<PAGE>
PROSPECTUS SUPPLEMENT [LOGO OF NORWEST APPEARS HERE]
(To Prospectus Dated March 19, 1997)
$148,827,599
(Approximate)
NORWEST ASSET SECURITIES CORPORATION ("NASCOR")
Seller
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-5 PRINCIPAL AND INTEREST
PAYABLE MONTHLY, COMMENCING IN APRIL 1997
-------------
The Series 1997-5 Mortgage Pass-Through Certificates (the "Series 1997-5
Certificates") will consist of one class of senior certificates (the "Class A
Certificates") and two classes of subordinated certificates (the "Class M
Certificates" and the "Class B Certificates," respectively, and together, the
"Subordinated Certificates"). The Class A Certificates are entitled to a
certain priority, relative to the Class M and Class B Certificates, in right of
distributions on the Mortgage Loans. As between the Class M Certificates and
the Class B Certificates, the Class M Certificates are entitled to a certain
priority in right of distributions on the Mortgage Loans. The Class A
Certificates will consist of eight subclasses of Certificates designated as the
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-PO, Class A-WIO
and Class A-R Certificates. The Class M Certificates will not be divided into
subclasses. The Class B Certificates will consist of five subclasses of
Certificates designated as the Class B-1, Class B-2, Class B-3, Class B-4 and
Class B-5 Certificates. Each subclass of Class A and Class B Certificates is
referred to herein as a "Subclass." The Class A Certificates, other than the
Class A-WIO Certificates, the Class M Certificates and the Class B-1 and Class
B-2 Certificates are the only Series 1997-5 Certificates being offered hereby
and are referred to herein collectively as the "Offered Certificates." The
Class A Certificates, other than the Class A-WIO Certificates, are referred to
herein collectively as the "Offered Class A Certificates." The Class B-1 and
Class B-2 Certificates are referred to herein collectively as the "Offered
Class B Certificates."
(Continued on next page)
-------------
THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF NORWEST AS-
SET SECURITIES CORPORATION OR ANY AFFILIATE THEREOF. NEITHER THESE SECURI-
TIES 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 SECURI-
TIES 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 OF-
FENSE.
-------------
<TABLE>
<CAPTION>
SUBCLASS OR INITIAL SUBCLASS OR
CLASS CLASS PRINCIPAL PASS-THROUGH
DESIGNATION BALANCE(1) RATE
----------- ------------------- ------------
<S> <C> <C>
Class A-1...... $20,600,000 7.000%
Class A-2...... $66,361,000 7.000%
Class A-3...... $12,896,000 7.000%
Class A-4...... $ 8,097,000 7.000%
Class A-5...... $37,228,000 7.000%
</TABLE>
<TABLE>
<CAPTION>
INITIAL SUBCLASS OR
SUBCLASS OR CLASS CLASS PRINCIPAL PASS-THROUGH
DESIGNATION BALANCE(1) RATE
----------------- ------------------- ------------
<S> <C> <C>
Class A-PO............. $1,021,549 (2)
Class A-R.............. $ 50 7.000%
Class M................ $1,500,000 7.000%
Class B-1.............. $ 750,000 7.000%
Class B-2.............. $ 374,000 7.000%
</TABLE>
- ------
(1) Approximate. The initial Subclass or Class Principal Balances are
subject to adjustment as described herein.
(2) The Class A-PO Certificates are principal-only certificates and will not
be entitled to distributions in respect of interest.
-------------
Prospective investors in the Offered Certificates should consider the factors
discussed under "Risk Factors" in this Prospectus Supplement on page S-28 and
in the Prospectus on page 12.
-------------
The Offered Certificates (other than the Class A-PO Certificates) will be
purchased by Morgan Stanley & Co. Incorporated ("Morgan Stanley") from the
Seller and will be offered by Morgan Stanley from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The Class A-PO Certificates will be purchased by Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ," and together with Morgan
Stanley, the "Underwriters") from the Seller and will be offered by DLJ from
time to time to the public in negotiated transactions or otherwise at varying
prices to be determined, in each case, at the time of sale. Proceeds to the
Seller are expected to be approximately 99.96% of the aggregate initial
principal balance of the Offered Class A Certificates (other than the Class A-
PO Certificates), approximately 68.25% of the aggregate initial principal
balance of the Class A-PO Certificates, approximately 99.34% of the aggregate
initial principal balance of the Class M Certificates, approximately 98.79% of
the aggregate initial principal balance of the Class B-1 Certificates and
approximately 97.43% of the aggregate initial principal balance of the Class B-
2 Certificates, plus, in each case, other than the case of the Class A-PO
Certificates, accrued interest thereon at the rate of 7.000% per annum, from
March 1, 1997 to (but not including) March 27, 1997, before deducting expenses
payable by the Seller estimated to be $250,000. The price to be paid to the
Seller by Morgan Stanley for the Offered Class A Certificates (other than the
Class A-PO Certificates) has not been allocated among such Subclasses. See
"Underwriting" herein.
The Offered Certificates purchased by each Underwriter are offered by such
Underwriter subject to prior sale, when, as and if accepted by such Underwriter
and subject to approval of certain legal matters by Brown & Wood LLP, counsel
for the Underwriters. It is expected that delivery of the Offered Certificates
will be made on or about March 27, 1997 through the facilities of The
Depository Trust Company or, in the case of the Class A-R, Class M, Class B-1
and Class B-2 Certificates, at the offices of Morgan Stanley & Co.
Incorporated, New York, New York, and in the case of the Class A-PO
Certificates, at the offices of Donaldson, Lufkin & Jenrette Securities
Corporation, New York, New York, in each case, on or about March 27, 1997.
-------------
MORGAN STANLEY & CO.
Incorporated
March 20, 1997
<PAGE>
(Continued from previous page)
The credit enhancement for the Series 1997-5 Certificates is provided through
the use of a "shifting interest" type subordination, which has the effect of
allocating all or a disproportionate amount of principal prepayments and other
unscheduled receipts of principal to the Class A Certificates (other than the
Class A-PO Certificates) in the aggregate for at least nine years beginning on
the first Distribution Date. See "Summary Information -- Distributions of Prin-
cipal and Interest -- Principal Distributions," "-- Credit Enhancement" and "--
Effects of Prepayments on Investment Expectations," "Description of the Cer-
tificates" and "Prepayment and Yield Considerations" herein.
The Series 1997-5 Certificates will evidence in the aggregate the entire ben-
eficial 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 10 years to approximately 15 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 1997-5 Certifi-
cates 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 ac-
quired from PHMC were originated by the Norwest Mortgage Correspondents or ac-
quired by the Norwest Mortgage Correspondents pursuant to mortgage loan pur-
chase programs operated by such Norwest Mortgage Correspondents. See "Descrip-
tion of the Mortgage Loans" herein. The Class A Certificates will initially ev-
idence in the aggregate an approximate 97.50% undivided interest in the princi-
pal balance of the Mortgage Loans. The Class M Certificates will initially evi-
dence in the aggregate an approximate 1.00% undivided interest in the principal
balance of the Mortgage Loans. The Class B-1 Certificates will initially evi-
dence in the aggregate an approximate 0.50% undivided interest in the principal
balance of the Mortgage Loans. The Class B-2 Certificates will initially evi-
dence in the aggregate an approximate 0.25% undivided interest in the principal
balance of the Mortgage Loans. The remaining approximate 0.75% undivided inter-
est in the principal balance of the Mortgage Loans will be evidenced by the
Class B-3, Class B-4 and Class B-5 Certificates.
Distributions in respect of interest and principal will be made on the 25th
day of each month or, if such day is not a business day, on the succeeding
business day (each a "Distribution Date"), commencing in April 1997, to the
holders of Offered Certificates, as described herein. The amount of interest
accrued on any Subclass or Class of Offered Certificates (other than the Class
A-PO Certificates) will 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 Certifi-
cates -- Interest." The Class A-PO Certificates are principal-only certificates
and will not be entitled to distributions of interest. On any Distribution
Date, the holders of the Class M Certificates will receive distributions of in-
terest only if the holders of the Class A Certificates have received all
amounts due them (other than the Class A-PO Deferred Amount) on such date. Dis-
tributions of principal to holders of the Class M Certificates will be made
only after the holders of the Class A Certificates have received all distribu-
tions to which they are entitled (including, in the case of the Class A-PO Cer-
tificates, the Class A-PO Deferred Amount) and the holders of the Class M Cer-
tificates have received the amount of interest due them with respect to such
Distribution Date. On any Distribution Date, the holders of a Subclass of Class
B Certificates will receive distributions of interest only if the holders of
the Class A Certificates and the Class M Certificates and each Subclass of
Class B Certificates with a lower numerical designation have received all
amounts of interest and of principal (other than the Class A-PO Deferred
Amount) to which they are entitled on such date. Distributions of principal to
holders of a Subclass of Class B Certificates will be made only after the hold-
ers of the Class A Certificates, the Class M Certificates and each Subclass of
Class B Certificates with a lower numerical designation have received all dis-
tributions to which they are entitled (including in the case of the Class A-PO
Certificates, the Class A-PO Deferred Amount) and such Subclass of Class B
S-2
<PAGE>
(Continued from previous page)
Certificates has received the amount of interest due with respect to such Dis-
tribution Date. Distributions in reduction of the principal balance of the
Class A Certificates on any Distribution Date will be allocated among the
Subclasses of the Class A Certificates in the manner described herein under
"Description of the Certificates-- Principal (Including Prepayments)." Distri-
butions to each Subclass or undivided Class of Offered Certificates will be
made pro rata among Certificateholders of such Subclass or Class.
The Offered Certificates may not be an appropriate investment for individual
investors who do not have sufficient resources or expertise to evaluate the
particular characteristics of the applicable Subclass or Class of Offered Cer-
tificates. This may be the case because:
. The yield to maturity of Offered Certificates purchased at a price other
than par will be sensitive to the uncertain rate and timing of principal
prepayments on the Mortgage Loans;
. The rate of principal distributions on, and the weighted average life of,
the Offered Certificates will be sensitive to the uncertain rate and
timing of principal prepayments on the Mortgage Loans, and as such the
Offered Certificates may be inappropriate investments for an investor
requiring a distribution of a particular amount of principal on a
specific date or an otherwise predictable stream of distributions;
. There can be no assurance that an investor will be able to reinvest
amounts distributed in respect of principal on an Offered Certificate
(which, in general, are expected to be greater during periods of
relatively low interest rates) at a rate at least as high as the Pass-
Through Rate applicable thereto;
. As discussed below, there can be no assurance that a secondary market for
the Offered Certificates will develop or provide Certificateholders with
liquidity of investment; and
. The Offered Certificates are subject to the further risks and other
special considerations discussed herein and in the Prospectus under the
heading "Risk Factors."
THE YIELD TO MATURITY OF THE OFFERED CERTIFICATES WILL BE SENSITIVE IN VARY-
ING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAY-
MENTS, WHICH MAY BE MADE AT ANY TIME WITHOUT PENALTY) ON THE MORTGAGE LOANS.
INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE ASSOCIATED RISKS, IN-
CLUDING, IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT, PARTICU-
LARLY THE CLASS A-PO CERTIFICATES, THE RISK THAT A SLOWER THAN ANTICIPATED RATE
OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE
LOANS, OR IN THE CASE OF THE CLASS A-PO CERTIFICATES, ON THE DISCOUNT MORTGAGE
LOANS, COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED AND, IN
THE CASE OF OFFERED CERTIFICATES PURCHASED AT A PREMIUM, THAT A FASTER THAN AN-
TICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON
THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICI-
PATED. INVESTORS PURCHASING OFFERED CERTIFICATES AT A PREMIUM SHOULD ALSO CON-
SIDER 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 INVEST-
ORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. THE YIELD TO INVESTORS IN THE
CLASS A-PO CERTIFICATES WILL BE SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS OF
THOSE MORTGAGE LOANS WITH NET MORTGAGE INTEREST RATES LESS THAN 7.000% (THE
"DISCOUNT MORTGAGE LOANS"). THE YIELD TO MATURITY OF THE CLASS M CERTIFICATES
WILL BE MORE SENSITIVE THAN THAT OF THE CLASS A CERTIFICATES TO THE AMOUNT AND
TIMING OF LOSSES DUE TO LIQUIDATIONS OF THE MORTGAGE LOANS IN THE EVENT THAT
THE CLASS B PRINCIPAL BALANCE HAS BEEN REDUCED TO ZERO.
THE YIELD TO MATURITY OF EACH SUBCLASS OF OFFERED CLASS B CERTIFICATES WILL
BE MORE SENSITIVE THAN THAT OF THE CLASS A CERTIFICATES, THE CLASS M CERTIFI-
CATES AND, IN THE CASE OF THE CLASS B-2 CERTIFICATES, THE CLASS B-1 CERTIFI-
CATES, TO THE AMOUNT AND TIMING OF LOSSES DUE TO LIQUIDATIONS OF THE MORTGAGE
LOANS IN THE EVENT THAT THE PRINCIPAL BALANCES OF THE SUBCLASSES OF CLASS B
CERTIFICATES WITH HIGHER NUMERICAL DESIGNATIONS HAVE BEEN REDUCED TO ZERO. SEE
"DESCRIPTION OF THE CERTIFICATES -- INTEREST," "-- PRINCIPAL (INCLUDING PREPAY-
MENTS)" AND "-- SUBORDINATION OF CLASS M AND CLASS B CERTIFICATES" HEREIN AND
"PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN AND IN THE PROSPECTUS.
The Offered Certificates, other than the Class A-PO, Class A-R, Class M and
Offered Class B Certificates, will be issued only in book-entry form (the
"Book-Entry Certificates"), and purchasers thereof will not be entitled to re-
ceive 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
S-3
<PAGE>
(Continued from previous page)
will be the "holder" or "Certificateholder" of such Certificates, as such terms
are used herein. See "Description of the Certificates" herein.
Each Subclass and Class of Offered Certificates is offered in the minimum
denominations described herein under "Summary Information -- Forms of
Certificates; Denominations." It is intended that the Offered Certificates not
be directly or indirectly held or beneficially owned in amounts lower than such
minimum denominations.
There is currently no secondary market for the Offered Certificates and there
can be no assurance that a secondary market will develop or, if such a market
does develop, that it will provide Certificateholders with liquidity of invest-
ment at any particular time or for the life of the Offered Certificates. Each
Underwriter intends to act as a market maker in the Offered Certificates pur-
chased by such Underwriter, subject to applicable provisions of federal and
state securities laws and other regulatory requirements, but is under no obli-
gation 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 Certif-
icate was purchased. THE CLASS M AND OFFERED CLASS B CERTIFICATES MAY NOT BE
TRANSFERRED UNLESS THE TRANSFEREE HAS DELIVERED (I) A REPRESENTATION LETTER TO
THE TRUSTEE AND THE SELLER STATING EITHER (A) THAT THE TRANSFEREE IS NOT A PLAN
AND IS NOT ACTING ON BEHALF OF A PLAN OR USING THE ASSETS OF A PLAN TO EFFECT
SUCH PURCHASE OR (B) SUBJECT TO CERTAIN CONDITIONS DESCRIBED HEREIN, THAT THE
SOURCE OF FUNDS USED TO PURCHASE THE CLASS M OR OFFERED CLASS B CERTIFICATES IS
AN "INSURANCE COMPANY GENERAL ACCOUNT" OR (II) AN OPINION OF COUNSEL AND SUCH
OTHER DOCUMENTATION AS PROVIDED IN THIS PROSPECTUS SUPPLEMENT. IN ADDITION, THE
CLASS A-R CERTIFICATE MAY NOT BE PURCHASED BY OR TRANSFERRED TO (I) A "DISQUAL-
IFIED ORGANIZATION," (II) EXCEPT UNDER CERTAIN LIMITED CIRCUMSTANCES, A PERSON
WHO IS NOT A "U.S. PERSON," (III) A PLAN OR A PERSON ACTING ON BEHALF OF OR IN-
VESTING THE ASSETS OF 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 FEDER-
AL, STATE OR LOCAL TAXES WITH RESPECT THERETO. See "ERISA Considerations" and
"Description of the Certificates -- Restrictions on Transfer of the Class A-R,
Class M and Offered Class B Certificates" herein and "Certain Federal Income
Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates --
Tax-Related Restrictions on Transfer of Residual Certificates" in the Prospec-
tus.
