8.56 5.26 3.47 2.45 24.99 12.47
<CAPTION>
CLASS A-16
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION --------------------------------------------
DATE 175% 300% 500% 0% 100% 175% 300%
<S> <C>
- ------------------------------------ --------------------------------------------
Initial.............................
100 100 100
100 100 100 100
July 1997...........................
100 100 100
100 100 100 100
July 1998...........................
100 100 100
100 100 100 100
July 1999...........................
100 100 47
100 100 100 100
July 2000...........................
100 80 0
100 100 100 100
July 2001...........................
100 14 0
100 100 100 100
July 2002...........................
92 0 0
100 100 100 51
July 2003...........................
57 0 0
100 100 100 0
July 2004...........................
28 0 0
100 100 100 0
July 2005...........................
4 0 0
100 100 100 0
July 2006...........................
0 0 0
100 100 77 0
July 2007...........................
0 0 0
100 100 51 0
July 2008...........................
0 0 0
100 100 28 0
July 2009...........................
0 0 0
100 100 8 0
July 2010...........................
0 0 0
100 100 0 0
July 2011...........................
0 0 0
100 100 0 0
July 2012...........................
0 0 0
100 90 0 0
July 2013...........................
0 0 0
100 69 0 0
July 2014...........................
0 0 0
100 50 0 0
July 2015...........................
0 0 0
100 31 0 0
July 2016...........................
0 0 0
100 14 0 0
July 2017...........................
0 0 0
100 0 0 0
July 2018...........................
0 0 0
100 0 0 0
July 2019...........................
0 0 0
100 0 0 0
July 2020...........................
0 0 0
100 0 0 0
July 2021...........................
0 0 0
100 0 0 0
July 2022...........................
0 0 0
100 0 0 0
July 2023...........................
0 0 0
69 0 0 0
July 2024...........................
0 0 0
9 0 0 0
July 2025...........................
0 0 0
0 0 0 0
July 2026...........................
0 0 0
0 0 0 0
Weighted Average
Life (years) (1).................. 7.36 4.50 3.03 27.36 18.11 11.17 6.09
<CAPTION>
DISTRIBUTION
DATE 500%
- ------------------------------------
Initial.............................
100
July 1997...........................
100
July 1998...........................
100
July 1999...........................
100
July 2000...........................
21
July 2001...........................
0
July 2002...........................
0
July 2003...........................
0
July 2004...........................
0
July 2005...........................
0
July 2006...........................
0
July 2007...........................
0
July 2008...........................
0
July 2009...........................
0
July 2010...........................
0
July 2011...........................
0
July 2012...........................
0
July 2013...........................
0
July 2014...........................
0
July 2015...........................
0
July 2016...........................
0
July 2017...........................
0
July 2018...........................
0
July 2019...........................
0
July 2020...........................
0
July 2021...........................
0
July 2022...........................
0
July 2023...........................
0
July 2024...........................
0
July 2025...........................
0
July 2026...........................
0
Weighted Average
Life (years) (1).................. 3.82
</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).
S-97
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-17(2) AND CLASS A-18 CLASS A-19
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
DISTRIBUTION ------------------------------------------------------- -------------------------------
DATE 0% 100% 175% 300% 500% 0% 100% 175%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ ------------------------------------------------------- -------------------------------
Initial............................. 100 100 100 100 100
100 100 100
July 1997........................... 100 100 100 100 100
100 100 100
July 1998........................... 100 100 100 100 100
100 100 100
July 1999........................... 100 100 100 100 100
100 100 100
July 2000........................... 99 99 99 99 99
100 100 100
July 2001........................... 98 98 98 98 46
100 100 100
July 2002........................... 96 96 96 96 12
99 97 95
July 2003........................... 95 95 95 93 0
97 93 90
July 2004........................... 94 94 94 70 0
96 88 83
July 2005........................... 93 93 93 54 0
94 82 74
July 2006........................... 92 92 92 43 0
92 76 65
July 2007........................... 90 90 90 34 0
90 70 57
July 2008........................... 89 89 89 28 0
88 64 50
July 2009........................... 88 88 88 22 0
85 59 43
July 2010........................... 87 87 80 18 0
83 53 38
July 2011........................... 86 86 70 14 0
80 48 33
July 2012........................... 84 84 60 11 0
77 44 28
July 2013........................... 83 83 51 9 0
74 39 24
July 2014........................... 82 82 44 7 0
70 35 20
July 2015........................... 81 81 37 5 0
66 31 17
July 2016........................... 80 80 31 4 0
62 28 15
July 2017........................... 78 77 26 3 0
58 24 12
July 2018........................... 77 66 21 2 0
53 21 10
July 2019........................... 76 56 17 2 0
48 18 8
July 2020........................... 75 47 14 1 0
42 15 6
July 2021........................... 74 38 10 1 0
36 12 5
July 2022........................... 72 29 8 1 0
30 9 4
July 2023........................... 71 21 5 * 0
23 7 2
July 2024........................... 70 13 3 * 0
15 4 1
July 2025........................... 34 5 1 * 0
7 2 1
July 2026........................... 0 0 0 0 0
0 0 0
Weighted Average
Life (years) (1).................. 24.96 22.23 17.66 10.67 5.10 21.17 15.72 13.35
<CAPTION>
CLASS A-R AND CLASS A-LR
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION -----------------------------------------------------
DATE 300% 500% 0% 100% 175% 300% 500%
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------ -----------------------------------------------------
Initial.............................
100 100
100 100 100 100 100
July 1997...........................
100 100
100 100 100 100 100
July 1998...........................
100 100
100 100 100 100 100
July 1999...........................
100 100
100 100 100 100 100
July 2000...........................
100 100
100 100 100 100 100
July 2001...........................
100 100
100 100 100 100 100
July 2002...........................
93 89
100 100 100 100 100
July 2003...........................
85 65
100 100 100 100 100
July 2004...........................
74 40
100 100 100 100 100
July 2005...........................
62 26
100 100 100 100 100
July 2006...........................
50 18
100 100 100 100 100
July 2007...........................
40 12
100 100 100 100 100
July 2008...........................
32 8
100 100 100 100 100
July 2009...........................
25 6
100 100 100 100 100
July 2010...........................
20 4
100 100 100 100 100
July 2011...........................
16 3
100 100 100 100 100
July 2012...........................
13 2
100 100 100 100 100
July 2013...........................
10 1
100 100 100 100 100
July 2014...........................
8 1
100 100 100 100 100
July 2015...........................
6 1
100 100 100 100 100
July 2016...........................
5 *
100 100 100 100 100
July 2017...........................
4 *
100 100 100 100 100
July 2018...........................
3 *
100 100 100 100 100
July 2019...........................
2 *
100 100 100 100 100
July 2020...........................
1 *
100 100 100 100 100
July 2021...........................
1 *
100 100 100 100 100
July 2022...........................
1 *
100 100 100 100 100
July 2023...........................
* *
100 100 100 100 100
July 2024...........................
* *
100 100 100 100 100
July 2025...........................
* *
100 100 100 100 100
July 2026...........................
0 0
0 0 0 0 0
Weighted Average
Life (years) (1).................. 11.03 8.30 30.00 29.89 29.85 29.77 29.64
</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).
(2)The weighted average life shown for the Class A-17 Certificates applies to
such Subclass taken as a whole. As a result of the distribution priorities
and allocations described herein, the weighted average life of any Class A-17
Certificate beneficially owned by an individual investor may vary
significantly from the weighted average life of the Subclass taken as a
whole.
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass.
S-98
<PAGE>
Based on the assumptions set forth in the last paragraph on page S-91, but
assuming that no prepayments are experienced on the Mortgage Loans, the final
Distribution Date for the Class A-1, Class A-2, Class A-3, Class A-4 and Class
A-5 Certificates would occur in November 1998, April 2000, September 2001,
September 2002 and August 2004, respectively. Depending on the characteristics
and performance of the Mortgage Loans, the actual final Distribution Date of the
Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates may be
earlier or later (perhaps substantially) than the date referred to in the
preceding sentence.
The principal payment priorities and principal payment schedules for each
Subclass of Scheduled Certificates set forth herein under the heading
"Description of the Certificates -- Principal (Including Prepayments) --
Allocation of Amount to be Distributed" were designed to provide a certain
amount of protection to the holders to such Subclasses against extension of the
weighted average lives thereof due to constant rates of prepayment on the
Mortgage Loans below 175% SPA but above 100% SPA. The principal payment
priorities and principal payment schedule for the Class A-6 Components set forth
herein under the heading "Description of the Certificates -- Principal
(Including Prepayments) -- Allocation of Amount to be Distributed" were designed
to provide a certain amount of protection to the holders of such the Class A-6
Certificates against extension of the weighted average life thereof due to
constant rates of prepayment on the Mortgage Loans below 175% SPA but above 125%
SPA. The percentages of the initial Class A Subclass Principal Balances and
Component Principal Balances of the Scheduled Certificates and the Class A-6
Components set forth in the tables beginning on page S-55 were calculated using
the assumptions set forth in the last paragraph on page S-91. Because, as noted
above, 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 and because the characteristics of the Mortgage Loans ultimately
included in the Trust Estate and the characteristics which were assumed in
preparing such tables are likely to vary, there can be no assurance that the
principal payment priorities and principal payment schedules of the Scheduled
Certificates and the Class A-6 Components will provide protection against the
extension of the weighted average lives of such Subclasses and Components.
THE WEIGHTED AVERAGE LIFE OF THE CLASS A-8 CERTIFICATES WILL BE PARTICULARLY
SENSITIVE TO THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS. Under relatively
fast prepayment scenarios, the Class A-8 A Component and the Class A-8 B
Component receive certain distributions in respect of principal on each
Distribution Date after the Class A-7 Accrual Component has been allocated
principal up to its Scheduled Amount until the Component Principal Balances of
the Class A-8 A Component and Class A-8 B Component have been reduced to zero
before the Class A-7 Accrual Component is allocated any principal in excess of
its Scheduled Amount. This is intended to decrease the likelihood that the Class
A-7 Accrual Component will be allocated principal in reduction of its Component
Principal Balance on any Distribution Date in excess of its Scheduled Amount. As
such, the Class A-8 Certificates support the Class A-7 Accrual Component. In
addition, under relatively slow prepayment scenarios, the Class A-8 A Component
and the Class A-8 B Component receive no distributions in respect of principal
until the Scheduled Certificates and the Class A-6 Components receive principal
payments in the amount of their Scheduled Amounts. This is intended to increase
the likelihood that the Scheduled Certificates and the Class A-6 Components will
be allocated principal in reduction of their Class A Subclass Principal Balances
and Component Principal Balances on any Distribution Date in the amount of their
Scheduled Principal Amounts. As such, the Class A-8 Certificates support the
Scheduled Certificates and the Class A-6 Components.
THE CLASS A-17 CERTIFICATES MAY NOT BE APPROPRIATE INVESTMENTS FOR ANY
INVESTOR WHO REQUIRES A SINGLE LUMP SUM PAYMENT ON A PREDETERMINED DATE OR AN
OTHERWISE PREDICTABLE STREAM OF PRINCIPAL PAYMENTS. THERE IS NO ASSURANCE THAT
ANY INVESTOR IN A CLASS A-17 CERTIFICATE WILL RECEIVE A DISTRIBUTION IN
REDUCTION OF ITS PRINCIPAL BALANCE ON A PARTICULAR DISTRIBUTION DATE. SEE
"DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS IN REDUCTION OF THE CLASS A-17
CERTIFICATES" HEREIN.
Interest accrued on the Class A 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 --
S-99
<PAGE>
Interest" herein. The yield on the Class A 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 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 Underwriters 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 assumptions set
forth in clauses (i) through (vii) of the last paragraph on page S-91 hereof.
Accordingly, such tables and other materials may not be relevant to or
appropriate for investors other than those specifically requesting them.
SENSITIVITY OF THE CLASS A-18 CERTIFICATES
THE YIELD TO AN INVESTOR IN THE CLASS A-18 CERTIFICATES WILL BE HIGHLY
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS)
OF THE MORTGAGE LOANS, WHICH RATE MAY FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME.
AN INVESTOR SHOULD FULLY CONSIDER THE ASSOCIATED RISKS, INCLUDING THE RISK THAT
A RELATIVELY SLOW RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE
MORTGAGE LOANS WILL HAVE A NEGATIVE EFFECT ON THE YIELD TO AN INVESTOR IN THE
CLASS A-18 CERTIFICATES.