An election will be made to treat the Trust Estate as a real estate mortgage
investment conduit (the "REMIC") for federal income tax purposes. 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, Class A-PO and Class A-WIO Certificates, the Class M Cer-
tificates and the Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Cer-
tificates will constitute "regular interests" in the REMIC and the Class A-R
Certificate will constitute the "residual interest" in the REMIC. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT THE CLASS A-R CERTIFICATEHOLDER'S REMIC TAXABLE
INCOME AND THE TAX LIABILITY THEREON MAY EXCEED, AND MAY SUBSTANTIALLY EXCEED,
CASH DISTRIBUTIONS TO SUCH HOLDER DURING CERTAIN PERIODS, IN WHICH EVENT SUCH
HOLDER MUST HAVE SUFFICIENT ALTERNATIVE SOURCES OF FUNDS TO PAY SUCH TAX LIA-
BILITY. See "Summary Information --Federal Income Tax Status" and "Federal In-
come Tax Considerations" herein and "Certain Federal Income Tax Consequences --
Federal Income Tax Consequences for REMIC Certificates" in the Prospectus.
The Offered Class A Certificates represent seven Subclasses of a Class, the
Class M Certificates represent a Class and the Offered Class B Certificates
represent two Subclasses of a Class, all of which are part of a separate Series
of Certificates being offered by the Seller pursuant to the Prospectus dated
March 19, 1997 accompanying this Prospectus Supplement. Any prospective in-
vestor should not purchase any Offered Certificates described herein unless it
shall have received the Prospectus and this Prospectus Supplement. The Prospec-
tus shall not be considered complete without this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read, in full, the
Prospectus and this Prospectus Supplement.
---------------
UNTIL JUNE 23, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CER-
TIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS.
S-4
<PAGE>
(Continued from previous page)
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUP-
PLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER HEREIN
CONTAINED AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE OFFERED CERTIFICATES OFFERED BY THIS PRO-
SPECTUS SUPPLEMENT AND THE PROSPECTUS OR ANY OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE OFFERED CERTIFICATES IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
S-5
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY INFORMATION.................. S-7
RISK FACTORS......................... S-28
General............................. S-28
Subordination....................... S-28
Book-Entry System for Certain
Subclasses of Class A
Certificates....................... S-28
DESCRIPTION OF THE CERTIFICATES...... S-29
Denominations....................... S-29
Definitive Form..................... S-29
Book-Entry Form..................... S-29
Distributions....................... S-29
Interest............................ S-32
Principal (Including Prepayments)... S-37
Calculation of Amount to be
Distributed to the Class A
Certificates (other than the Class
A-PO Certificates)................ S-38
Calculation of Amount to be
Distributed to the Class A-PO
Certificates...................... S-40
Calculation of Amount to be
Distributed to the Class M and
Class B Certificates.............. S-41
Allocation of Amount to be
Distributed....................... S-44
Additional Rights of the Class A-R
Certificateholder.................. S-46
Periodic Advances................... S-46
Restrictions on Transfer of the
Class A-R, Class M and Offered
Class B Certificates............... S-46
Reports............................. S-47
Subordination of Class M and Class B
Certificates....................... S-48
Allocation of Losses............... S-49
DESCRIPTION OF THE MORTGAGE LOANS.... S-53
General............................. S-53
PHMC Acquisition.................... S-55
Mortgage Loan Underwriting.......... S-55
Mortgage Loan Data.................. S-56
Mandatory Repurchase or Substitution
of Mortgage Loans.................. S-58
Optional Repurchase of Defaulted
Mortgage Loans..................... S-58
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DELINQUENCY AND FORECLOSURE
EXPERIENCE.......................... S-59
PREPAYMENT AND YIELD CONSIDERATIONS.. S-63
Sensitivity of the Class A-PO
Certificates....................... S-70
Historic Loss Experience of
Securitized Mortgage Loans......... S-71
Yield Considerations with Respect to
the Class B-1 and Class B-2
Certificates....................... S-72
POOLING AND SERVICING AGREEMENT...... S-75
General............................. S-75
Distributions....................... S-75
Voting.............................. S-75
Trustee............................. S-76
Trust Administrator................. S-76
Master Servicer..................... S-76
Special Servicing Agreements........ S-76
Optional Termination................ S-77
SERVICING OF THE MORTGAGE LOANS...... S-77
The Servicers....................... S-77
Servicer Custodial Accounts......... S-78
Unscheduled Principal Receipts...... S-78
Anticipated Changes in Servicing.... S-79
Servicing Compensation and Payment
of Expenses........................ S-79
Servicer Defaults................... S-80
FEDERAL INCOME TAX CONSIDERATIONS.... S-80
Regular Certificates................ S-80
Residual Certificate................ S-81
ERISA CONSIDERATIONS................. S-82
LEGAL INVESTMENT..................... S-83
SECONDARY MARKET..................... S-83
UNDERWRITING......................... S-84
LEGAL MATTERS........................ S-84
USE OF PROCEEDS...................... S-84
RATINGS.............................. S-85
INDEX OF SIGNIFICANT PROSPECTUS
SUPPLEMENT DEFINITIONS.............. S-86
</TABLE>
S-6
<PAGE>
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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............................................................... 12
The Trust Estates.......................................................... 14
The Seller................................................................. 17
Norwest Mortgage........................................................... 18
Norwest Bank............................................................... 18
The Mortgage Loan Programs................................................. 19
Description of the Certificates............................................ 28
Prepayment and Yield Considerations........................................ 35
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Servicing of the Mortgage Loans............................................ 37
Certain Matters Regarding the Master Servicer.............................. 46
The Pooling and Servicing Agreement........................................ 47
Certain Legal Aspects of the Mortgage Loans................................ 52
Certain Federal Income Tax Consequences.................................... 59
ERISA Considerations....................................................... 81
Legal Investment........................................................... 85
Plan of Distribution....................................................... 86
Use of Proceeds............................................................ 87
Legal Matters.............................................................. 87
Rating..................................................................... 87
Index of Significant Definitions........................................... 88
</TABLE>
S-7
<PAGE>
SUMMARY INFORMATION
The following is qualified in its entirety by reference to the detailed in-
formation appearing elsewhere in this Prospectus Supplement and in the accompa-
nying 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.
Title of Securities... Mortgage Pass-Through Certificates, Series 1997-5 (the
"Series 1997-5 Certificates" or the "Certificates").
Seller................ Norwest Asset Securities Corporation (the "Seller").
The Mortgage Loans will have been acquired by the
Seller from Norwest Mortgage, Inc. ("Norwest Mort-
gage"), an affiliate of the Seller and the Master
Servicer. The Mortgage Loans that the Seller acquires
from Norwest Mortgage will either have been originated
by Norwest Mortgage or acquired by Norwest Mortgage,
or an affiliate of Norwest Mortgage, from The Pruden-
tial Home Mortgage Company, Inc. ("PHMC") or various
other entities (each such other entity, a "Norwest
Mortgage Correspondent"), which either originated the
Mortgage Loans or acquired the Mortgage Loans pursuant
to mortgage loan purchase programs operated by the
Norwest Mortgage Correspondents. The Mortgage Loans
acquired by Norwest Mortgage from PHMC will either
have been originated by PHMC or acquired by PHMC from
various other entities (each such other entity, a
"PHMC Correspondent"). None of the Norwest Mortgage
Correspondents or PHMC Correspondents is an affiliate
of Norwest Mortgage. See "Description of the Mortgage
Loans" in this Prospectus Supplement.
Servicing/Servicers... Norwest Mortgage and one or more other Servicers
(which will be Norwest Mortgage Correspondents or PHMC
Correspondents) 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 re-
spect 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 expressed as one-
twelfth of 0.25% multiplied by the scheduled principal
balance of such Mortgage Loan on the first day of the
preceding 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 af-
filiate of the Seller and Norwest Mortgage. The Master
Servicer will (a) monitor certain aspects of the ser-
vicing 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 Loans and the Certifi-
cates, (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
S-8
<PAGE>
advance and (f) make payments to cover certain prepay-
ment interest shortfalls. The Master Servicer will be
entitled to (i) a monthly Master Servicing Fee with
respect to each Mortgage Loan, payable on each Distri-
bution Date, in an amount equal to one-twelfth of
0.016% multiplied by the scheduled principal balance
of such Mortgage Loan on the first day of the preced-
ing month and (ii) any interest earned on funds in the
Certificate Account. See "Description of the Certifi-
cates -- Interest" and "The Pooling and Servicing
Agreement -- Master Servicer" herein and "Norwest
Bank," "Servicing of the Mortgage Loans -- The Master
Servicer" and "Certain Matters Regarding the Master
Servicer" in the Prospectus.
Trustee............... Firstar Trust Company, a banking corporation organized
under the laws of Wisconsin (the "Trustee"). See
"Pooling and Servicing Agreement --Trustee" in this
Prospectus Supplement.
Trust Administrator... First Union National Bank of North Carolina (the
"Trust Administrator"). The Trust Administrator will
perform certain administrative functions on behalf of
the Trustee and will act as the initial paying agent,
certificate registrar and custodian. The Trust Admin-
istrator will be required to make advances, to the ex-
tent described herein, with respect to the Mortgage
Loans if Norwest Mortgage, as Servicer, fails to make
a required advance. See "Pooling and Servicing Agree-
ment -- Trust Administrator" in this Prospectus Sup-
plement.
Rating of It is a condition to the issuance of the Offered Class
Certificates......... A Certificates, other than the Class A-PO Certifi-
cates, that they shall have been rated "AAA" by Stan-
dard & Poor's ("S&P"). It is a condition to the issu-
ance of the Class A-PO Certificates that they shall
have been rated "AAAr" by S&P. S&P assigns the addi-
tional rating of "r" to highlight classes of securi-
ties that S&P believes may experience high volatility
or high variability in expected returns due to non-
credit risks. It is a condition to the issuance of the
Offered Class A Certificates that they shall have been
rated "AAA" by Fitch Investors Service, L.P.
("Fitch"). It is a condition to the issuance of the
Class M Certificates that they shall have been rated
at least "AA" by S&P and Fitch. It is a condition to
the issuance of the Class B-1 and Class B-2 Certifi-
cates that they shall have been rated at least "A" and
"BBB," respectively, by S&P. The ratings of S&P on
mortgage pass-through certificates address the likeli-
hood of receipt by the certificateholders of timely
payment of interest and the ultimate return of princi-
pal. The ratings of Fitch on mortgage pass-through
certificates address the likelihood of the receipt by
the certificateholders of all distributions of princi-
pal and interest to which such certificateholders are
entitled. The ratings of S&P and Fitch are not recom-
mendations 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 ad-
dress 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
"Ratings" in this Prospectus Supplement.
Description of The Series 1997-5 Certificates will consist of the
Certificates......... Class A Certificates, the Class M Certificates and the
Class B Certificates. The Class A Certificates repre-
sent a type of interest referred to in the Prospectus
as "Senior Certif-
S-9
<PAGE>
icates" and the Class M and Class B Certificates rep-
resent a type of interest referred to in the Prospec-
tus as "Subordinated Certificates." As these designa-
tions suggest, the Class A Certificates are entitled
to a certain priority, relative to the Class M and
Class B Certificates, in right of distributions on the
mortgage loans underlying the Series 1997-5 Certifi-
cates (the "Mortgage Loans"). As between the Class M
Certificates and the Class B Certificates, the Class M
Certificates are entitled to a certain priority in
right of distributions on the Mortgage Loans and, as
among the Subclasses of Class B Certificates, the
Subclasses with lower numerical designations are enti-
tled to a certain priority in right of distributions
on the Mortgage Loans relative to those Subclasses
with higher numerical designations. See "-- Distribu-
tions of Principal and Interest" below.
The Class A Certificates will consist of eight
Subclasses, designated as the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-PO, Class A-
WIO and Class A-R Certificates. The Class M Certifi-
cates will not be divided into subclasses. The Class B
Certificates will consist of five Subclasses, desig-
nated as the Class B-1, Class B-2, Class B-3, Class B-
4 and Class B-5 Certificates. The Class A Certificates
(other than the Class A-WIO Certificates), the Class M
Certificates and the Class B-1 and Class B-2 Certifi-
cates are referred to in this Prospectus Supplement
collectively as the "Offered Certificates." The Class
A Certificates, other than the Class A-WIO Certifi-
cates, are referred to herein collectively as the "Of-
fered Class A Certificates." The Class B-1 and Class
B-2 Certificates are referred to in this Prospectus
Supplement collectively as the "Offered Class B Cer-
tificates." The Class A-WIO, Class B-3, Class B-4 and
Class B-5 Certificates are not offered hereby and may
be retained or sold by the Seller.
The Offered Certificates have the approximate aggre-
gate initial principal balances set forth on the cover
of this Prospectus Supplement. Any difference between
the aggregate principal balance of the Class A,
Class M and Offered Class B Certificates as of the
date of issuance of the Series 1997-5 Certificates and
the approximate aggregate initial principal balance of
such Subclasses and Class as of the date of this Pro-
spectus Supplement will not, with respect to the Class
A Certificates, exceed 5% of the aggregate initial
principal balance of the Class A Certificates stated
on the cover of this Prospectus Supplement and, with
respect to the Class M Certificates and Offered Class
B Certificates, will depend on the final subordination
levels for the Series 1997-5 Certificates. Any differ-
ence allocated to the Class A Certificates will be al-
located to one or more of the Subclasses of Class A
Certificates, other than the Class A-WIO and Class A-R
Certificates.
S-10
<PAGE>
The following table sets forth for each Class and
Subclass indicated the approximate undivided interest
in the principal balance of the Mortgage Loans that is
expected to be evidenced in the aggregate by such
Class or Subclass as of the Closing Date (as defined
herein).
-------------------------------------------------------
<TABLE>
<CAPTION>
APPROXIMATE INITIAL
CLASS OR SUBCLASS UNDIVIDED INTEREST
------------------------------- ---------------------
<S> <C> <C>
Class A (other than Class A-PO) 96.82%
Class A-PO* 0.68%
---------
Class A (all Subclasses) 97.50%
Class M 1.00%
Class B-1 0.50%
Class B-2 0.25%
Classes B-3, B-4 and B-5 0.75%
==========
Total 100.00%
==========
</TABLE>
-------
* The Class A-PO Certificates in the aggregate repre-
sent an approximate 2.73% initial interest in the
principal balances of the Mortgage Loans (such in-
terest in the aggregate, the "Pool Balance (PO Por-
tion)") that have Net Mortgage Interest Rates, as
defined on page S-34, of less than 7.000% (the "Dis-
count Mortgage Loans").
-------------------------------------------------------
By virtue of the subordination of the Class M and
Class B Certificates, it is possible that the Class A-
PO Certificates may receive support from certain pay-
ments made with respect to the Mortgage Loans in the
Trust Estate other than Discount Mortgage Loans. The
Class A Certificates (other than the Class A-PO Cer-
tificates) and the Class M and Class B Certificates
will evidence the entire interest in the principal
balance of the Mortgage Loans other than the Pool Bal-
ance (PO Portion) (such remaining interest, the "Pool
Balance (Non-PO Portion)").
The following table sets forth for each Class indi-
cated the approximate undivided interest in the Pool
Balance (Non-PO Portion) that is expected to be evi-
denced in the aggregate by such Class as of the Clos-
ing Date.