The following table indicates the sensitivity to various rates of prepayment
on the Mortgage Loans of the pre-tax yields to maturity on a corporate bond
equivalent ("CBE") basis of the Class A-18 Certificates. Such calculations are
based on distributions made in accordance with "Description of the Certificates"
above, on the assumptions described in clauses (i) through (vii) of the last
paragraph on page S-91 and on the further assumptions that (i) the Class A-18
Certificates will be purchased on July 25, 1996 at an aggregate purchase price
of % of the initial Class A Subclass Principal Balance of the Class A-18
Certificates and (ii) distributions to holders of the Class A-18 Certificates
will be made on the 25th day of each month commencing in August 1996.
SENSITIVITY OF THE PRE-TAX YIELD ON THE CLASS A-18 CERTIFICATES TO PREPAYMENTS
<TABLE>
<CAPTION>
PERCENTAGES OF SPA
--------------------------------------------------------------------
0% % % % % % %
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield (CBE)........... % % % % % % %
</TABLE>
The pre-tax yields set forth in the preceding 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-18 Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal an
assumed aggregate purchase price for the Class A-18 Certificates of
approximately % of their initial Class A Subclass Principal Balance 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-18
Certificates and consequently does not purport to reflect the return on any
investment in the Class A-18 Certificates when such reinvestment rates are
considered.
NOTWITHSTANDING THE ASSUMED PREPAYMENT RATES REFLECTED IN THE PRECEDING
TABLE, IT IS HIGHLY UNLIKELY THAT THE MORTGAGE LOANS WILL PREPAY AT A CONSTANT
RATE UNTIL MATURITY OR THAT ALL OF THE MORTGAGE LOANS WILL PREPAY AT THE SAME
RATE. In addition, the actual characteristics of the Mortgage Loans initially
included in the Trust Estate will differ from those characteristics assumed in
preparing the preceding table, and thereafter may be changed as a result of
permitted substitutions. As a result of these factors, the pre-tax yields on the
Class A-18 Certificates are likely to differ from those shown in such table,
even if all of the Mortgage Loans prepay at the indicated percentages of SPA.
S-100
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Series 1996-1 Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be dated as of the date of initial issuance of the Series
1996-1 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 Underlying Servicing Agreement and the Series
1996-1 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 Class
A Certificates of each 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 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
1996-1 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 1996-1 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) and the holders of
the Class B Certificates will collectively be entitled to the balance of the
aggregate Voting Interest represented by all Series 1996-1 Certificates. The
aggregate Voting Interests of each Subclass of Class A Certificates on any date
will be equal to the product of (a) 99% of the portion of the Class A Voting
Interest on such date represented by clause (A) above and (b) the fraction
obtained by dividing the Class A Subclass Principal Balance of such Subclass
less, in the case of the Class A-7 Certificates, the Component Principal Balance
of the Class A-7 PO Component on such date by the
S-101
<PAGE>
Class A Non-PO Principal Balance on such date. In addition to the Voting
Interest of the Class A-7 Certificates determined in accordance with the
preceding sentence the Class A-7 Certificates will be entitled to an additional
1% of the Class A Voting Interest represented by clause (A) above and the Class
A Voting Interest represented by clause (B) above. Each Certificateholder of a
Subclass will have a Voting Interest equal to the product of the Voting Interest
to which such Subclass is collectively entitled and the Percentage Interest in
such Subclass represented by such holder's Certificates. With respect to any
provisons of the Pooling and Servicing Agreement providing for action, consent
or approval of each Subclass of Certificates or specified Subclasses of
Certificates, each Certificateholder of a Subclass will have a Voting Interest
in such Subclass equal to such holder's Percentage Interest in such 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 1996-1 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 Bank National Association, a national banking association, will act as
Trust Administrator for the Series 1996-1 Certificates. The corporate trust
office of the Trust Administrator is located at 180 East Fifth Street, St. Paul,
Minnesota 55101. 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-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
S-102
<PAGE>
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 1996-1
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 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 93.73% (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.
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................................................ 93.73%
FBS Mortgage Corporation............................................. 2.13
Countrywide Funding Corporation...................................... 1.72
Barnett Mortgage Company............................................. 1.14
National City Mortgage Company....................................... 0.91
Bank of Hawaii....................................................... 0.24
GMAC Mortgage Corporation of P.A..................................... 0.09
Great Financial Federal, a Savings and Loan Association.............. 0.04
-------
Total............................................................ 100.00%
-------
-------
</TABLE>
Certain information with respect to the loan servicing experience of Norwest
Mortgage is set forth under "Delinquency and Foreclosure Experience."
S-103
<PAGE>
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 1,563 of the Mortgage Loans in the Trust Estate, representing
approximately 73.19% of the Cut-Off Date Aggregate Principal Balance of the
Mortgage Loans will be Norwest Frederick-Serviced Loans and 479 of the Mortgage
Loans in the Trust Estate, representing approximately 26.81% 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";
(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
Each Underlying 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
S-104
<PAGE>
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-Federick-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, require Norwest Mortgage, as
Servicer under the related Underlying Servicing Agreement to, or enter into and
direct the Trustee to 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 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), without the consent
of any Certificateholder, 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.
CHANGES IN UNSCHEDULED PRINCIPAL RECEIPT PERIOD. 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, (i) direct a
Servicer to change the Unscheduled Principal Receipt Period applicable to any
type of Unscheduled Principal Receipt within the parameters described below or
(ii) enter into and direct the Trustee to 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 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
S-105
<PAGE>
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.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
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 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, as of the
Cut-Off Date, is expected to be approximately 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.
There will be no Fixed Retained Yield (as defined in the Prospectus)
retained on any Mortgage Loan. See "Servicing of the Mortgage Loans -- Fixed
Retained Yield, Servicing Compensation and Payment of Expenses" in the
Prospectus for information regarding other possible compensation to a Servicer.
The servicing fees and other expenses of the Trust Fund will be allocated to the
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
S-106
<PAGE>
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) 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-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-18 and Class
A-19 Certificates (collectively, the "Regular Certificates"), together with the
Class A-7 Accrual Component, the Class A-7 IO A Component, the Class A-7 IO B
Component, the Class A-7 PO Component and the Class B-1, Class B-2, Class B-3,
Class B-4, Class B-5 and Class B-6 Certificates, will be designated as regular
interests in the Upper-Tier REMIC, and the Class A-R Certificate 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, "regular
or residual interests in a REMIC" for domestic building and loan associations,
and "real estate assets" for real estate investment trusts, to the extent
described in the Prospectus.