-------------------------------------------------------
<TABLE>
<CAPTION>
APPROXIMATE INITIAL
UNDIVIDED INTEREST
-----------------------
CLASS PERCENTAGE IN DOLLARS
------------------------------- ---------- ------------
<S> <C> <C>
Class A (other than Class A-PO) 97.48% $145,182,050
Class M 1.01 1,500,000
Class B 1.51 2,249,545
------ ------------
Totals 100.00% $148,931,595
====== ============
-------------------------------------------------
</TABLE>
The relative interests in the initial Pool Balance
(Non-PO Portion) represented by the Class A Certifi-
cates (other than the Class A-PO Certificates) and the
Class M and 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-PO Certifi-
cates) for a specified period and the allocation of
certain losses and certain shortfalls first to the
Subclasses of Class B Certificates in reverse numeri-
cal order, and then to the Class M Certificates, prior
to the allocation of
S-11
<PAGE>
such losses and shortfalls to the Class A Certifi-
cates, as discussed in "-- Distributions of Principal
and Interest" and "-- Credit Enhancement" below.
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 benefi-
cially owned in amounts lower than such minimum denom-
inations. See "Descriptions of the Certificates -- De-
nominations" in this Prospectus Supplement.
- --------------------------------------------------------------------------------
FORM AND DENOMINATIONS OF OFFERED CERTIFICATES
<TABLE>
<CAPTION>
ORIGINAL CERTIFICATE MINIMUM INCREMENTAL
CLASS OR SUBCLASS FORM DENOMINATION DENOMINATION
----------------- -------------------- ------------ ------------
<S> <C> <C> <C>
Classes A-1, A-2, A-3, A-4 and
A-5........................... Book-Entry $100,000 $1,000
Class A-PO(/1/)................ Definitive $100,000 $1,000
Class A-R...................... Definitive $ 50 N/A
Class M........................ Definitive $100,000 $1,000
Classes B-1 and B-2............ Definitive $100,000 $1,000
</TABLE>
- -------------------
(1) In order to aggregate the original principal balance of such Subclass, one
Certificate of such Subclass will be issued in an incremental denomination
of less than that shown.
- --------------------------------------------------------------------------------
Book-Entry Form. The Offered Certificates, other than
the Class A-PO, Class A-R, Class M and Offered Class B
Certificates, will be issued in book-entry form,
through the facilities of The Depository Trust Company
("DTC"). These Certificates are referred to collec-
tively in this Prospectus Supplement as the "Book-En-
try Certificates." An investor in a Subclass of Book-
Entry Certificates will not receive a physical certif-
icate 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 Prospec-
tus. 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 dis-
tributions by an investor and may restrict an invest-
or'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 Supplement.
Definitive Form. The Class A-PO, Class A-R, Class M
and Offered Class B Certificates will each be issued
as Definitive Certificates. See "Description of the
Certificates -- Denominations" and "-- Definitive
Form" in this Prospectus Supplement.
Mortgage Loans........ General. The Mortgage Loans, which are the source of
distributions to holders of the Series 1997-5 Certifi-
cates, will consist of conventional, fixed interest
rate, monthly pay, fully amortizing, one- to four-fam-
ily, residential first mortgage loans, having original
terms to stated maturity
S-12
<PAGE>
ranging from approximately 10 to approximately 15
years, which may include loans secured by cooperative
housing corporations. Some of the Mortgage Loans are
expected to be mortgage loans originated in connection
with the relocation of employees of various corporate
employers participating in Norwest Mortgage's or
PHMC's relocation program and of employees of various
non-participating employers.
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.
- --------------------------------------------------------------------------------
SELECTED MORTGAGE LOAN DATA(/1/)
(AS OF THE CUT-OFF DATE)
<TABLE>
<S> <C> <C>
Cut-Off Date: March 1, 1997
Number of Mortgage Loans: 494
Aggregate Unpaid Principal Balance(/2/): $149,953,144
Range of Unpaid Principal Balances(/2/): $24,340 to $997,111
Average Unpaid Principal Balance(/2/): $303,549
Aggregate Unpaid Principal Balance of Relocation
Mortgage Loans(/2/): $11,650,465
Relocation Mortgage Loans as a Percentage of the
Aggregate Unpaid Principal Balance(/2/): 7.77%
Range of Mortgage Interest Rates: 6.500% to 8.875%
Weighted Average Mortgage Interest Rate(/2/): 7.544%
Range of Remaining Terms to Stated Maturity: 116 months to 180 months
Weighted Average Remaining Term to Stated
Maturity(/2/): 178 months
Range of Original Loan-to-Value Ratios(/2/): 18.07% to 95.00%
Weighted Average Original Loan-to-Value Ratio(/2/): 68.22%
Geographic Concentration of Mortgaged Properties
Securing Mortgage Loans in Excess of 5% of the
Aggregate Unpaid Principal Balance(/2/): California 22.75%
New Jersey 5.84%
Florida 5.26%
Maximum Five-Digit Zip Code Concentration(/2/): 1.17%
</TABLE>
- -----------------
(1) Information concerning the Discount Mortgage Loans and Premium Mortgage
Loans is set forth under "Description of the Mortgage Loans -- General."
(2) Approximate.
- --------------------------------------------------------------------------------
PHMC Acquisition. On May 7, 1996, Norwest Mortgage and
an affiliate acquired from PHMC certain mortgage loans
and a substantial portion of PHMC's mortgage servicing
portfolio (such transaction, the "PHMC Acquisition").
The Mortgage Loans included in the Trust Estate con-
sist of (i) Mortgage Loans originated by Norwest Mort-
gage 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 "Description
of the Mortgage Loans -- PHMC Acquisition" in this
Prospectus Supplement and "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
S-13
<PAGE>
issuance of the Series 1997-5 Certificates (which is
expected to occur on or about March 27, 1997) (the
"Closing Date"). Any of such Mortgage Loans may be ex-
cluded from the Trust Estate (i) as a result of prin-
cipal prepayment thereof in full or (ii) if, as a re-
sult of delinquencies or otherwise, the Seller other-
wise 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 cer-
tain of the pool characteristics set forth in the ta-
ble 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 1997-5 Certificates vary materially from those
described herein, revised information regarding the
Mortgage Loans will be made available to purchasers of
the Offered Certificates on or before such issuance
date, and a Current Report on Form 8-K containing such
information will be filed with the Securities and Ex-
change Commission within 15 days following such issu-
ance date. See "Description of the Mortgage Loans" in
this Prospectus Supplement.
Subsequent to the issuance of the Series 1997-5 Cer-
tificates, certain Mortgage Loans may be removed from
the pool through repurchase or, under certain circum-
stances, through substitution by the Seller, if the
Mortgage Loans are discovered to have defective docu-
mentation or if they otherwise do not conform to the
standards established by the Seller's representations
and warranties concerning the Mortgage Loans. See "De-
scription of the Mortgage Loans -- Mandatory Repur-
chase or Substitution of Mortgage Loans" in this Pro-
spectus 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
1997-5 Certificates. See "Pooling and Servicing Agree-
ment -- Optional Termination" in this Prospectus Sup-
plement.
Underwriting
Standards............ Approximately 97.69% (by Cut-Off Date Aggregate Prin-
cipal Balance) of the Mortgage Loans were generally
originated in conformity with the underwriting stan-
dards described in the Prospectus under the heading
"The Mortgage Loan Programs -- Mortgage Loan Under-
writing -- Norwest Mortgage Underwriting" (the "Under-
writing Standards"). In certain instances, exceptions
to the Underwriting Standards may have been granted by
Norwest Mortgage or PHMC. See "The Mortgage Loan Pro-
grams --Mortgage Loan Underwriting" in the Prospectus.
The remaining approximate 2.31% (by Cut-Off Date Ag-
gregate 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 Stan-
dards (the "Bulk Purchase Underwritten Loans"). Howev-
er, Norwest Mortgage or PHMC has in each case reviewed
the underwriting standards applied for such Bulk Pur-
chase Underwritten Loans and determined that such
variances did not depart materially from the Under-
writing Standards. See "Description of the Mortgage
Loans" in this Prospectus Supplement and "The Mortgage
Loan Programs -- Mortgage Loan Underwriting" in the
Prospectus.
S-14
<PAGE>
Distributions of
Principal and
Interest............. Distributions in General. Distributions on the Series
1997-5 Certificates will be made on the 25th day of
each month, or, if such day is not a business day, on
the succeeding business day (each such date is re-
ferred to in this Prospectus Supplement as a "Distri-
bution Date"), commencing in April 1997, to holders of
record at the close of business on the last business
day of the preceding month. In the case of the Book-
Entry Certificates, the holder of record will be Cede
& Co., as nominee of DTC.
The amount available for distribution on any Distribu-
tion Date is primarily a function of (i) the amount
remitted by mortgagors of the Mortgage Loans in pay-
ment of their scheduled installments of principal and
interest, (ii) the amount of prepayments made by the
mortgagors and (iii) proceeds from liquidations of de-
faulted Mortgage Loans.
On any Distribution Date, holders of the Class A Cer-
tificates will be entitled to receive all amounts due
them (other than the Class A-PO Deferred Amount, as
defined on page S-41) before any distributions are
made to holders of the Class M or Class B Certificates
on that Distribution Date. The Class A-PO Certificates
will be entitled to receive the Class A-PO Deferred
Amount as described below. The amount that is avail-
able to be distributed on any Distribution Date will
be allocated first to pay interest due to the holders
of the Class A Certificates and then, if the amount
available for distribution exceeds the amount of in-
terest due to the holders of such Certificates, to pay
the principal due to the holders of the Class A Cer-
tificates. The likelihood that a holder of a particu-
lar Subclass of Class A Certificates (other than the
Class A-PO Certificates) will receive principal dis-
tributions on any Distribution Date will depend on the
priority in which such Subclass is entitled to princi-
pal distributions, as set forth under the headings
"Description of the Certificates -- Principal (Includ-
ing Prepayments) -- Allocation of Amount to be Dis-
tributed" and "-- Calculation of Amount to be Distrib-
uted to the Class A Certificates (other than the Class
A-PO Certificates)" in this Prospectus Supplement.
After all amounts due on the Class A Certificates
(other than the Class A-PO Deferred Amount) have been
paid, the amount remaining will be distributed, in the
following order, to pay (i) any Class A-PO 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 oth-
erwise distributable as principal on the Class B-5
Certificates, then from amounts otherwise distributa-
ble as principal on the Class B-4 Certificates, and so
on), and then from amounts otherwise distributable as
principal on the Class M Certificates, (ii) interest
due to the holders of the Class M Certificates, (iii)
principal due to the holders of the Class M Certifi-
cates less any amounts used to pay the Class A-PO De-
ferred Amount and (iv) with respect to each Subclass
of Class B Certificates sequentially in numerical or-
der, interest due and then principal due to the hold-
ers of each such Subclass of Class B Certificates be-
fore any Subclasses of Class B Certificates with
higher numerical designations receive any payments in
respect of interest or principal, provided that the
principal due to the holders of any Subclass of Class
B Certificates will be reduced by any amount used to
pay the Class A-PO Deferred Amount. See "Description
of the Certificates -- Distributions" in this Prospec-
tus Supplement.
S-15
<PAGE>
If any mortgagor is delinquent in the payment of prin-
cipal or interest on a Mortgage Loan in any month, the
respective Servicer is required to advance such pay-
ment unless such Servicer determines that the delin-
quent 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 cir-
cumstances, be required to make such advances upon a
Servicer's default on its obligation to advance. See
"Description of the Certificates -- Periodic Advances"
in this Prospectus Supplement.
Interest Distributions. The amount of interest to
which holders of each Subclass or Class of Offered
Certificates, other than the Class A-PO Certificates,
will be entitled each month is calculated based on the
outstanding principal balance of such Subclass or
Class as of the related Distribution Date. Interest
will accrue each month on each such Subclass or Class
according to the following formula: 1/12th of the
Pass-Through Rate for such Subclass or Class multi-
plied by the outstanding principal balance of such
Subclass or Class as of the related Distribution Date.
Holders of the Class A-PO Certificates will not be en-
titled to receive distributions of interest.
The "Pass-Through Rate" for each Subclass or Class of
Offered Certificates is the percentage set forth on
the cover of this Prospectus Supplement.
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 by mort-
gagors, the Master Servicer will be obligated to cover
resulting interest shortfalls with respect to a Dis-
tribution Date in an amount (such amount, "Compensat-
ing 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 by mortgagors, to the
extent they exceed the amount of Compensating Interest
with respect to a Distribution Date ("Non-Supported
Interest Shortfalls"), will be allocated pro rata
among the Class A Certificates (other than the
Class A-PO Certificates), the Class M Certificates and
the Class B Certificates, based on their then-out-
standing principal balances. The amount allocated to
the Class A or Class B Certificates will be allocated
pro rata among the Subclasses of Class A or Class B
Certificates, as the case may be, based on interest
accrued. See "Description of the Certificates -- In-
terest" in this Prospectus Supplement.
Interest shortfalls resulting from partial principal
prepayments and other unscheduled principal receipts
(other then principal prepayments in full by mortga-
gors) will not be covered by the Master Servicer, but
instead will
S-16
<PAGE>
be borne first by the Class B Certificates in reverse
numerical order, second by the Class M Certificates
and, finally, pro rata by the Class A Certificates
(other than the Class A-PO Certificates) based on in-
terest accrued. See "Description of the Certifi-
cates -- Subordination of Class M and Class B Certifi-
cates" in this Prospectus Supplement.
In addition, the amount of interest required to be
distributed to holders of the Series 1997-5 Certifi-
cates will be reduced by a portion of certain Special
Hazard Losses, Fraud Losses and Bankruptcy Losses at-
tributable to interest. See "-- Credit Enhancement --
Extent of Loss Coverage" below and "Description of
the Certificates -- Interest" in this Prospectus Sup-
plement.
To the extent that the amount available for distribu-
tion on any Distribution Date is insufficient to per-
mit the distribution of the applicable amount of ac-
crued interest on the Class A Certificates (net of any
Non-Supported Interest Shortfall, other shortfalls and
losses allocable to the Class A Certificates as de-
scribed above), the amount of interest to be distrib-
uted will be allocated among the outstanding
Subclasses of Class A Certificates (other than the
Class A-PO Certificates) in accordance with their re-
spective entitlements to interest. The amount of any
deficiency will be added to the amount of interest
that such Class A Certificates are entitled to receive
on subsequent Distribution Dates. No interest will ac-
crue on such deficiencies.
To the extent that the amount available for distribu-
tion on any Distribution Date, after the payment of
all amounts due the Class A Certificates (other than
any Class A-PO Deferred Amount) has been made, is in-
sufficient to permit distribution in full of accrued
interest on the Class M Certificates (net of any Non-
Supported Interest Shortfall, other shortfalls and
losses allocable to the Class M Certificates as de-
scribed above), the amount of any deficiency will be
added to the amount of interest that the Class M Cer-
tificates are entitled to receive on subsequent Dis-
tribution Dates. No interest will accrue on such defi-
ciencies.
To the extent that the amount available for distribu-
tion on any Distribution Date, after the payment of
all amounts due the Class A Certificates (other than
the Class A-PO Deferred Amount), the Class M Certifi-
cates and each Subclass of Class B Certificates with a
lower numerical designation has been made, is insuffi-
cient to permit distribution in full of accrued inter-
est on a Subclass of Class B Certificates (net of any
Non-Supported Interest Shortfall, other shortfalls and
losses allocable to such Subclass of Class B Certifi-
cates as described above), the amount of any defi-
ciency will be added to the amount of interest that
such Subclass of Class B Certificates is entitled to
receive on subsequent Distribution Dates. No interest
will accrue on such deficiencies.