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.
The Class A-18 Certificates will be issued with original issue discount in
an amount equal to the excess of the initial principal balance thereof over
their issue price. It is anticipated that the Class A- and Class A- Certificates
will be issued with original issue discount in an amount equal to the excess of
the initial principal balances of such Subclasses over their respective issue
prices (including accrued interest). It is further anticipated that the Class
A- and Class A- Certificates will be issued at a premium and that the Class A-
Certificates will be issued with DE MINIMIS original issue discount for federal
income tax purposes. The Class A-7 Certificates and each Subclass of the Class B
Certificates, which are not offered hereby, also will be treated as issued with
original issue discount for federal income tax purposes.
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 175% 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
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<PAGE>
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.
Under the REMIC Regulations, because the fair market value of the Class A-R
and Class A-LR Certificates will not exceed 2% of the fair market value of the
respective REMIC, the Class A-R and Class A-LR Certificates will not have
"significant value," and thrift institutions will not be permitted to offset
their net operating losses against such excess inclusion income. In addition,
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 and Class A-LR 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.
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.
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<PAGE>
ERISA CONSIDERATIONS
Neither 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.
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 Plan. 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 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 February 22, 1991, the DOL issued to Lehman Brothers an individual
administrative exemption, Prohibited Transaction Exemption 91-14, 56 Fed. Reg.
7413 (the "Lehman Brothers Exemption"), on May 24, 1990, the DOL issued to Bear,
Stearns & Co. Inc. an individual administrative exemption, Prohibited
Transaction Exemption 90-30, 55 Fed. Reg. 21461 (the "Bear Stearns Exemption"),
and, on October 17, 1989, the DOL issued to Salomon Brothers Inc an individual
administrative exemption, Prohibited Transaction Exemption 89-89, 54 Fed. Reg.
42589 (the "Salomon Brothers Exemption," and together with the Lehman Brothers
Exemption and the Bear Stearns Exemption, the "Exemptions" and each, an
"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, other than the Class A-R
Certificate, 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.
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<PAGE>
LEGAL INVESTMENT
The Offered 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 Offered 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 Offered Certificates, as certain Subclasses of the
Class A 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. 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 Offered Certificates constitute legal
investments for such investors. See "Legal Investment" in the Prospectus.
SECONDARY MARKET
There will not be any market for the Offered Certificates prior to the
issuance thereof. The Underwriters and, with respect to the Class A-17
Certificates, the Dealer intend to act as market makers in the Offered
Certificates, subject to applicable provisions of federal and state securities
laws and other regulatory requirements, but are 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.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated as
of June , 1996 (the "Underwriting Agreement") among Norwest Mortgage, the
Seller and Lehman Brothers, as representative of the Underwriters, the Seller
has agreed to sell to the Underwriters, and the Underwriters have severally but
not jointly agreed to purchase from the Seller, the respective Class A Subclass
Principal Balance (subject to a permitted variance of plus or minus 5%), of each
Subclass of the Offered Certificates set forth opposite their names below:
<TABLE>
<CAPTION>
BEAR, STEARNS & CO.
SUBCLASS LEHMAN BROTHERS INC. INC. SALOMON BROTHERS INC
- --------------------------------------------- -------------------- ---------------------- --------------------
<S> <C> <C> <C>
A-1.......................................... $ $ $
A-2..........................................
A-3..........................................
A-4..........................................
A-5..........................................
A-6..........................................
A-8..........................................
A-9..........................................
A-10.........................................
A-11.........................................
A-12.........................................
A-13.........................................
A-14.........................................
A-15.........................................
A-16.........................................
A-17.........................................
A-18.........................................
A-19.........................................
A-R.......................................... 100 0 0
A-LR......................................... 100 0 0
Total....................................
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all the
Offered Certificates if any Offered Certificates are purchased. In the event of
a default by any Underwriter, the Underwriting Agreement provides that, in
certain circumstances, purchase commitments of the nondefaulting Underwriter may
be increased or the underwriting may be terminated.
The Seller has been advised by the Underwriters that they and the Dealer
propose initially to offer the Offered Certificates to the public at the public
offering prices set forth on the cover page of this Prospectus Supplement. After
the initial public offering, the public offering prices may be changed.
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<PAGE>
The compensation paid to the Underwriters varies by Subclass as set forth
below:
<TABLE>
<CAPTION>
DISCOUNT (PERCENT OF
SUBCLASS OF OFFERED CERTIFICATES CERTIFICATE PRINCIPAL AMOUNT)
- ------------------------------------------------------------------------------------- -------------------------------
<S> <C>
A-1.................................................................................. %
A-2..................................................................................
A-3..................................................................................
A-4..................................................................................
A-5..................................................................................
A-6..................................................................................
A-8..................................................................................
A-9..................................................................................
A-10.................................................................................
A-11.................................................................................
A-12.................................................................................
A-13.................................................................................
A-14.................................................................................
A-15.................................................................................
A-16.................................................................................
A-17.................................................................................
A-18.................................................................................
A-19.................................................................................
A-R.................................................................................. (1)
A-LR................................................................................. (1)
</TABLE>
- ------------------------------
(1) The Class A-R and Class A-LR Certificates will be offered by Lehman
Brothers from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale.
The Underwriters and any dealers that participate with the Underwriters 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 Underwriters against certain civil liabilities under the
Securities Act or contribute to payments which the Underwriters 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, New York, New York.
EXPERTS
The consolidated balance sheet of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1995 and December 31, 1994, and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1995,
incorporated by reference in this Prospectus Supplement have been incorporated
herein, in reliance on the report of Coopers & Lybrand, L.L.P., independent
accountants, given on the authority of that firm as experts in auditing and
accounting.
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 1996-1 Certificates.