Interest on the Class A Certificates (other than the
Class A-PO Certificates), the Class M Certificates and
the Class B Certificates will be calculated on the ba-
sis of a 360-day year consisting of twelve 30-day
months.
See "Description of the Certificates -- Interest" in
this Prospectus Supplement.
S-17
<PAGE>
Principal Distributions. The aggregate amount of prin-
cipal to which the holders of the Class A Certificates
(other than the holders of the Class A-PO Certifi-
cates) 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 Per-
centage") of certain unscheduled payments of principal
on each Mortgage Loan. The "Non-PO Fraction" with re-
spect to any Mortgage Loan will equal the lesser of
(a) the Net Mortgage Interest Rate for such Mortgage
Loan divided by 7.000% and (b) 1.0. The Class A Per-
centage will be equal, on each Distribution Date, to
the percentage corresponding to the fraction that rep-
resents the ratio of the then-outstanding principal
balance of the Class A Certificates (other than the
Class A-PO Certificates) 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 percent-
age of the principal otherwise distributable to the
holders of the Subordinated Certificates. As a result,
the percentage of certain unscheduled principal pay-
ments otherwise distributable to the holders of the
Subordinated Certificates that is instead distributa-
ble to the holders of the Class A Certificates (other
than the Class A-PO Certificates) will be equal to
100% during the first five years beginning on the
first Distribution Date and, subject to meeting cer-
tain conditions, will likely decline during the subse-
quent four years, as described under the heading "De-
scription of the Certificates --Principal (Including
Prepayments) -- Calculation of Amount to be Distrib-
uted to the Class A Certificates (other than the
Class A-PO Certificates)" in this Prospectus Supple-
ment, until the ninth anniversary of the first Distri-
bution Date and thereafter will likely be equal to ze-
ro. On each Distribution Date, the Subordinated Cer-
tificates will collectively be entitled to receive the
percentages of the scheduled and certain unscheduled
payments of principal on the portion of each Mortgage
Loan representing the Non-PO Fraction of such Mortgage
Loan equal, in each case, to 100% less the applicable
percentage for the Class A Certificates (other than
the Class A-PO Certificates) described above.
As a result of the method of calculating the Class A-5
Priority Amount (as defined herein) and the priorities
for the allocation of the Class A Non-PO Principal
Distribution Amount (as defined herein), it is ex-
pected that, absent an exceptionally high rate of
principal prepayments on the Mortgage Loans, no prin-
cipal prepayments will be made on the Class A-5 Cer-
tificates during the first five years following the
issuance of the Series 1997-5 Certificates. Thereaf-
ter, while the percentage of principal prepayments al-
located to the Class A-5 Certificates during the four
years thereafter will gradually increase, such per-
centage, until the tenth year following the issuance
of the Series 1997-5 Certificates, will be dispropor-
tionately lower than the percentage of principal pre-
payments allocated to the other Class A Certificates
(other than the Class A-PO Certificates). See "De-
scription of the Certificates -- Principal (Including
Prepayments) -- Allocation of Amount to be Distribut-
ed" and "Prepayment and Yield Considerations" in this
Prospectus Supplement.
The aggregate amount of principal to which holders of
the Class A-PO Certificates are entitled each month
will equal the sum for each Discount
S-18
<PAGE>
Mortgage Loan of the product of (a) the PO Fraction
for such Mortgage Loan and (b) the sum of (i) sched-
uled principal payments on such Mortgage Loan and (ii)
certain unscheduled payments of principal on such
Mortgage Loan. See "Description of the Certificates --
Principal (Including Prepayments) -- Calculation of
Amount to be Distributed to the Class A-PO Certifi-
cates" in this Prospectus Supplement. In addition, the
Class A-PO 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-PO 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 (In-
cluding Prepayments)" in this Prospectus Supplement.
The holders of the Class A-PO Certificates will also
be entitled each month to an amount equal to the Class
A-PO Deferred Amount. The Class A-PO Deferred Amount
will be paid to holders of the Class A-PO Certificates
only from amounts otherwise distributable as principal
to the Subclasses of Class B Certificates in reverse
numerical order and then from amounts otherwise dis-
tributable as principal to the Class M Certificates.
No interest will accrue on any Class A-PO Deferred
Amount.
Except as described below under "-- Effect of Subordi-
nation Level on Principal Distributions," on each Dis-
tribution Date, the Class M, Class B-1 and Class B-2
Certificates will be entitled to a portion of sched-
uled payments and certain unscheduled payments of
principal on the Mortgage Loans allocable to the Sub-
ordinated Certificates that represents the ratio of
the then-outstanding principal balance of the Class M,
Class B-1 or Class B-2 Certificates, as the case may
be, to the then-outstanding principal balance of the
Subordinated Certificates.
The amount that is available for distribution to the
holders of the Class A Certificates on any Distribu-
tion Date as a distribution of principal (other than
any Class A-PO Deferred Amount) is equal to the amount
remaining after deducting the amount of interest dis-
tributable on the Class A Certificates from the total
amount collected that is available to be distributed
to holders of the Series 1997-5 Certificates on such
Distribution Date. Principal will be distributed to
the holders of the Class A Certificates in accordance
with the payment priorities described under the head-
ing "Description of the Certificates -- Principal (In-
cluding Prepayments) -- Allocation of Amount to be
Distributed."
The amount that is available for distribution to the
holders of the Class M Certificates on any Distribu-
tion Date as a distribution of principal is the amount
remaining after all interest and principal distribu-
tions due on the Class A Certificates (including any
Class A-PO Deferred Amount) and interest due on the
Class M Certificates have been deducted from the total
amount collected that is available to be distributed
to holders of the Series 1997-5 Certificates.
The amount that is available for distribution to the
holders of a Subclass of Class B Certificates on any
Distribution Date as a distribution of prin-
S-19
<PAGE>
cipal is the amount remaining after all interest and
principal distributions due on the Class A Certifi-
cates (including any Class A-PO Deferred Amount), all
interest and principal distributions on the Class M
Certificates and the Subclasses of Class B Certifi-
cates with lower numerical designations and interest
due on such Subclass of Class B Certificates have been
deducted from the total amount collected that is
available to be distributed to holders of the Series
1997-5 Certificates.
Effect of Subordination Level on Principal
Distributions. In order to preserve the availability
of the original subordination level as protection
against losses on the Class M Certificates, the Class
B-1 Certificates, the Class B-2 Certificates, the
Class B-3 Certificates and the Class B-4 Certificates,
some or all of the Subclasses of Class B Certificates,
as described below, may not be entitled to distribu-
tions of principal on certain Distribution Dates and
the principal balances of such Subclasses will not be
considered for purposes of allocation of principal
among the Subordinated Certificates.
In the case of the Class M Certificates, if on any
Distribution Date the percentage obtained by dividing
the outstanding principal balance of the Class B Cer-
tificates by the sum of the outstanding principal bal-
ances of the Class A Certificates (other than the
Class A-PO Certificates), the Class M Certificates and
the Class B Certificates is less than such percentage
was upon the initial issuance of the Series 1997-5
Certificates, then the Class B Certificates will not
be entitled to distributions of principal on such Dis-
tribution Date and the Class M Certificates will be
entitled to all distributions of principal allocable
to the Subordinated Certificates for such Distribution
Date.
In the case of the Class B-1, Class B-2, Class B-3 or
Class B-4 Certificates, if on any Distribution Date
the percentage obtained by dividing the sum of the
then-outstanding principal balances of the Subclasses
of Class B Certificates with higher numerical designa-
tions by the sum of the then-outstanding principal
balances of the Class A Certificates (other than the
Class A-PO Certificates), the Class M Certificates and
the Class B Certificates is less than such percentage
at the time of the initial issuance of the Series
1997-5 Certificates, then such Subclasses of Class B
Certificates with higher numerical designations will
not be entitled to distributions of principal and the
principal balances of such Subclasses will not be
taken into account for purposes of calculating the
portions of scheduled and unscheduled principal pay-
ments allocable to the Class M Certificates and to the
Subclasses of Class B Certificates with lower numeri-
cal designations.
In either of the cases described above, the Class M
Certificates and those Subclasses of Class B Certifi-
cates with lower numerical designations will receive a
greater portion of scheduled and unscheduled payments
of principal on the Mortgage Loans allocable to the
Subordinated Certificates than the Class M Certifi-
cates and those Subclasses of Class B Certificates
with lower numerical designations would have received
had all Subclasses of Class B Certificates been enti-
tled to their portion of such principal payments. See
"Description of the Certificates -- Principal (Includ-
ing Prepayments) -- Calculation of Amount to be Dis-
tributed to the Class M and Class B Certificates" in
this Prospectus Supplement.
S-20
<PAGE>
Credit Enhancement.... Description of "Shifting-Interest" Subordination. The
rights of the holders of the Class M Certificates to
receive distributions will be subordinated to the
rights of the holders of the Class A Certificates to
receive distributions, to the extent described herein.
The rights of the holders of a Subclass of Class B
Certificates to receive distributions will be subordi-
nated to the rights of the holders of the Class A Cer-
tificates, the Class M Certificates and the Subclasses
of Class B Certificates with lower numerical designa-
tions to receive distributions, to the extent de-
scribed herein. This subordination provides a certain
amount of protection to the holders of the Class A
Certificates (to the extent of the subordination of
the Class M and Class B Certificates), the Class M
Certificates (to the extent of the subordination of
the Class B Certificates) and the Subclasses of Class
B Certificates (other than the Class B-5 Certificates)
(to the extent of the subordination of the Subclasses
of Class B Certificates with higher numerical designa-
tions) against delays in the receipt of scheduled pay-
ments of interest and principal and against losses as-
sociated with the liquidation of defaulted Mortgage
Loans and certain losses resulting from the bankruptcy
of a mortgagor.
In general, the protection afforded the holders of the
Class A Certificates by means of this subordination
will be effected in two ways: (i) by the preferential
right of the holders of the Class A Certificates to
receive, prior to any distribution being made on any
Distribution Date in respect of the Class M and Class
B Certificates, the amounts of interest and principal
due the holders of the Class A Certificates (other
than the Class A-PO Deferred Amount) and, if neces-
sary, by the right of such holders to receive future
distributions on the Mortgage Loans that would other-
wise have been allocated to the holders of the Class M
and Class B Certificates and (ii) by the allocation to
the Class M and Class B Certificates, until their re-
spective principal balances have been reduced to zero,
of certain losses resulting from the liquidation of
defaulted Mortgage Loans or the bankruptcy of mortga-
gors prior to the allocation of such losses to the
Class A Certificates. See "Description of the Certifi-
cates -- Distributions" in this Prospectus Supplement.
In general, the protection afforded the holders of the
Class M Certificates by means of this subordination
will also be effected in two ways: (i) by the prefer-
ential right of the holders of the Class M Certifi-
cates to receive, prior to any distribution being made
on any Distribution Date in respect of the Class B
Certificates, the amounts of interest and principal
due the holders of the Class M Certificates on such
date and, if necessary, by the right of such holders
to receive future distributions on the Mortgage Loans
that would otherwise have been allocated to the hold-
ers of the Class B Certificates and (ii) by the allo-
cation to the Class B Certificates, until their prin-
cipal balance has been reduced to zero, of certain
losses resulting from the liquidation of defaulted
Mortgage Loans or the bankruptcy of mortgagors prior
to the allocation of such losses to the Class M Cer-
tificates. See "Description of the Certificates --
Distributions" in this Prospectus Supplement.
In general, the protection afforded the holders of a
Subclass of Class B Certificates by means of this sub-
ordination will also be effected in two ways: (i) by
the preferential right of the holders of such Subclass
to re-
S-21
<PAGE>
ceive, prior to any distribution being made on any
Distribution Date in respect of the Subclasses of
Class B Certificates with higher numerical designa-
tions, the amounts of interest and principal due the
holders of such Subclass on such date and, if neces-
sary, by the right of such holders to receive future
distributions on the Mortgage Loans that would other-
wise have been allocated to the holders of the
Subclasses of Class B Certificates with higher numeri-
cal designations and (ii) by the allocation to the
Subclasses of Class B Certificates with higher numeri-
cal designations, until their principal balances have
been reduced to zero, of certain losses resulting from
the liquidation of defaulted Mortgage Loans or the
bankruptcy of mortgagors prior to the allocation of
such losses to such Subclass. See "Description of the
Certificates -- Distributions" in this Prospectus Sup-
plement.
In addition, in order to increase the period during
which the principal balances of the Class M and Class
B Certificates remain available as credit enhancement
to the Class A Certificates, a disproportionate amount
of prepayments and certain unscheduled recoveries with
respect to the Mortgage Loans will be allocated to the
Class A Certificates (other than the Class A-PO Cer-
tificates). This allocation has the effect of acceler-
ating the amortization of the Class A Certificates
(other than the Class A-PO Certificates) while, in the
absence of losses in respect of the liquidation of de-
faulted Mortgage Loans or losses resulting from the
bankruptcy of mortgagors, increasing the respective
percentage interests in the principal balance of the
Mortgage Loans evidenced by the Class M and Class B
Certificates. See "-- Distributions of Principal and
Interest -- Principal Distributions" and "Prepayment
and Yield Considerations" in this Prospectus Supple-
ment.
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) attribut-
able to certain actions which may be taken by a bank-
ruptcy court in connection with a Mortgage Loan, in-
cluding a reduction by a bankruptcy court of the prin-
cipal balance of or the interest rate on a Mortgage
Loan or an extension of its maturity, will not be al-
located to the Class A Certificates until the date on
which the aggregate principal balance of the Class M
and Class B Certificates (which aggregate balance is
expected initially to be approximately $3,749,545) has
been reduced to zero; will not be allocated to the
Class M Certificates until the date on which the ag-
gregate principal balance of the Class B Certificates
(which aggregate balance is expected initially to be
approximately $2,249,545) has been reduced to zero;
and will not be allocated to the Class B-1 or Class B-
2 Certificates until the date on which the aggregate
principal balance of the Subclasses of Class B Certif-
icates with higher numerical designations has been re-
duced to zero (which aggregate balance is expected
initially to be approximately $1,499,545 with respect
to the Class B-1 Certificates and approximately
$1,125,545 with respect to the Class B-2 Certifi-
cates). Such losses will be allocated first among the
Subclasses of Class B Certificates, in reverse numeri-
cal order (that is, to the Class B-5, Class B-4, Class
B-3, Class B-2 and Class B-1 Certificates, respective-
ly).
S-22
<PAGE>
With respect to any Distribution Date subsequent to
the first Distribution Date, the availability of the
credit enhancement provided by the Class M Certifi-
cates and the Subclasses of Class B Certificates will
be affected by the prior reduction of the principal
balance of the Class M Certificates and such
Subclasses of Class B Certificates. Reduction of the
principal balance of the Class M Certificates and any
Subclass of Class B Certificates will result from (i)
the prior allocation of losses due to the liquidation
of defaulted Mortgage Loans, including losses due to
special hazards and fraud losses up to the respective
limits referred to below, (ii) the prior allocation of
bankruptcy losses up to the limit referred to below
and (iii) the prior receipt of principal distributions
by the holders of such Certificates.