S-112
<PAGE>
RATINGS
It is a condition to the issuance of the Offered Certificates that they will
have been rated "AAA" by Fitch Investors Service, L.P. ("Fitch"). It is a
condition to the issuance of the Offered Certificates (other than the Class A-18
Certificates) that they will have been rated "AAA" by Standard and Poor's
("S&P"). It is a condition to the issuance of the Class A-18 Certificates that
they 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. 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 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 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-113
<PAGE>
INDEX OF SIGNIFICANT
PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Adjusted Pool Amount..................................................................................... S-40
Adjusted Pool Amount (PO Portion)........................................................................ S-40
Adjustment Amount........................................................................................ S-70
Aggregate Current Bankruptcy Losses...................................................................... S-70
Aggregate Current Fraud Losses........................................................................... S-70
Aggregate Current Special Hazard Losses.................................................................. S-69
Available Master Servicing Compensation.................................................................. S-40
Bankruptcy Loss.......................................................................................... S-45
Bankruptcy Loss Amount................................................................................... S-71
Bear Stearns Exemption................................................................................... S-109
Beneficial Owner......................................................................................... S-33
Book-Entry Certificates.................................................................................. S-4
Bulk Purchase Underwritten Loans......................................................................... S-16
CBE...................................................................................................... S-100
Cede..................................................................................................... S-33
Certificate Account...................................................................................... S-107
Certificateholder........................................................................................ S-4
Certificates............................................................................................. S-8
Class A Certificates..................................................................................... Cover
Class A Non-PO Distribution Amount....................................................................... S-36
Class A Non-PO Optimal Amount............................................................................ S-43
Class A Non-PO Optimal Principal Amount.................................................................. S-44
Class A Non-PO Principal Balance......................................................................... S-39
Class A Percentage....................................................................................... S-21
Class A Prepayment Percentage............................................................................ S-21
Class A Principal Amount................................................................................. S-44
Class A Principal Distribution Amount.................................................................... S-44
Class A Subclass Interest Accrual Amount................................................................. S-36
Class A Subclass Interest Shortfall Amount............................................................... S-43
Class A Subclass Principal Balance....................................................................... S-38
Class A Voting Interest.................................................................................. S-101
Class A-6 A Scheduled Component.......................................................................... S-2
Class A-6 B Scheduled Component.......................................................................... S-2
Class A-6 Component...................................................................................... S-2
Class A-7 Accrual Component.............................................................................. S-2
Class A-7 Accrual Component Distribution Amount.......................................................... S-44
Class A-7 Component...................................................................................... S-2
Class A-7 IO A Component................................................................................. S-2
Class A-7 IO A Component Notional Amount................................................................. S-38
Class A-7 IO B Component................................................................................. S-2
Class A-7 IO B Component Notional Amount................................................................. S-38
Class A-7 PO Component................................................................................... S-2
Class A-7 PO Component Deferred Amount................................................................... S-47
Class A-7 PO Component Optimal Principal Amount.......................................................... S-47
Class A-7 PO Component Principal Distribution Amount..................................................... S-47
Class A-8 Component...................................................................................... S-2
Class A-8 A Component.................................................................................... S-2
Class A-8 B Component.................................................................................... S-2
Class A-19 Percentage.................................................................................... S-51
</TABLE>
S-114
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Class A-19 Prepayment Shift Percentage................................................................... S-51
Class A-19 Priority Amount............................................................................... S-51
Class A-19 Scheduled Percentage.......................................................................... S-51
Class B Certificates..................................................................................... Cover
Class B Percentage....................................................................................... S-47
Class B Prepayment Percentage............................................................................ S-47
Class B Principal Balance................................................................................ S-40
Class B Subclass Interest Accrual Amount................................................................. S-38
Class B Subclass Principal Balance....................................................................... S-39
Closing Date............................................................................................. S-15
Code..................................................................................................... S-30
Compensating Interest.................................................................................... S-19
Component Interest Accrual Amount........................................................................ S-37
Component Interest Shortfall Amount...................................................................... S-43
Component Principal Balance.............................................................................. S-39
Component Rate........................................................................................... S-37
Cooperatives............................................................................................. S-72
Co-op Shares............................................................................................. S-72
Cross-Over Date.......................................................................................... S-68
Curtailment Interest Shortfalls.......................................................................... S-41
Cut-Off Date Aggregate Principal Balance................................................................. S-72
Dealer................................................................................................... Cover
Debt Service Reduction................................................................................... S-46
Deceased Holders......................................................................................... S-59
Deficient Valuation...................................................................................... S-46
Definitive Certificates.................................................................................. S-13
Determination Date....................................................................................... S-34
Discount Mortgage Loans.................................................................................. S-10
Distribution Date........................................................................................ S-2
DOL...................................................................................................... S-109
DTC...................................................................................................... S-13
Enhancement Act.......................................................................................... S-31
ERISA.................................................................................................... S-30
ERISA Plan............................................................................................... S-109
Excess Bankruptcy Losses................................................................................. S-70
Excess Fraud Losses...................................................................................... S-70
Excess Special Hazard Losses............................................................................. S-69
Exchange Act............................................................................................. S-65
Exemption................................................................................................ S-109
Exemptions............................................................................................... S-109
Financial Security....................................................................................... S-3
Fitch.................................................................................................... S-9
Fixed Non-relocation PHMC Portfolio Loans................................................................ S-82
Fixed PHMC Portfolio Loans............................................................................... S-82
Fraud Loss............................................................................................... S-45
Fraud Loss Amount........................................................................................ S-70
GEMICO................................................................................................... S-16
Group I Certificates and Components...................................................................... S-2
Group I Percentage....................................................................................... S-50
Group II Certificates.................................................................................... S-2
Guaranteed Distributions................................................................................. S-63
</TABLE>
S-115
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Holdings................................................................................................. S-64
Individual Class A-17 Certificate........................................................................ S-59
Lehman Brothers.......................................................................................... S-20
Lehman Brothers Exemption................................................................................ S-109
Liquidated Loan.......................................................................................... S-45
Liquidated Loan Loss..................................................................................... S-45
Living Holder............................................................................................ S-59
Lower-Tier REMIC......................................................................................... S-4
Lower-Tier REMIC Regular Interest........................................................................ S-107
Master Servicer.......................................................................................... S-2
Master Servicing Fee..................................................................................... S-102
Master Servicing Fee Rate................................................................................ S-102
Mid-Month Receipt Period................................................................................. S-105
Month End Interest....................................................................................... S-40
Moody's.................................................................................................. S-27
Mortgage Loans........................................................................................... S-2
Mortgaged Properties..................................................................................... S-72
Mortgages................................................................................................ S-72
NASCOR................................................................................................... Cover
Net Foreclosure Profits.................................................................................. S-62
Net Mortgage Interest Rate............................................................................... S-40
Net Partial Liquidation Proceeds......................................................................... S-35
NMI Portfolio Loans...................................................................................... S-82
Non-PO Fraction.......................................................................................... S-21
Non-PO Voting Interest................................................................................... S-101
Non-Supported Interest Shortfalls........................................................................ S-19
Norwest Bank............................................................................................. S-2
Norwest Frederick-Serviced Loans......................................................................... S-104
Norwest Mortgage......................................................................................... S-2
Norwest Mortgage Correspondent........................................................................... S-2
Norwest Non-Frederick-Serviced Loans..................................................................... S-104
Offered Certificates..................................................................................... Cover
Order.................................................................................................... S-63
Original Subordinated Principal Balance.................................................................. S-46
Other Servicers.......................................................................................... S-103
Partial Liquidation Proceeds............................................................................. S-35
Pass-Through Rate........................................................................................ S-18
Percentage Interest...................................................................................... S-36
Periodic Advance......................................................................................... S-62
PHMC..................................................................................................... S-2
PHMC Acquisition......................................................................................... S-74
PHMC Correspondent....................................................................................... S-8
PHMC Portfolio Loans..................................................................................... S-82
Plan..................................................................................................... S-31
PO Fraction.............................................................................................. S-22
Policy................................................................................................... S-3
Pool Balance (Non-PO Portion)............................................................................ S-11
Pool Balance (PO Portion)................................................................................ S-10
Pool Certification Underwritten Loans.................................................................... S-16
Pool Distribution Amount................................................................................. S-34
Pool Distribution Amount Allocation...................................................................... S-35
</TABLE>
S-116
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Pooling and Servicing Agreement.......................................................................... S-101
Premium Mortgage Loans................................................................................... S-37
Premium Payment.......................................................................................... S-38
Premium Shortfall Amount................................................................................. S-43
Prepayments in Full...................................................................................... S-40
Prepayment Interest Shortfalls........................................................................... S-40
Prior Month Receipt Period............................................................................... S-105
Prospectus............................................................................................... S-8
PTE 83-1................................................................................................. S-109
Realized Loss............................................................................................ S-45
Record Date.............................................................................................. S-34
Regular Certificates..................................................................................... S-107
Relocation Mortgage Loans................................................................................ S-82
REMIC.................................................................................................... S-4
Remittance Date.......................................................................................... S-35
REO Property............................................................................................. S-103
Reserve Fund............................................................................................. S-3
Residual Certificate..................................................................................... S-107
Rounding Account......................................................................................... S-59
S&P...................................................................................................... S-9
Salomon Brothers Exemption............................................................................... S-109
Scheduled Certificates................................................................................... S-2
Scheduled Principal Amount............................................................................... S-51
Scheduled Principal Balance.............................................................................. S-45
Securities Act........................................................................................... S-109
Seller................................................................................................... S-2
Series 1996-1 Certificates............................................................................... Cover
Servicer................................................................................................. S-2
Servicer Custodial Account............................................................................... S-104
Servicing Fee Rate....................................................................................... S-106
Similar Law.............................................................................................. S-31
SPA...................................................................................................... S-91
Special Hazard Loss...................................................................................... S-45
Special Hazard Loss Amount............................................................................... S-70
Subclass................................................................................................. Cover
Subsidy Account.......................................................................................... S-73
Subsidy Loan............................................................................................. S-73
Target Regime............................................................................................ S-105
Trust Administrator...................................................................................... S-9
Trust Estate............................................................................................. S-2
Trustee.................................................................................................. S-9
U.S. Person.............................................................................................. S-66
UGRIC.................................................................................................... S-16
Underlying Servicing Agreement........................................................................... S-8
Underwriters............................................................................................. Cover
Underwriting Agreement................................................................................... S-111
Underwriting Standards................................................................................... S-16
Unscheduled Principal Amount............................................................................. S-51
Unscheduled Principal Receipt Period..................................................................... S-104
Unscheduled Principal Receipts........................................................................... S-34
Upper-Tier Certificates.................................................................................. S-107
</TABLE>
S-117
<PAGE>
<TABLE>
<CAPTION>
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- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Upper-Tier REMIC......................................................................................... S-4
400% SPA Targeted Balance................................................................................ S-51
175% SPA Targeted Balance................................................................................ S-51
</TABLE>
S-118
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME A
FINAL PROSPECTUS IS DELIVERED. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
PROSPECTUS, SUBJECT TO COMPLETION, DATED MAY 28, 1996
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 JULY , 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.