As of the date of issuance of the Series 1997-5 Cer-
tificates, the amount of losses attributable to spe-
cial hazards, fraud and bankruptcy that will be ab-
sorbed solely by the holders of the Subclasses of
Class B Certificates in reverse numerical order and
then solely by the holders of the Class M Certificates
will be approximately 1.33%, 2.00% and 0.07%, respec-
tively, of the Cut-Off Date Aggregate Principal Bal-
ance of the Mortgage Loans (approximately $1,994,220,
$2,999,063 and $100,000, respectively). If losses due
to special hazards, fraud or bankruptcy exceed any of
such amounts prior to the principal balances of the
Class M and Class B Certificates being reduced to ze-
ro, (a) the principal portion of any such excess
losses with respect to the Mortgage Loans will gener-
ally be shared pro rata by (i) the Class A Certifi-
cates (other than the Class A-PO Certificates), the
Class M Certificates and the Class B Certificates and
(ii) to the extent such losses arise with respect to
Discount Mortgage Loans, the Class A-PO Certificates,
in each case according to their respective interests
in such Mortgage Loans and (b) the interest portion of
any such losses with respect to the Mortgage Loans
will generally be shared pro rata by the Class A,
Class M and Class B Certificates based on their re-
spective interest accrual amounts. Under certain cir-
cumstances, the limits set forth above may be reduced
as described under "Description of the Certificates --
Subordination of Class M and Class B Certificates --
Allocation of Losses" in this Prospectus Supplement.
After the principal balances of the Class M and Class
B Certificates have been reduced to zero, the princi-
pal portion of all losses (other than the portion at-
tributable to the Class A-PO Certificates, if any)
will be allocated to the Class A Certificates (other
than the Class A-PO Certificates). To the extent such
losses arise with respect to Discount Mortgage Loans,
principal losses will be shared among the Class A Cer-
tificates, according to their respective interests in
such Mortgage Loans. The principal portion of any
losses borne by the Class A Certificates (other than
losses borne by the Class A-PO Certificates) will be
shared pro rata by the Subclasses of Class A Certifi-
cates (other than the Class A-PO Certificates) based
on their then-outstanding principal balances and the
interest portion of such losses will be shared pro
rata by such Subclasses based on interest accrued. See
"Description of the Certificates -- Interest" and "--
Subordination of Class M and Class B Certificates --
Allocation of Losses" in this Prospectus Supplement.
S-23
<PAGE>
THE YIELD TO MATURITY ON THE CLASS M CERTIFICATES WILL
BE MORE SENSITIVE TO LOSSES DUE TO LIQUIDATIONS OF THE
MORTGAGE LOANS (AND THE TIMING THEREOF) THAN THAT ON
THE CLASS A CERTIFICATES, IN THE EVENT THAT THE AGGRE-
GATE PRINCIPAL BALANCE OF THE CLASS B CERTIFICATES HAS
BEEN REDUCED TO ZERO.
THE YIELD TO MATURITY ON EACH SUBCLASS OF OFFERED
CLASS B CERTIFICATES WILL BE MORE SENSITIVE TO LOSSES
DUE TO LIQUIDATIONS OF THE MORTGAGE LOANS (AND THE
TIMING THEREOF) THAN THAT ON THE CLASS A CERTIFICATES
AND THE CLASS M CERTIFICATES AND, IN THE CASE OF THE
CLASS B-2 CERTIFICATES, THE CLASS B-1 CERTIFICATES, IN
THE EVENT THAT THE PRINCIPAL BALANCES OF THE
SUBCLASSES OF CLASS B CERTIFICATES WITH HIGHER NUMERI-
CAL DESIGNATIONS HAVE BEEN REDUCED TO ZERO.
See "Description of the Certificates -- Subordination
of Class M and Class B Certificates" in this Prospec-
tus Supplement.
Effects of
Prepayments on
Investment
Expectations......... The actual rate of prepayment of principal on the
Mortgage Loans cannot be predicted. The investment
performance of the Offered Certificates may vary mate-
rially 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 (other than the
Class A-PO Certificates) in the aggregate will be more
sensitive to prepayments on the Mortgage Loans than
the Subordinated Certificates due to the dispropor-
tionate allocation of such prepayments to investors in
such Class A Certificates then entitled to principal
distributions during the nine years beginning on the
first Distribution Date. See "-- Distributions of
Principal and Interest -- Principal Distributions" and
"Prepayment and Yield Considerations" in this Prospec-
tus Supplement. The actual yield to the holder of an
Offered Certificate may not be equal to the yield an-
ticipated 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 DE-
CIDING 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
(other than a Class A-PO 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 prin-
cipal balance of an Offered Certificate (that is, buys
the Certificate at a "discount" or "premium," respec-
tively), then, based on the assumptions set forth in
the preceding sentence, the effective yield to the in-
vestor will be higher or lower, respectively, than the
stated interest rate on the Certificate, because such
discount or premium will be amortized over the life of
the Certificate. Any deviation in the actual rate of
prepayments on the Mortgage Loans from the rate as-
sumed by the investor will affect the period of time
over which, or the rate at which, the discount or pre-
mium will be amortized and, consequently, will change
the investor's actual yield from that antici-
S-24
<PAGE>
pated. The timing of receipt of prepayments may also
affect the investor's actual yield. The yield experi-
enced by an investor in the Class A-PO Certificates,
which do not bear interest, is primarily a function of
the price paid by such investor, the rate and timing
of principal payments on the Discount Mortgage Loans
and losses incurred on and after the Cross-Over Date.
The particular sensitivity of the Class A-PO Certifi-
cates is displayed in the 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-PO CERTIFICATES, SHOULD CONSIDER THE RISK THAT
A SLOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS
ON THE MORTGAGE LOANS OR, IN THE CASE OF THE CLASS A-
PO CERTIFICATES, ON THE DISCOUNT MORTGAGE LOANS, WILL
RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN SUCH IN-
VESTOR'S EXPECTED YIELD. AN INVESTOR THAT PURCHASES
ANY OFFERED CERTIFICATES AT A PREMIUM SHOULD CONSIDER
THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRIN-
CIPAL PAYMENTS ON THE MORTGAGE LOANS WILL RESULT IN AN
ACTUAL YIELD THAT IS LOWER THAN SUCH INVESTOR'S EX-
PECTED 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 Cer-
tificate (other than a Class A-PO Certificate) is pur-
chased at par, fluctuations in the rate of distribu-
tions of principal will generally not affect the yield
to maturity of that Certificate. However, the total
return on any investor's investment, including an in-
vestor 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-PO Certificates, the expected
yield, which is based on the price paid by the in-
vestor 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. Consequent-
ly, 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 inter-
est rates. During such periods, it is less likely that
mortgagors will elect to prepay or refinance Mortgage
Loans and, therefore, the amount of principal distri-
butions 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 in-
vestor. Low rates of prepayment may result in the ex-
tension of the weighted average life of a Certificate;
high rates, in the shortening of such weighted average
life.
S-25
<PAGE>
In general, if the weighted average life of a Certifi-
cate purchased at par is extended beyond that ini-
tially anticipated, such Certificate's market value
may be adversely affected even though the yield to ma-
turity on the Certificate is unaffected. The weighted
average life of the Class A-PO Certificates will be
determined by the rate of prepayment of the Discount
Mortgage Loans and generally will not be affected by
the rate of prepayment on other Mortgage Loans.
The weighted average lives of the Offered Certifi-
cates, under various prepayment scenarios, are dis-
played in the tables appearing under the heading "Pre-
payment and Yield Considerations" in this Prospectus
Supplement.
Federal Income Tax
Status............... An election will be made to treat the Trust Estate as
a real estate mortgage investment conduit (the
"REMIC") for federal income tax purposes. The Class A-
1, Class A-2, Class A-3, Class A-4, Class A-5, Class
A-PO and Class A-WIO Certificates, the Class M Certif-
icates, and the Class B-1, Class B-2, Class B-3, Class
B-4 and Class B-5 Certificates will constitute "regu-
lar interests" in the REMIC and the Class A-R Certifi-
cate will constitute the "residual interest" in the
REMIC.
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-PO Certificates will be is-
sued 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-3, Class A-4, Class M, Class B-1 and Class B-2
Certificates will be issued with original issue dis-
count in an amount equal to the excess of their ini-
tial principal balances (plus 2 days of interest at
the Pass-Through Rates thereon) over their respective
issue prices (including accrued interest). It is also
anticipated that the Class A-1 Certificates will be
issued at a premium and that the Class A-2 and Class
A-5 Certificates will be issued with de minimis origi-
nal issue discount for federal income tax purposes.
Finally, it is anticipated that the Class A-WIO, Class
B-3, Class B-4 and Class B-5 Certificates, which are
not offered hereby, will be issued with original issue
discount for federal income tax purposes.
The holder of the Class A-R Certificate will be re-
quired to include the taxable income or loss of the
REMIC in determining its federal taxable income. It is
anticipated that all or a substantial portion of the
taxable income of the REMIC includible by the Class A-
R Certificateholder will be treated as "excess inclu-
sion" income subject to special limitations for fed-
eral income tax purposes. AS A RESULT, THE EFFECTIVE
AFTER-TAX RETURN OF THE CLASS A-R CERTIFICATE MAY BE
SIGNIFICANTLY LOWER THAN WOULD BE THE CASE IF THE
CLASS A-R CERTIFICATE WERE TAXED AS A DEBT INSTRUMENT,
OR MAY BE NEGATIVE. FURTHER, SIGNIFICANT RESTRICTIONS
APPLY TO THE TRANSFER OF THE CLASS A-R CERTIFICATE.
THE CLASS A-R CERTIFICATE WILL BE CONSIDERED A
"NONECONOMIC RESIDUAL INTEREST," CERTAIN TRANSFERS OF
WHICH MAY BE DISREGARDED FOR FEDERAL INCOME TAX PUR-
POSES.
See "Description of the Certificates -- Restrictions
on Transfer of the Class A-R, Class M and Offered
Class B Certificates" and "Federal Income Tax Consid-
erations" in this Prospectus Supplement and "Certain
S-26
<PAGE>
Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates" in the Prospec-
tus.
ERISA
Considerations....... A fiduciary of any employee benefit plan subject to
Title I of 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 as defined in Sec-
tion 3(32) of ERISA subject to any federal, state or
local law ("Similar Law") which is, to a material ex-
tent, similar to the foregoing provisions of ERISA or
the Code (collectively, a "Plan"), should carefully
review with its legal advisors whether the purchase or
holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible
under ERISA, the Code or Similar Law. BECAUSE THE
CLASS M AND OFFERED CLASS B CERTIFICATES ARE SUBORDI-
NATED TO THE CLASS A CERTIFICATES, THE CLASS M AND OF-
FERED CLASS B CERTIFICATES MAY NOT BE TRANSFERRED UN-
LESS THE TRANSFEREE HAS DELIVERED (I) A REPRESENTATION
LETTER TO THE TRUST ADMINISTRATOR AND SELLER STATING
EITHER (A) THAT THE TRANSFEREE IS NOT A PLAN AND IS
NOT ACTING ON BEHALF OF A PLAN OR USING THE ASSETS OF
A PLAN TO EFFECT SUCH PURCHASE OR (B) SUBJECT TO CER-
TAIN CONDITIONS DESCRIBED HEREIN, THAT THE SOURCE OF
FUNDS USED TO PURCHASE THE CLASS M OR OFFERED CLASS B
CERTIFICATES IS AN "INSURANCE COMPANY GENERAL ACCOUNT"
OR (II) AN OPINION OF COUNSEL AND SUCH OTHER DOCUMEN-
TATION AS DESCRIBED UNDER "ERISA CONSIDERATIONS" IN
THIS PROSPECTUS SUPPLEMENT RELATING TO THE OFFERING OF
SUCH CERTIFICATES. THE CLASS A-R CERTIFICATE MAY NOT
BE PURCHASED BY OR TRANSFERRED TO A PLAN. See "ERISA
Considerations" in this Prospectus Supplement and in
the Prospectus.
Legal Investment...... The Offered Class A and Class M Certificates will con-
stitute "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 organiza-
tion. As such, the Offered Class A and Class M Certif-
icates are legal investments for certain entities to
the extent provided in the Enhancement Act. However,
there are regulatory requirements and considerations
applicable to regulated financial institutions and re-
strictions on the ability of such institutions to in-
vest in certain types of mortgage related securities.
The Class B-1 and Class B-2 Certificates will not con-
stitute "mortgage related securities" under the En-
hancement Act. The appropriate characterization of the
Class B-1 and Class B-2 Certificates under various le-
gal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase
the Class B-1 and Class B-2 Certificates, may be sub-
ject to significant interpretive uncertainties. Pro-
spective 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.
S-27
<PAGE>
RISK FACTORS
GENERAL
The rate of distributions in reduction of the principal balance of any
Subclass or Class of Offered Certificates, the aggregate amount of distribu-
tions of principal and interest on any Subclass or Class of Offered Certifi-
cates and the yield to maturity of any Subclass or Class of Offered Certifi-
cates will be directly related to the rate of payments of principal on the
Mortgage Loans in the Trust Estate or, in the case of the Class A-PO Certifi-
cates, on the Discount Mortgage Loans, 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, among other things, the amortiza-
tion schedules of the Mortgage Loans, the rate of principal prepayments (in-
cluding 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 rep-
resentations and warranties, optional purchase by the Seller of defaulted Mort-
gage Loans and optional purchase by the Seller of all of the Mortgage Loans in
connection with the termination of the Trust Estate. See "Prepayment and Yield
Considerations" 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 Mort-
gage 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, particu-
larly the Class A-PO Certificates, should consider the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans or, in the case of
the Class A-PO Certificates, on the Discount 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.
SUBORDINATION
The rights of the holders of the Class M Certificates to receive distribu-
tions with respect to the Mortgage Loans in the Trust Estate will be subordi-
nated to such rights of the holders of the Class A Certificates and the rights
of the holders of a Subclass of Class B Certificates to receive distributions
with respect to the Mortgage Loans in the Trust Estate will be subordinated to
such rights of the holders of the Class A Certificates, the Class M Certifi-
cates and the Subclasses of Class B Certificates with lower numerical designa-
tions, all to the extent described herein under "Description of the Certifi-
cates -- Subordination of Class M and Class B Certificates."
BOOK-ENTRY SYSTEM FOR CERTAIN SUBCLASSES OF CLASS A CERTIFICATES
Transactions in the Book-Entry Certificates generally can be effected only
through DTC, DTC Participants and Indirect DTC Participants. The ability of a
Beneficial Owner to pledge Book-Entry Certificates and the liquidity of the
Book-Entry Certificates in general may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, Beneficial Owners
may experience delays in their receipt of payments. See "Risk Factors -- Book-
Entry System for Certain Classes and Subclasses of Certificates" and "Descrip-
tion of the Certificates -- Book-Entry Form" in the Prospectus.
See "Risk Factors" in the Prospectus for a description of certain other risks
and special considerations applicable to the Offered Certificates.
S-28
<PAGE>
DESCRIPTION OF THE CERTIFICATES
DENOMINATIONS
The Offered Certificates, other than the Class A-R Certificate, will be is-
sued in minimum denominations of $100,000 initial principal balance and inte-
gral multiples of $1,000 initial principal balance in excess thereof, except
that one of the Class A-PO Certificates may be issued in any denomination in
excess of $100,000. The Class A-R Certificate will be issued as a single Cer-
tificate with a denomination of $50 initial principal balance.
DEFINITIVE FORM
Offered Certificates issued in fully registered, certificated form are re-
ferred to herein as "Definitive Certificates." The Class A-PO, Class A-R, Class
M and Offered Class B Certificates will be issued as Definitive Certificates.
Distributions of principal of, and interest on, the Definitive Certificates
will be made by the Trust Administrator or other paying agent directly to hold-
ers of Definitive Certificates in accordance with the procedures set forth in
the Pooling and Servicing Agreement. The Definitive Certificates will be trans-
ferable 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 connec-
tion 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 nom-
inee of DTC, which will be the "holder" or "Certificateholder" of such Certifi-
cates, 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-En-
try Form" in the Prospectus), and all references herein to distributions, no-
tices, 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 Cer-
tificates, as the case may be, for distribution to Beneficial Owners in accor-
dance with DTC procedures. See "Description of the Certificates -- Book-Entry
Form" in the Prospectus.