2
<PAGE>
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 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...................................................................... 34
General................................................................................................ 34
Distributions of Interest.............................................................................. 35
Distributions of Principal............................................................................. 36
Other Credit Enhancement................................................................................. 37
Limited Guarantee...................................................................................... 37
Financial Guaranty Insurance Policy or Surety Bond..................................................... 37
Letter of Credit....................................................................................... 38
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............................................................................................ 43
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............................ 48
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....................................................................................... 55
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.............................................................................................. 59
Certain Legal Aspects of the Mortgage Loans................................................................ 59
General.................................................................................................. 59
Foreclosure.............................................................................................. 60
Foreclosure on Shares of Cooperatives.................................................................... 61
Rights of Redemption..................................................................................... 61
Anti-Deficiency Legislation and Other Limitations on Lenders............................................. 62
</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.................................................................................... 65
Applicability of Usury Laws.............................................................................. 66
Enforceability of Certain Provisions..................................................................... 66
Certain Federal Income Tax Consequences.................................................................... 66
Federal Income Tax Consequences for REMIC Certificates................................................... 67
General.................................................................................................. 67
Status of REMIC Certificates............................................................................. 67
Qualification as a REMIC................................................................................. 68
Taxation of Regular Certificates......................................................................... 69
General................................................................................................ 69
Original Issue Discount................................................................................ 70
Acquisition Premium.................................................................................... 72
Variable Rate Regular Certificates..................................................................... 72
Market Discount........................................................................................ 74
Premium................................................................................................ 74
Election to Treat All Interest Under the Constant Yield Method......................................... 75
Treatment of Losses.................................................................................... 75
Sale or Exchange of Regular Certificates............................................................... 76
Taxation of Residual Certificates........................................................................ 76
Taxation of REMIC Income............................................................................... 76
Basis and Losses....................................................................................... 78
Treatment of Certain Items of REMIC Income and Expense................................................. 78
Original Issue Discount and Premium.................................................................... 78
Market Discount........................................................................................ 79
Premium................................................................................................ 79
Limitations on Offset or Exemption of REMIC Income..................................................... 79
Tax-Related Restrictions on Transfer of Residual Certificates.......................................... 80
Disqualified Organizations............................................................................. 80
Noneconomic Residual Interests......................................................................... 81
Foreign Investors...................................................................................... 82
Sale or Exchange of a Residual Certificate............................................................. 82
Mark to Market Regulations............................................................................. 83
Taxes That May Be Imposed on the REMIC Pool.............................................................. 83
Prohibited Transactions................................................................................ 83
Contributions to the REMIC Pool After the Startup Day.................................................. 83
Net Income from Foreclosure Property................................................................... 84
Liquidation of the REMIC Pool............................................................................ 84
Administrative Matters................................................................................... 84
Limitations on Deduction of Certain Expenses............................................................. 84
Taxation of Certain Foreign Investors.................................................................... 85
Regular Certificates................................................................................... 85
Residual Certificates.................................................................................. 85
Backup Withholding....................................................................................... 86
Reporting Requirements................................................................................... 86
</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................................................................................... 88
Premium................................................................................................ 88
Original Issue Discount................................................................................ 88
Market Discount........................................................................................ 88
Recharacterization of Servicing Fees................................................................... 89
Sale or Exchange of Certificates....................................................................... 89
Stripped Certificates.................................................................................... 90
General................................................................................................ 90
Status of Stripped Certificates........................................................................ 91
Taxation of Stripped Certificates...................................................................... 91
Original Issue Discount................................................................................ 91
Sale or Exchange of Stripped Certificates.............................................................. 92
Purchase of More Than One Class of Stripped Certificates............................................... 92
Possible Alternative Characterizations................................................................. 92
Reporting Requirements and Backup Withholding............................................................ 93
Taxation of Certain Foreign Investors.................................................................... 93
ERISA Considerations....................................................................................... 93
General.................................................................................................. 93
Certain Requirements Under ERISA......................................................................... 94
General................................................................................................ 94
Parties in Interest/Disqualified Persons............................................................... 94
Delegation of Fiduciary Duty........................................................................... 94
Administrative Exemptions................................................................................ 95
Individual Administrative Exemptions................................................................... 95
PTE 83-1............................................................................................... 96
Exempt Plans............................................................................................. 97
Unrelated Business Taxable Income -- Residual Certificates............................................... 97
Legal Investment........................................................................................... 97
Plan of Distribution....................................................................................... 99
Use of Proceeds............................................................................................ 100
Legal Matters.............................................................................................. 100
Rating..................................................................................................... 100
Index of Significant Definitions........................................................................... 101
</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
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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
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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,
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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
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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.
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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."
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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
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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
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(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
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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")
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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-
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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.
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("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
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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
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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
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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, in lieu of a verification of employment, employment information
may be obtained through V.I.E., Inc., an affiliate of Norwest Mortgage, that
obtains employment data from state unemployment insurance departments. 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, all borrowers applying for loans generally 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 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 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
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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 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
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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%. Only primary residences (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
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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.
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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
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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;
(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 13 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
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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;
(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;
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(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 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
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(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.
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.
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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, 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
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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 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.
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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 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;
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(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;
(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.
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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 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.
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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 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.
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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.
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
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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.
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
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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.
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,
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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 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
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returns; (vii) preparation of reports, if any, required under the Securities and
Exchange Act of 1934, as 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.
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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 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
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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 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
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(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.
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;
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(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);
(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
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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 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
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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 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.
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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
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
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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
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
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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 and prior to deposit of such payments in the Servicer
Custodial Account or Certificate Account for such Series or may withdraw from
the Servicer Custodial Account or Certificate Account, or request the Master
Servicer to withdraw from the Certificate Account for remittance to Norwest
Mortgage as Servicer, the Fixed Retained Yield after the entire payment has been
deposited in such account. 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 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
or foreclosure 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. 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
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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.
Each year the Master Servicer will review each Servicer's performance under
its Underlying Servicing Agreement and the status of any fidelity bond and
errors and omissions policy required to be maintained by such Servicer under the
Underlying Servicing Agreement.
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
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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.
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 is
discovered at any time not to be in conformance with the representations and
warranties Norwest Mortgage has made to the Seller, 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
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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 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
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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.
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;
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(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 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
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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).
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
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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 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
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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 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
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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.
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.
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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.
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
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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.
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
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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.
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
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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.
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
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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.
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
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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 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
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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, 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 mutual savings bank or a domestic building and
loan association will constitute "qualifying real property loans" within the
meaning of Code Section 593(d)(1) in the same proportion that the assets of the
REMIC Pool would be so treated. REMIC Certificates held by a domestic building
and loan association will constitute "a regular or residual interest in a REMIC"
within the 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 Sections 593(d)(1)
and 856(c)(5)(A), payments of principal and interest on the Mortgage Loans that
are reinvested pending distribution to holders of REMIC Certificates qualify for
such treatment. Where two REMIC Pools are a part of a tiered structure they will
be treated as one REMIC for
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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 "qualifying real
property loans" or "loans...secured by an interest in real property" for
purposes of Code Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be
required to be reduced by the amount of the related Buy-Down Funds. REMIC
Certificates held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(4)(A)(i).
REMIC Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1).
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
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
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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 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.
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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 (the "OID Regulations") and proposed
Treasury regulations issued on December 16, 1994 (the "Proposed 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 and the Proposed 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 and the Proposed 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 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
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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 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.
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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.
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 multiple of not less than zero nor 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 includes a
rate determined using a single fixed formula and that is based on one or more
qualified floating rates or the yield or changes in the price of actively traded
personal property. The Proposed OID Regulations would expand the definition of
objective rate to include 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
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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 and the Proposed
OID Regulations. The Proposed 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 Proposed
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.
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.
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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 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
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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.
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
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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 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
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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
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.
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BASIS AND LOSSES
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual 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.
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."
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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.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
Except in the case of certain thrift institutions, 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. 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
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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.