DISTRIBUTIONS
Distributions of interest and in reduction of principal balance to holders of
each Subclass of Class A and Class B Certificates and the Class M Certificates
will be made monthly, to the extent of each Subclass's or Class's entitlement
thereto, on the 25th day of each month or, if such day is not a business day,
on the succeeding business day (each, a "Distribution Date"), beginning in
April 1997. 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 Administra-
tor and specified in the notice of final distribution in respect of such Cer-
tificate.
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 prepay-
ments and Liquidation Proceeds in respect of principal, if any), and interest
on or in respect of the Mortgage Loans received by the Master Servicer, includ-
ing 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 liqui-
dation 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 Compen-
sating Interest) placed in the Certificate
S-29
<PAGE>
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 Servic-
ing 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 repre-
sents any unreimbursed Periodic Advances of such Servicer;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent (i) the applicable Servicing Fee, (ii) the Master Ser-
vicing Fee and (iii) the Fixed Retained Yield, if any;
(d) all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such Distribution
Date occurs;
(e) all principal prepayments in full, all partial principal prepayments,
all proceeds of any Mortgage Loans or property acquired in respect thereof,
or liquidated pursuant to the Pooling and Servicing Agreement, including
net Partial Liquidation Proceeds but excluding any Net Foreclosure Profits
(as defined under "-- Additional Rights of the Class A-R Certificateholder"
below), and other unscheduled receipts in respect of principal of the Mort-
gage 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 each Servicer 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 Distri-
bution Date occurs and the excess of the unpaid principal balance of any
defective Mortgage Loan for which a Mortgage Loan was substituted over the
unpaid principal balance of such substituted Mortgage Loan on or following
the Due Date in the month in which such Distribution Date occurs;
(g) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds or insurance proceeds with respect to a
Mortgage Loan or proceeds of any Mortgaged Property that becomes owned by
the Trustee which represents any unpaid Servicing Fee or Master Servicing
Fee to which such Servicer or the Master Servicer, respectively, is enti-
tled, 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 previ-
ously been allocated as a loss to one or more Subclasses of the Class A or
Class B Certificates or the Class M Certificates.
The "Remittance Date" with respect to any Distribution Date and any Mortgage
Loan serviced by an Other Servicer will be the 18th day of each month or, if
any such day is not a business day, the preceding business day. The "Remittance
Date" with respect to any Distribution Date and any Mortgage Loan serviced by
Norwest Mortgage will, except as described below under "Servicing of the Mort-
gage Loans -- Anticipated Changes in Servicing," be the 24th day of each month
or, if any such day is not a business day, the preceding business day.
S-30
<PAGE>
"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 Remit-
tance 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 Dis-
tribution 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 re-
quired 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 Distribu-
tion Amount Allocation"):
first, to the Subclasses of Class A Certificates (other than the Class A-PO
Certificates), pro rata based on their respective Class A Subclass Interest Ac-
crual Amounts, in an aggregate amount up to the sum of the Class A Subclass In-
terest Accrual Amounts with respect to such Distribution Date;
second, to the Subclasses of Class A Certificates (other than the Class A-PO
Certificates), pro rata based on their respective unpaid Class A Subclass In-
terest Shortfall Amounts, in an aggregate amount up to the sum of the previ-
ously unpaid Class A Subclass Interest Shortfall Amounts;
third, concurrently, pro rata to the Class A Certificates (other than the
Class A-PO Certificates), based on the Class A Non-PO Optimal Principal Amount,
and the Class A-PO Certificates, based on the Class A-PO Optimal Principal
Amount, (A) to the Subclasses of Class A Certificates (other than the Class A-
PO Certificates) in an aggregate amount up to the Class A Non-PO Optimal Prin-
cipal Amount, such distribution to be allocated among such Subclasses in accor-
dance with the priorities set forth below under "-- Principal (Including Pre-
payments) -- Allocation of Amount to be Distributed" and (B) to the Class A-PO
Certificates in an amount up to the Class A-PO Optimal Principal Amount;
fourth, to the Class A-PO Certificates in an amount up to the Class A-PO De-
ferred Amount, but only from amounts otherwise distributable (without regard to
this priority) to: first the Subclasses of Class B Certificates pursuant to
priorities fourteenth clause (C), thirteenth and tenth of this Pool Distribu-
tion Amount Allocation; and then the Class M Certificates pursuant to priority
seventh of this Pool Distribution Amount Allocation;
fifth, to the Class M Certificates in an amount up to the Class M Interest
Accrual Amount with respect to such Distribution Date;
sixth, to the Class M Certificates in an amount up to the sum of the previ-
ously unpaid Class M Interest Shortfall Amounts;
seventh, to the Class M Certificates in an amount up to the Class M Optimal
Principal Amount; provided, however, that the amount distributable pursuant to
this priority seventh to the Class M Certificates will be reduced by the
amount, if any, otherwise distributable as principal hereunder used to pay the
Class A-PO Deferred Amount in accordance with priority fourth;
eighth, to the Class B-1 Certificates in an amount up to the Class B Subclass
Interest Accrual Amount for such Subclass with respect to such Distribution
Date;
ninth, to the Class B-1 Certificates in an amount up to the sum of the previ-
ously unpaid Class B Subclass Interest Shortfall Amounts for such Subclass;
tenth, to the Class B-1 Certificates in an amount up to the Subclass B Opti-
mal Principal Amount for such Subclass; provided, however, that the amount dis-
tributable pursuant to this priority tenth will be reduced by the amount, if
any, otherwise distributable as principal hereunder used to pay the Class A-PO
Deferred Amount in accordance with priority fourth;
S-31
<PAGE>
eleventh, to the Class B-2 Certificates in an amount up to the Class B
Subclass Interest Accrual Amount for such Subclass with respect to such Distri-
bution Date;
twelfth, to the Class B-2 Certificates in an amount up to the sum of the pre-
viously unpaid Class B Subclass Interest Shortfall Amounts for such Subclass;
thirteenth, to the Class B-2 Certificates in an amount up to the Subclass B
Optimal Principal Amount for such Subclass; provided, however, that the amount
distributable pursuant to this priority thirteenth will be reduced by the
amount, if any, otherwise distributable as principal hereunder used to pay the
Class A-PO Deferred Amount in accordance with priority fourth; and
fourteenth, sequentially, to the Class B-3, Class B-4 and Class B-5 Certifi-
cates so that each such Subclass shall receive (A) first, an amount up to its
Class B Subclass Interest Accrual Amount with respect to such Distribution
Date, (B) then, an amount up to its previously unpaid Class B Subclass Interest
Shortfall Amounts and (C) finally, an amount up to its Subclass B Optimal Prin-
cipal Amount before any Subclasses of Class B Certificates with higher numeri-
cal designations receive any payments in respect of interest or principal; pro-
vided, however, that the amount distributable pursuant to this priority four-
teenth 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-PO Deferred Amount in accordance with priority fourth.
The "Class A Non-PO Distribution Amount" for any Distribution Date will be
equal to the sum of the amounts distributed in accordance with priorities
first, second and third clause (A) of the Pool Distribution Amount Allocation
set forth above.
The "Class M Distribution Amount" for any Distribution Date will be equal to
the sum of the amounts distributed in accordance with priorities fifth through
seventh of the Pool Distribution Amount Allocation set forth above.
The "Class B Subclass Distribution Amount" for any Distribution Date and the
Class B-1 or Class B-2 Certificates will be equal to the sum of the amounts
distributed in accordance with priorities eighth through tenth of the Pool Dis-
tribution Amount Allocation set forth above with respect to the Class B-1 Cer-
tificates and priorities eleventh through thirteenth of the Pool Distribution
Amount Allocation set forth above with respect to the Class B-2 Certificates.
The undivided percentage interest (the "Percentage Interest") represented by
any Offered Certificate of a Subclass or Class in distributions to such
Subclass or Class will be equal to the percentage obtained by dividing the ini-
tial principal balance of such Certificate by the aggregate initial principal
balance of all Certificates of such Subclass or Class, as the case may be.
INTEREST
The amount of interest that will accrue on each Subclass of Class A Certifi-
cates, other than the Class A-PO 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 In-
terest Accrual Amount for each Subclass of Class A Certificates, other than the
Class A-PO Certificates, will equal the difference between (a) the product of
(i) 1/12th of the Pass-Through Rate for such Subclass and (ii) the outstanding
Class A Subclass Principal Balance of such Subclass or, in the case of the
Class A-WIO Certificates, the outstanding Class A-WIO Notional Amount and (b)
the sum of (i) any Non-Supported Interest Shortfall allocable to such Subclass,
(ii) the interest portion of any Excess Special Hazard Losses, Excess Fraud
Losses and Excess Bankruptcy Losses allocable to such Subclass and (iii) the
interest portion of any Realized Losses, other than the interest portion of any
Excess Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses
allocable to such Subclass on or after the Cross-Over Date. The pass-through
rate for each Subclass of Class A Certificates, other than the Class A-WIO and
Class A-PO Certificates (the "Pass-Through Rate"), is the percentage set forth
on the cover of this Prospectus Supplement.
S-32
<PAGE>
The Pass-Through Rate for the Class A-WIO Certificates with respect to any
Distribution Date will be a per annum rate equal to the difference between (A)
the weighted average of the Net Mortgage Interest Rates of the Mortgage Loans
that have Net Mortgage Interest Rates greater than 7.000% (the "Premium Mort-
gage Loans") (based on the Scheduled Principal Balances of the Premium Mortgage
Loans as of such Distribution Date) and (B) 7.000%.
The Class A-WIO Certificates are interest-only certificates and have no prin-
cipal balance. The "Class A-WIO Notional Amount" with respect to each Distribu-
tion Date will be equal to the aggregate Scheduled Principal Balance of the
Premium Mortgage Loans as of such Distribution Date. The Class A-WIO Notional
Amount with respect to the first Distribution Date will be approximately
$112,510,237 less any Unscheduled Principal Receipts received in March 1997 and
applied as of the Cut-Off Date. A notional amount does not entitle a holder to
receive distributions of principal on the basis of such notional amount, but is
used solely for the purpose of computing the amount of interest accrued on a
Subclass.
No interest will accrue on the Class A-PO Certificates.
The amount of interest that will accrue on the Class M 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 M Interest Accrual Amount." The Class M Interest Accrual
Amount will equal the difference between (a) the product of (i) 1/12th of
7.000% and (ii) the outstanding Class M Principal Balance and (b) the sum of
(i) any Non-Supported Interest Shortfall allocable to such Class and (ii) the
interest portion of any Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses allocable to such Class.
The amount of interest that will accrue on each Subclass of Class B Certifi-
cates 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 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 7.000% 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 Ex-
cess 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 Certifi-
cates (other than the Class A-WIO and Class A-PO Certificates) as of any Deter-
mination Date will be the principal balance of such Subclass on the date of
initial issuance of the Class A Certificates less (i) all amounts previously
distributed to holders of Certificates of such Subclass in reduction of the
principal balance of such Subclass and (ii) such Subclass's pro rata share of
the principal portion of Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses allocated through such Determination Date to the hold-
ers of Class A Certificates (other than the Class A-PO Certificates) in the
manner described herein under "-- Subordination of Class M and Class B Certifi-
cates-- Allocation of Losses." After the Cross-Over Date, the Class A Subclass
Principal Balance of a Subclass of Class A Certificates (other than the Class
A-PO Certificates) may be subject to further reduction in an amount equal to
such Subclass's pro rata share of the difference, if any, between (a) the Class
A Non-PO Principal Balance as of such Determination Date without regard to this
provision and (b) the difference between (i) the Adjusted Pool Amount for the
preceding Distribution Date and (ii) the Adjusted Pool Amount (PO Portion) for
the preceding Distribution Date. Any pro rata allocation among the Subclasses
of Class A Certificates described in this paragraph will be made among the
Subclasses of Class A Certificates (other than the Class A-PO Certificates) on
the basis of their then-outstanding Class A Subclass Principal Balances.
The "Class A Subclass Principal Balance" of the Class A-PO 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 pre-
viously distributed to the holders of the Class A-PO Certificates pursuant to
priorities third clause (B) and fourth of the Pool Distribution Amount Alloca-
tion and (ii) the principal portion of Excess Special Hazard Losses, Excess
Fraud Losses and Excess Bankruptcy Losses allocated through such Determination
Date to the Class A-PO Certificates in the manner described herein under "--
Subordination of Class M and Class B Certificates -- Allocation of Losses."
After the Cross-Over Date, the Class A Subclass Principal Balance of the Class
A-PO Certificates will be subject to further reduction in an amount equal to
the excess, if any, of (a) the
S-33
<PAGE>
Class A Subclass Principal Balance of the Class A-PO Certificates 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 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 as of such 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-PO Certificates).
The "Class M Principal Balance" as of any Determination Date will be the
lesser of (a) the principal balance of the Class M Certificates on the date of
initial issuance of the Class M Certificates less (i) all amounts previously
distributed to holders of the Class M Certificates in reduction of the princi-
pal balance thereof and (ii) the principal portion of Excess Special Hazard
Losses, Excess Fraud Losses and Excess Bankruptcy Losses allocated through such
Determination Date to the holders of the Class M Certificates in the manner de-
scribed herein under "-- Subordination of Class M and Class B Certificates --
Allocation of Losses" and (b) the Adjusted Pool Amount as of the preceding
Distribution Date less the Class A Principal Balance as of such Determination
Date.
The "Class B Subclass Principal Balance" of a Subclass of Class B Certifi-
cates as of any Determination Date will be the lesser of (a) the principal bal-
ance of such Subclass on the date of initial issuance of the Class B Certifi-
cates 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
allocated through such Determination Date to the holders of such Subclass in
the manner described under "-- Subordination of Class M and Class B Certifi-
cates -- Allocation of Losses" and (b) the Adjusted Pool Amount as of the pre-
ceding Distribution Date less the sum of (i) the Class A Principal Balance,
(ii) the Class M Principal Balance and (iii) the Class B Subclass Principal
Balances of the Subclasses of Class B Certificates with lower numerical desig-
nations, each as of such Determination Date.
The "Class B Principal Balance" as of any date will be equal to the sum of
the Class B Subclass Principal Balances of the Subclasses of Class B Certifi-
cates 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 Mort-
gage Loans (including amounts received as Periodic Advances, principal prepay-
ments and Liquidation Proceeds in respect of principal) and distributed to
holders of the Series 1997-5 Certificates on such Distribution Date and all
prior Distribution Dates and (ii) the principal portion of all Realized Losses
(other than Debt Service Reductions) incurred on the Mortgage Loans from the
Cut-Off Date through the end of the month preceding such Distribution Date.
With respect to any Distribution Date, the "Adjusted Pool Amount (PO Por-
tion)" 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 1997-5 Certificates on such Distribution Date and all prior Distri-
bution 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. See "Servicing of the Mortgage Loans -- Servic-
ing 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 inter-
est shortfalls to the extent that such payment or recovery is not included in
the distribution to Certificateholders made in the month
S-34
<PAGE>
in which it is received. Interest shortfalls resulting from principal prepay-
ments 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 Admininstrator for the
benefit of Certificateholders, from the Master Servicer's own funds (including
amounts otherwise payable to the Master Servicer in respect of such Distribu-
tion Date as Master Servicing Fees) an amount (such amount, "Compensating In-
terest") 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 Distribu-
tion Date on any Prepayments in Full remitted to the Master Servicer and depos-
ited in the Certificate Account (which amount of interest with respect to Pre-
payments 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 de-
scribed 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 Un-
derlying Servicing Agreement) of the Mortgage Loans serviced by Norwest Mort-
gage. With respect to the Mortgage Loans serviced by each Other Servicer,
"Month End Interest" for each Distribution Date will be equal to the lesser of
(i) the sum of the aggregate Prepayment Interest Shortfalls and aggregate Cur-
tailment 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 Un-
derlying 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 Distri-
bution Date (other than with respect to the Mortgage Loans serviced by Country-
wide Home Loans, Inc.). As described below under "Servicing of the Mortgage
Loans -- Anticipated Changes in Servicing," any or all of the Servicers may be
required to begin to remit to the Master Servicer Unscheduled Principal Re-
ceipts in full for deposit into the Certificate Account daily on a specified
business day following receipt thereof which will generally result in a deposit
earlier than on the following Remittance Date and, in conjunction therewith,
may be relieved of its obligation to remit Month End Interest. Any such change
may have an impact on the amount of Compensating Interest by increasing the
amount described in clause (b) of the definition of Available Master Servicing
Compensation and decreasing the amount described in clause (c) of the defini-
tion thereof. No assurance can be given as to the timing of any such changes or
that any such changes will occur.
As to any Distribution Date, Prepayment Interest Shortfalls to the extent
that they exceed Compensating Interest are referred to herein as "Non-Supported
Interest Shortfalls" and will be allocated to (i) the Class A Certificates
(other than the Class A-PO Certificates) according to the percentage obtained
by dividing the then-outstanding Class A Non-PO Principal Balance by the sum of
the then-outstanding Class A Non-PO Principal Balance, Class M Principal Bal-
ance and Class B Principal Balance, (ii) the Class M Certificates according to
the percentage obtained by dividing the then-outstanding Class M Principal Bal-
ance by the sum of the then- outstanding Class A Non-PO Principal Balance,
Class M Principal Balance and Class B Principal Balance and (iii) the Class B
Certificates according to the percentage obtained by dividing the then-out-
standing Class B Principal Balance by the sum of the then-outstanding Class A
Non-PO Principal Balance, Class M Principal Balance and Class B Principal Bal-
ance. 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. Such allocation of the
Non-Supported Interest Shortfall will also reduce the amount of interest due to
be distributed to the holders of the Class M Certificates and the Class B Cer-
tificates. Any such reduction in respect of interest allocated to the Class A
Certificates or Class B Certificates will be allocated among such Subclasses of
Class A or Class B Certificates, as the case may be, pro rata on the basis of
their respective Class A Subclass Interest Accrual Amount or Class B Subclass
Interest Accrual Amount, without regard to any reduction pursuant to this para-
graph, for such Distribution Date.
S-35
<PAGE>
Any interest shortfalls arising from Unscheduled Principal Receipts in full
that are not Prepayments in Full and any interest shortfalls resulting from the
timing of the receipt of partial principal prepayments by mortgagors ("Curtail-
ment 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 Subclasses of Class B Certificates in
reverse numerical order, second by the Class M Certificates, and then, pro rata
by the Class A Certificates (other than the Class A-PO Certificates) based on
interest accrued. See "Description of the Certificates -- Subordination of
Class M and Class B Certificates" herein. After the Cross-Over Date all inter-
est shortfalls arising from Unscheduled Principal Receipts, other than Prepay-
ment Interest Shortfalls covered by Compensating Interest, will be treated as
Non-Supported Interest Shortfalls and allocated in reduction of interest ac-
crued on the Class A Certificates.
The interest portion of any Excess Special Hazard Losses, Excess Fraud Losses
or Excess Bankruptcy Losses will be allocated among the Class A, Class M and
Class B Certificates pro rata based on the interest accrued on each such Class
and among the Subclasses of Class A Certificates (other than the Class A-PO
Certificates) or Class B Certificates, as the case may be, pro rata on the ba-
sis of their respective Class A Subclass Interest Accrual Amounts or Class B
Subclass Interest Accrual Amounts, without regard to any reduction pursuant to
this paragraph, for such Distribution Date.
Allocations of the interest portion of Realized Losses (other than Excess
Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses) first
to the Subclasses of Class B Certificates in reverse numerical order and then
to the Class M Certificates will result from the priority of distributions
first to the holders of the Class A Certificates, second to the holders of the
Class M Certificates and finally to the holders of the Subclasses of Class B
Certificates in numerical order of the Pool Distribution Amount as described
above under "Description of the Certificates -- Distributions."
On each Distribution Date on which the Pool Distribution Amount equals or ex-
ceeds the sum of the Class A Subclass Interest Accrual Amounts, distributions
in respect of interest to each Subclass of Class A Certificates will equal such
Subclass's Class A Subclass Interest Accrual Amount.
If, on any Distribution Date, the Pool Distribution Amount is less than the
sum of the Class A Subclass Interest Accrual Amounts, the amount of interest
currently distributed on the Class A Certificates will equal the Pool
Distribution Amount and will be allocated among the Subclasses of Class A
Certificates pro rata in accordance with each such Subclass's Class A Subclass
Interest Accrual Amount. Amounts so allocated will be distributed in respect of
interest to each Subclass of Class A Certificates. Any difference between the
portion of the Pool Distribution Amount distributed in respect of current
interest to each Subclass of Class A Certificates and the Class A Subclass
Interest Accrual Amount for such Subclass with respect to the related
Distribution Date (as to each Subclass, the "Class A Subclass Interest
Shortfall Amount") will be added to the amount to be distributed on subsequent
Distribution Dates to such Subclass, but only so long as it is outstanding, to
the extent that the Pool Distribution Amount is sufficient therefor. No
interest will accrue on the unpaid Class A Subclass Interest Shortfall Amounts.
On each Distribution Date on which the Pool Distribution Amount exceeds the
sum of the Class A Subclass Interest Accrual Amounts, any excess will then be
allocated first to pay previously unpaid Class A Subclass Interest Shortfall
Amounts. Such amounts will be allocated among the Subclasses of Class A Certif-
icates pro rata in accordance with their respective unpaid Class A Subclass In-
terest Shortfall Amounts immediately prior to such Distribution Date.
On each Distribution Date on which the Pool Distribution Amount equals or ex-
ceeds the sum for such Distribution Date of (A) the sum of (i) the sum of the
Class A Subclass Interest Accrual Amounts with respect to the Subclasses of
Class A Certificates, (ii) the sum of the unpaid Class A Subclass Interest
Shortfall Amounts with respect to the Subclasses of Class A Certificates and
(iii) the Class A Non-PO Optimal Principal Amount (collectively with the
amounts described in clauses (i) and (ii), the "Class A Non-PO Optimal
Amount"), (B) the Class A-PO Optimal Principal Amount (collectively with the
amount described in clause (A), the "Class A Optimal Amount") and (C) the Class
M Interest Accrual Amount, distributions in respect of current interest to the
Class M Certificates will equal the Class M Interest Accrual Amount.
S-36
<PAGE>
If, on any Distribution Date, the Pool Distribution Amount is less than the
sum of (i) the Class A Optimal Amount and (ii) the Class M Interest Accrual
Amount, the amount of current interest distributed on the Class M Certificates
will equal the Pool Distribution Amount minus the amounts distributed to the
Class A Certificates with respect to such Distribution Date. Any difference be-
tween the portion of the Pool Distribution Amount distributed in respect of
current interest to the Class M Certificates and the Class M Interest Accrual
Amount with respect to such Distribution Date (the "Class M Interest Shortfall
Amount") will be added to the amount to be distributed on subsequent Distribu-
tion Dates to the Class M Certificates, but only so long as they are outstand-
ing, to the extent that the Pool Distribution Amount is sufficient therefor. No
interest will accrue on the unpaid Class M Interest Shortfall Amount.
Subject to the payment of any Class A-PO Deferred Amount, on each Distribu-
tion Date on which the Pool Distribution Amount exceeds the sum of the Class A
Optimal Amount and the Class M Interest Accrual Amount, any excess will be al-
located first to pay previously unpaid Class M Interest Shortfall Amounts and
then to make distributions in respect of principal on the Class M Certificates.
With respect to each Distribution Date, the "Class M Optimal Amount" will equal
the sum of (i) the Class M Interest Accrual Amount, (ii) the unpaid Class M In-
terest Shortfall Amount and (iii) the Class M Optimal Principal Amount.
On each Distribution Date on which the Pool Distribution Amount equals or ex-
ceeds the sum of (i) the Class B Subclass Interest Accrual Amount for a partic-
ular Subclass of Class B Certificates and (ii) all amounts senior in priority
to such Class B Subclass Interest Accrual Amount as set forth in the Pool Dis-
tribution Amount Allocation, the distribution in respect of current interest to
such Subclass of Class B Certificates will equal such Subclass's Class B
Subclass Interest Accrual Amount.
If on any Distribution Date, the Pool Distribution Amount is less than the
sum of (i) the Class B Subclass Interest Accrual Amount for a particular
Subclass of Class B Certificates and (ii) all amounts senior in priority to
such Class B Subclass Interest Accrual Amount based on the priorities in the
Pool Distribution Amount Allocation, the amount of current interest distributed
on such Subclass of Class B Certificates will equal the Pool Distribution
Amount less all amounts senior in priority to such Class B Subclass Interest
Accrual Amount as set forth in the Pool Distribution Amount Allocation. Any
difference between the amount distributed in respect of current interest to
such Subclass of Class B Certificates and the Class B Subclass Interest Accrual
Amount for such Subclass with respect to the related Distribution Date (as to
such Subclass, the "Class B Subclass Interest Shortfall Amount") will be added
to the amount to be distributed on subsequent Distribution Dates to such
Subclass, but only so long as it is outstanding, to the extent the Pool Distri-
bution Amount is sufficient therefor. No interest will accrue on such Class B
Subclass Interest Shortfall Amount.
For a particular Subclass of Class B Certificates, subject to the payment of
any Class A-PO Deferred Amount, on each Distribution Date on which the Pool
Distribution Amount exceeds the sum of the Class A Optimal Amount, the Class M
Optimal Amount, the Subclass B Optimal Amount for each Subclass of Class B Cer-
tificates with a lower numerical designation and the Class B Subclass Interest
Accrual Amount for such Subclass, any excess will be allocated first to pay
previously unpaid Class B Subclass Interest Shortfall Amounts of such Subclass
and then to make distributions in respect of principal on such Subclass. With
respect to each Distribution Date, the "Subclass B Optimal Amount" for any
Subclass of Class B Certificates will equal the sum of (i) the Class B Subclass
Interest Accrual Amount, (ii) the unpaid Class B Subclass Interest Shortfall
Amounts and (iii) the Subclass B Optimal Principal Amount.
On any Distribution Date on which the Pool Distribution Amount is less than
the Class A Optimal Amount, the Class M Certificates and the Subclasses of
Class B Certificates will not be entitled to any distributions of interest or
principal.
PRINCIPAL (INCLUDING PREPAYMENTS)
The principal balance of a Class A or Class B Certificate of any Subclass
(other than a Class A-WIO Certificate) or of any Class M Certificate at any
time is equal to the product of the Class A Subclass Principal Balance or Class
B Subclass Principal Balance of such Subclass or the Class M Principal Balance,
as the case may be, and such Certificate's Percentage Interest, and represents
the maximum specified dollar amount (exclusive of (i) any interest that may ac-
crue on such Class A Certificate, such Class M Certificate or such Class B Cer-
tificate and (ii) in the case of the Class A-R Certificate, any additional
amounts to which the holder of such
S-37
<PAGE>
Certificate may be entitled as described below under "-- Additional Rights of
the Class A-R Certificateholder") to which the holder thereof is entitled from
the cash flow on the Mortgage Loans at such time, and will decline to the ex-
tent of distributions in reduction of the principal balance of, and allocations
of losses to, such Certificate. The approximate initial Class A Subclass Prin-
cipal Balance or Class B Subclass Principal Balance of each Subclass of Class A
and Offered Class B Certificates (other than the Class A-WIO Certificates) and
the approximate initial Class M Principal Balance are set forth on the cover of
this Prospectus Supplement. The Class A-WIO Certificates will have no Class A
Subclass Principal Balance.
Calculation of Amount to be Distributed to the Class A Certificates (other
than the Class A-PO Certificates)
Distributions in reduction of the principal balance of the Class A Certifi-
cates (other than the Class A-PO Certificates) will be made on each Distribu-
tion Date pursuant to priority third clause (A) of the Pool Distribution Amount
Allocation, in an aggregate amount (the "Class A Non-PO Principal Distribution
Amount") 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 Distribu-
tion 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 re-
spect 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 Distribu-
tion Date occurs, less (B) if the Bankruptcy Loss Amount is zero, the prin-
cipal portion of Debt Service Reductions with respect to such Mortgage
Loan,
(ii) the Class A Prepayment Percentage of all Unscheduled Principal Re-
ceipts that were received by a Servicer with respect to such Mortgage Loan
during the Unscheduled Principal Receipt Period relating to such Distribu-
tion Date for each applicable type of Unscheduled Principal Receipt,
(iii) the Class A Prepayment Percentage of the Scheduled Principal Bal-
ance 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 Pro-
spectus.
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-PO Certificates) each Subclass of
Class A Certificates, for so long as its principal balance has not been reduced
to zero, will be entitled to its pro rata share of such recovery in an amount
up to the amount by which the Class A Subclass Principal Balance of such
Subclass was reduced as a result of such Realized Loss.
The "Non-PO Fraction" with respect to any Mortgage Loan will equal the Net
Mortgage Interest Rate for such Mortgage Loan divided by 7.000%, 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), mora-
torium 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 princi-
pal previously received, to any partial principal prepayments and Deficient
Valuations occurring prior to such Due Date, to the payment of principal due on
such Due Date irrespective of any delinquency in payment by the mortgagor and
to any Unscheduled Principal Receipts received or applied during the applicable
Unscheduled
S-38
<PAGE>
Principal Receipt Period for the Distribution Date in the month preceding the
month in which such Distribution Date occurs.
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 de-
faulted Mortgage Loan as to which the Servicer has determined that all recover-
able 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 ac-
cordance 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 Manage-
ment 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 sus-
pected presence of hazardous wastes or substances on a Mortgaged Property. A
"Fraud Loss" is a Liquidated Loan Loss incurred on a Liquidated Loan as to
which there was fraud in the origination of such Mortgage Loan. A "Bankruptcy
Loss" is a Debt Service Reduction or a Deficient Valuation. A "Debt Service Re-
duction" means a reduction in the amount of monthly payments due to certain
bankruptcy proceedings, but does not include any permanent forgiveness of prin-
cipal. A "Deficient Valuation" with respect to a Mortgage Loan means a valua-
tion by a court of the Mortgaged Property in an amount less than the outstand-
ing 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 princi-
pal balance on such date) by the Pool Balance (Non-PO Portion). The "Pool Bal-
ance (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 Sched-
uled Principal Balance of such Mortgage Loan as of such Distribution Date. The
Class A Percentage for the first Distribution Date will be approximately
97.48%. 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-PO Certificates) and will increase as a result of the alloca-
tion of Realized Losses to the Class M and Class B Certificates. The Class A
Percentage for each Distribution Date occurring after the Cross-Over Date will
be 100%.