An exception to the inability of a Residual Holder to offset excess
inclusions with unrelated deductions and net operating losses applies to Code
Section 593 institutions ("thrift institutions"). For purposes of applying this
rule, all members of an affiliated group filing a consolidated return are
treated as one taxpayer, except that thrift institutions to which Code Section
593 applies, together with their subsidiaries formed to issue REMICs, are
treated as separate corporations. Furthermore, the Code provides that
regulations may disallow the ability of a thrift institution to use deductions
to offset excess inclusions if necessary or appropriate to prevent the avoidance
of tax. A thrift institution may not so offset its excess inclusions unless the
Residual Certificates have "significant value," which requires that (i) the
Residual Certificates have an issue price that is at least equal to 2% of the
aggregate of the issue prices of all Residual Certificates and Regular
Certificates with respect to the REMIC Pool, and (ii) the anticipated weighted
average life of the Residual Certificates is at least 20% of the anticipated
weighted average life of the REMIC Pool. The anticipated weighted average life
of the Residual Certificates is based on all distributions anticipated to be
received with respect thereto (using the Prepayment Assumption). The anticipated
weighted average life of the REMIC Pool is the aggregate weighted average life
of all classes of interests therein (computed using all anticipated
distributions on a regular interest with nominal or no principal). Finally, an
ordering rule under the REMIC Regulations provides that a thrift institution may
only offset its excess inclusion income with deductions after it has first
applied its deductions against income that is not excess inclusion income. If
applicable, the Prospectus Supplement with respect to a Series will set forth
whether the Residual Certificates are expected to have "significant value"
within the meaning of the REMIC Regulations.
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 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
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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 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
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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 thereof, or an estate or trust that
is subject to U.S. federal income tax regardless of the source of its income.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual 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
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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.
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.
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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 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
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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 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)
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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 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
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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 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 financial institution described in Code
Section 593(a) will be considered to represent "qualifying real
property loans" within the meaning of Code Section 593(d)(1), provided that
the real property securing the Mortgage Loans represented by that
Certificate is of the type described in such section of the Code.
3. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of
Code Section 856(c)(5)(A) to the extent that the assets of the related Trust
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).
4. A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by
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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, 2 and 3 of the
immediately preceding paragraph. Code Section 593(d)(1)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a Buy-Down Fund is uncertain, but may require that a taxpayer's
investment in a Buy-Down Loan be reduced by the Buy-Down Fund. As to the
treatment of Buy-Down Loans as "qualifying real property loans" under Code
Section 593(d)(1) if the exception of Code Section 593(d)(1)(C) is inapplicable,
as "loans...secured by an interest in real property" under Code Section
7701(a)(19)(C)(v) or as "real estate assets" under Code Section 856(c)(5)(A),
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 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
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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 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
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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 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
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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. 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.
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.
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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 and the Proposed OID Regulations. The Proposed 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 Proposed 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.
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
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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 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,
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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.
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,
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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 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.
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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 "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
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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.
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,
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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).
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.
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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.
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
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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.
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INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
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<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...................................................................................................... 95
Deferred Interest........................................................................................ 17
Definitive Certificates.................................................................................. 11
Delegated Underwriting................................................................................... 21
Department............................................................................................... 94
Depository............................................................................................... 43
Detailed Information..................................................................................... 2
Disqualified Organization................................................................................ 81
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.................................................................................................... 95
Fixed Retained Yield..................................................................................... 35
FNMA..................................................................................................... 25
Fraud Loss............................................................................................... 37
</TABLE>
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<TABLE>
<CAPTION>
TERM PAGE
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Fraud Loss Amount........................................................................................ 37
<S> <C>
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.................................................................................................. 95
Mortgage Interest Rate................................................................................... 35
Mortgage Loans........................................................................................... cover
Mortgage Notes........................................................................................... 15
Mortgaged Properties..................................................................................... 15
Mortgages................................................................................................ 15
NASCOR................................................................................................... cover
NCUA..................................................................................................... 98
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...................................................................................... 81
Paying Agent............................................................................................. 46
Percentage Interest...................................................................................... 34
Periodic Advances........................................................................................ 10
PHMC..................................................................................................... 19
PHMC Mortgage Loans...................................................................................... 19
Plans.................................................................................................... 93
Policy Statement......................................................................................... 98
Pool Distribution Amount................................................................................. 34
Pool Insurers............................................................................................ 25
Pooling and Servicing Agreement.......................................................................... 8
Prepayment Assumption.................................................................................... 71
Program Loans............................................................................................ 42
Proposed Mark to Market Regulations...................................................................... 83
Proposed OID Regulations................................................................................. 70
PTE 83-1................................................................................................. 96
Qualified Mortgage....................................................................................... 30
Rating Agency............................................................................................ 12
Record Date.............................................................................................. 10
</TABLE>
102
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<TABLE>
<CAPTION>
TERM PAGE
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Regular Certificateholder................................................................................ 69
<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......................................................................................... 96
Rules.................................................................................................... 32
S&P...................................................................................................... 95
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.............................................................................................. 82
UCC...................................................................................................... 61
UGRIC.................................................................................................... 25
Underlying Servicing Agreement........................................................................... 8
Underwriter's Exemption.................................................................................. 95
Voting Interests......................................................................................... 56
Window Period............................................................................................ 65
Window Period Loans...................................................................................... 65
Window Period States..................................................................................... 65
</TABLE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER
OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
INDEX
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Table of Contents................................. S-6
Summary Information............................... S-8
Risk Factors...................................... S-32
Description of the Certificates................... S-33
Description of Mortgage Loans..................... S-72
Delinquency and Foreclosure
Experience...................................... S-82
Prepayment and Yield Considerations............... S-88
Pooling and Servicing Agreement................... S-101
Servicing of the Mortgage Loans................... S-103
Federal Income Tax Considerations................. S-106
ERISA Considerations.............................. S-109
Legal Investment.................................. S-110
Secondary Market.................................. S-110
Underwriting...................................... S-111
Legal Matters..................................... S-112
Experts........................................... S-112
Use of Proceeds................................... S-112
Ratings........................................... S-113
Index of Significant Prospectus Supplement
Definitions..................................... S-114
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.............................. 99
Use of Proceeds................................... 100
Legal Matters..................................... 100
Rating............................................ 100
Index of Significant Definitions.................. 101
</TABLE>
$373,217,000
(APPROXIMATE)
NORWEST ASSET
SECURITIES CORPORATION
("NASCOR")
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1996-1
------------------------
PROSPECTUS SUPPLEMENT
-------------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
SALOMON BROTHERS INC
EDWARD JONES
July , 1996
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