The "Class A Prepayment Percentage" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN CLASS A PREPAYMENT PERCENTAGE
- ------------------------------ --------------------------------
<S> <C>
April 1997 through March 2002.................. 100%;
April 2002 through March 2003.................. the Class A Percentage, plus 70%
of the Subordinated Percentage;
April 2003 through March 2004.................. the Class A Percentage, plus 60%
of the Subordinated Percentage;
April 2004 through March 2005.................. the Class A Percentage, plus 40%
of the Subordinated Percentage;
April 2005 through March 2006.................. the Class A Percentage, plus 20%
of the Subordinated Percentage;
and
April 2006 and thereafter...................... the Class A Percentage;
</TABLE>
S-39
<PAGE>
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 "Prepay-
ment 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 Distribu-
tion 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 Mort-
gaged Property has been acquired by the Trust Estate) is greater than or equal
to 50% of the sum of the then-outstanding Class M Principal Balance and the
then-outstanding Class B Principal Balance, or (ii) for any Distribution Date,
cumulative Realized Losses with respect to the Mortgage Loans exceed the per-
centages of the principal balance of the Subordinated Certificates as of the
Cut-Off Date (the "Original Subordinated Principal Balance") indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL SUBORDINATED
DISTRIBUTION DATE OCCURRING IN PRINCIPAL BALANCE
- ------------------------------ ---------------------
<S> <C>
April 2002 through March 2003............................. 30%
April 2003 through March 2004............................. 35%
April 2004 through March 2005............................. 40%
April 2005 through March 2006............................. 45%
April 2006 and thereafter................................. 50%
</TABLE>
This disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the Class
A Certificates (other than the Class A-PO Certificates) while, in the absence
of Realized Losses, increasing the interest in the principal balance of the
Mortgage Loans evidenced by the Class M and Class B Certificates. Increasing
the respective interest of the Class M and Class B Certificates relative to
that of the Class A Certificates (other than the Class A-PO Certificates) is
intended to preserve the availability of the subordination provided by the
Class M and Class B Certificates. See "-- Subordination of Class M and Class B
Certificates" below. The "Subordinated Percentage" for any Distribution Date
will be calculated as the difference between 100% and the Class A Percentage
for such date. The "Subordinated Prepayment Percentage" for any Distribution
Date will be calculated as the difference between 100% and the Class A Prepay-
ment Percentage for such date. If on any Distribution Date the allocation to
the Class A Certificates (other than the Class A-PO 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 ze-
ro.
Calculation of Amount to be Distributed to the Class A-PO Certificates
Distributions in reduction of the Class A Subclass Principal Balance of the
Class A-PO Certificates will be made on each Distribution Date in an aggregate
amount equal to the Class A-PO Distribution Amount. The "Class A-PO Distribu-
tion 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-PO Op-
timal 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-PO Deferred Amount.
The "Class A-PO Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum for each outstanding Mortgage Loan (in-
cluding each defaulted Mortgage Loan, other than a Liquidated Loan, with re-
spect 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 Re-
ductions with respect to such Mortgage Loan,
S-40
<PAGE>
(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-PO 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-PO Optimal Principal Amount for all prior Distribution
Dates exceeds the amounts distributed to the Class A-PO Certificates 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-PO Certificates as de-
scribed in "-- Subordination of Class M and Class B Certificates -- Allocation
of Losses" below and (ii) the sum of the product for each Discount Mortgage
Loan which became a Liquidated Loan at any time on or prior to the last day of
the applicable Unscheduled Principal Receipt Period for the current Distribu-
tion 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-PO Certifi-
cates on prior Distribution Dates pursuant to priority fourth of the Pool Dis-
tribution Amount Allocation. On or after the Cross-Over Date, the Class A-PO
Deferred Amount will be zero. No interest will accrue on any Class A-PO De-
ferred 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-PO Certificates, such Subclass, for so long as its principal balance
has not been reduced to zero, will be entitled to its share of such recovery in
an amount up to the amount by which the Class A Subclass Principal Balance of
the Class A-PO Certificates 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 Discount Mortgage Loan
and the PO Fraction for such Discount Mortgage Loan.
Calculation of Amount to be Distributed to the Class M and Class B
Certificates
Distributions in reduction of the principal balance of the Class M Certifi-
cates will be made on each Distribution Date, pursuant to priority seventh of
the Pool Distribution Amount Allocation, in an aggregate amount (the "Class M
Principal Distribution Amount") up to the Class M Optimal Principal Amount.
The "Class M Optimal Principal Amount" with respect to each Distribution Date
will be an amount equal to the sum for each outstanding Mortgage Loan (includ-
ing each defaulted Mortgage Loan, other than a Liquidated Loan, with respect to
which the related Mortgaged Property has been acquired by the Trust Estate) of
the product of (A) the Non-PO Fraction for such Mortgage Loan and (B) the sum
of:
(i) the Class M Percentage of (A) the scheduled payment of principal due
on such Mortgage Loan on the first day of the month in which the Distribu-
tion Date occurs, less (B) if the Bankruptcy Loss Amount is zero, the prin-
cipal portion of Debt Service Reductions with respect to such Mortgage
Loan,
S-41
<PAGE>
(ii) the Class M Prepayment Percentage of all Unscheduled Principal Re-
ceipts that were received by a Servicer with respect to such Mortgage Loan
during the Unscheduled Principal Receipt Period relating to such Distribu-
tion Date for each applicable type of Unscheduled Principal Receipt,
(iii) the Class M Prepayment Percentage of the Scheduled Principal Bal-
ance of such Mortgage Loan which, during the month preceding the month of
such Distribution Date was repurchased by the Seller, as described under
the heading "Description of the Mortgage Loans -- Mandatory Repurchase or
Substitution of Mortgage Loans" herein, and
(iv) the Class M Percentage of the excess of the unpaid principal balance
of any defective Mortgage Loan for which a Mortgage Loan was substituted
during the month preceding the month in which such Distribution Date occurs
over the unpaid principal balance of such substituted Mortgage Loan, less
the amount allocable to the principal portion of any unreimbursed advances
in respect of such defective Mortgage Loan. See "The Pooling and Servicing
Agreement -- Assignment of the Mortgage Loans to the Trustee" in the Pro-
spectus.
Distributions in reduction of the principal balances of the Class B-1 and
Class B-2 Certificates will be made on each Distribution Date, pursuant to pri-
orities tenth and thirteenth, respectively, of the Pool Distribution Amount Al-
location, in an aggregate amount with respect to each such Subclass (the "Class
B-1 Principal Distribution Amount" and "Class B-2 Principal Distribution
Amount," respectively) up to the Subclass B Optimal Principal Amount for such
Subclass.
The "Subclass B Optimal Principal Amount" for a particular Subclass of Class
B Certificates with respect to each Distribution Date will be an amount equal
to the sum for each outstanding Mortgage Loan (including each defaulted Mort-
gage Loan, other than a Liquidated Loan, with respect to which the related
Mortgaged Property has been acquired by the Trust Estate) of the product of (A)
the Non-PO Fraction for such Mortgage Loan and (B) the sum of:
(i) the Subclass B Percentage for such Subclass of (A) the scheduled pay-
ment 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 re-
spect to such Mortgage Loan,
(ii) the Subclass B Prepayment Percentage for such Subclass of all
Unscheduled Principal Receipts that were received by a Servicer with re-
spect to such Mortgage Loan during the Unscheduled Principal Receipt Period
relating to such Distribution Date for each applicable type of Unscheduled
Principal Receipt,
(iii) the Subclass B Prepayment Percentage for such Subclass of the
Scheduled Principal Balance of such Mortgage Loan which, during the month
preceding the month of such Distribution Date was repurchased by the Sell-
er, as described under the heading "Description of the Mortgage Loans --
Mandatory Repurchase or Substitution of Mortgage Loans" herein, and
(iv) the Subclass B Percentage for such Subclass of the excess of the un-
paid 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 substi-
tuted Mortgage Loan, less the amount allocable to the principal portion of
any unreimbursed advances in respect of such defective Mortgage Loan. See
"The Pooling and Servicing Agreement -- Assignment of the Mortgage Loans to
the Trustee" in the Prospectus.
The principal distribution to the holders of Class M Certificates or a
Subclass of Class B Certificates will be reduced on any Distribution Date on
which (i) the principal balance of the Class M Certificates or such Subclass of
Class B Certificates on the following Determination Date would be reduced to
zero as a result of principal distributions or allocation of losses and (ii)
the principal balance of any Class A Certificates, and in the case of a
Subclass of Class B Certificates, the principal balances of the Class M Certif-
icates or any Subclass of Class B Certificates with a lower numerical designa-
tion, would be subject to reduction on such Determination Date as a result of
allocation of Realized Losses (other than Excess Bankruptcy Losses, Excess
Fraud Losses and Excess Special Hazard Losses). The amount of any such reduc-
tion in the principal distributed to the holders of Class M Certificates or
such Subclass of Class B Certificates will instead be distributed pro rata to
the holders of any
S-42
<PAGE>
Subclass (other than the Class A-PO Certificates) and Class senior in priority
to receive distributions in accordance with the Pool Distribution Amount Allo-
cation.
In addition, in the event that there is any recovery of an amount in respect
of principal which had previously been allocated as a Realized Loss to the
Class M Certificates or any Subclass of Class B Certificates, the Class M Cer-
tificates or such Subclass, for so long as the principal balance of such Class
or Subclass has not been reduced to zero, will be entitled to their pro rata
share of such recovery up to the amount by which the Class M Principal Balance
or Class B Subclass Principal Balance was reduced as a result of such Realized
Loss.
The "Class M Percentage" and "Class M Prepayment Percentage" for any Distri-
bution Date will equal that portion of the Subordinated Percentage and Subordi-
nated Prepayment Percentage, as the case may be, represented by the fraction
the numerator of which is the then-outstanding Class M Principal Balance and
the denominator of which is the sum of the Class M Principal Balance and, if
any of the Subclasses of the Class B Certificates are entitled to principal
distributions for such Distribution Date as described below, the Class B
Subclass Principal Balances of the Subclasses entitled to principal distribu-
tions.
The "Subclass B Percentage" and "Subclass B Prepayment Percentage" for a
Subclass of Class B Certificates will equal the portion of the Subordinated
Percentage and Subordinated Prepayment Percentage, as the case may be, repre-
sented by the fraction, the numerator of which is the then-outstanding Class B
Subclass Principal Balance for such Subclass of Class B Certificates and the
denominator of which is the sum of the Class M Principal Balance and the Class
B Subclass Principal Balances of the Subclasses entitled to principal distribu-
tions for such Distribution Date as described below. In the event that a
Subclass of Class B Certificates is not entitled to principal distributions for
such Distribution Date, the Subclass B Percentage and Subclass B Prepayment
Percentage for such Subclass will both be 0% with respect to such Distribution
Date.
In the event that on any Distribution Date, the Current Class M Fractional
Interest is less than the Original Class M Fractional Interest, then the Class
B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates will not be en-
titled to distributions in respect of principal and the Class B Subclass Prin-
cipal Balances thereof will not be used to determine the Class M Percentage and
Class M Prepayment Percentage for such Distribution Date. For such Distribution
Date, the Class M Percentage and Class M Prepayment Percentage will equal the
Subordinated Percentage and the Subordinated Prepayment Percentage, respective-
ly. In the event that the Current Class M Fractional Interest equals or exceeds
the Original Class M Fractional Interest but the Current Class B-1 Fractional
Interest is less than the Original Class B-1 Fractional Interest, the Class B-
2, Class B-3, Class B-4 and Class B-5 Certificates will not be entitled to dis-
tributions in respect of principal and the Class B Subclass Principal Balances
of such Subclasses will not be used to determine the Class M Percentage, the
Class M Prepayment Percentage, the Subclass B Percentage for the Class B-1 Cer-
tificates and the Subclass B Prepayment Percentage for the Class B-1 Certifi-
cates for such Distribution Date. In the event that each of the Current Class M
Fractional Interest and the Current Class B-1 Fractional Interest equals or ex-
ceeds the Original Class M Fractional Interest and the Original Class B-1 Frac-
tional Interest, respectively, but the Current Class B-2 Fractional Interest is
less than the Original Class B-2 Fractional Interest, the Class B-3, Class B-4
and Class B-5 Certificates will not be entitled to distributions in respect of
principal and the Class B Subclass Principal Balances of such Subclasses will
not be used to determine the Class M Percentage, the Class M Prepayment Per-
centage, the Subclass B Percentages for the Subclasses of Class B Certificates
with lower numerical designations and the Subclass B Prepayment Percentages for
the Subclasses of Class B Certificates with lower numerical designations for
such Distribution Date. In the event that each of the Current Class M Frac-
tional Interest, the Current Class B-1 Fractional Interest and the Current
Class B-2 Fractional Interest equals or exceeds the Original Class M Fractional
Interest, the Original Class B-1 Fractional Interest and the Original Class B-2
Fractional Interest, respectively, but the Current Class B-3 Fractional Inter-
est is less than the Original Class B-3 Fractional Interest, the Class B-4 and
Class B-5 Certificates will not be entitled to distributions in respect of
principal and the Class B Subclass Principal Balances of such Subclasses will
not be used to determine the Class M Percentage, the Class M Prepayment Per-
centage, the Subclass B Percentages for the Subclasses of Class B Certificates
with lower numerical designations and the Subclass B Prepayment Percentages for
the Subclasses of Class B Certificates with lower numerical designations for
such Distribution Date. In the event that each of the Current Class M Frac-
tional Interest, the Current Class B-1 Fractional Interest, the Current Class
B-2 Fractional Interest and the Current Class B-3 Fractional Interest equals or
exceeds the Original Class M Fractional Interest, the Original
S-43
<PAGE>
Class B-1 Fractional Interest, the Original Class B-2 Fractional Interest and
the Original Class B-3 Fractional Interest, respectively, but the Current Class
B-4 Fractional Interest is less than the Original Class B-4 Fractional Inter-
est, the Class B-5 Certificates will not be entitled to distributions in re-
spect of principal and the Class B Subclass Principal Balance of such Subclass
will not be used to determine the Class M Percentage, the Class M Prepayment
Percentage, the Subclass B Percentages for the Subclasses of Class B Certifi-
cates with lower numerical designations and the Subclass B Prepayment Percent-
ages for the Subclasses of Class B Certificates with lower numerical designa-
tions for such Distribution Date. The Class B-5 Certificates will not have
original or current fractional interests which are required to be maintained as
described above.
The "Original Class M Fractional Interest" is the percentage obtained by di-
viding the sum of the initial Class B Subclass Principal Balances of the Class
B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates by the sum of
the initial Class A Non-PO Principal Balance, initial Class M Principal Balance
and initial Class B Principal Balance. The Original Class M Fractional Interest
is expected to be approximately 1.51%. The "Current Class M Fractional Inter-
est" for any Distribution Date is the percentage obtained by dividing the sum
of the then-outstanding Class B Subclass Principal Balances of the Class B-1,
Class B-2, Class B-3, Class B-4 and Class B-5 Certificates by the sum of the
then-outstanding Class A Non-PO Principal Balance, the Class M Principal Bal-
ance and the Class B Principal Balance.
The "Original Class B-1 Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the
Class B-2, Class B-3, Class B-4 and Class B-5 Certificates by the sum of the
initial Class A Non-PO Principal Balance, initial Class M Principal Balance and
initial Class B Principal Balance. The Original Class B-1 Fractional Interest
is expected to be approximately 1.01%. The "Current Class B-1 Fractional Inter-
est" for any Distribution Date is the percentage obtained by dividing the sum
of the then-outstanding Class B Subclass Principal Balances of the Class B-2,
Class B-3, Class B-4 and Class B-5 Certificates by the sum of the then-out-
standing Class A Non-PO Principal Balance, the Class M Principal Balance and
the Class B Principal Balance.
The "Original Class B-2 Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the
Class B-3, Class B-4 and Class B-5 Certificates by the sum of the initial Class
A Non-PO Principal Balance, initial Class M Principal Balance and initial Class
B Principal Balance. The Original Class B-2 Fractional Interest is expected to
be approximately 0.76%. The "Current Class B-2 Fractional Interest" for any
Distribution Date is the percentage obtained by dividing the sum of the then-
outstanding Class B Subclass Principal Balances of the Class B-3, Class B-4 and
Class B-5 Certificates by the sum of the then-outstanding Class A Non-PO Prin-
cipal Balance, the Class M Principal Balance and the Class B Principal Balance.
The "Original Class B-3 Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the
Class B-4 and Class B-5 Certificates by the sum of the initial Class A Non-PO
Principal Balance, initial Class M Principal Balance and initial Class B Prin-
cipal Balance. The Original Class B-3 Fractional Interest is expected to be ap-
proximately 0.40%. The "Current Class B-3 Fractional Interest" for any Distri-
bution Date is the percentage obtained by dividing the sum of the then-out-
standing Class B Subclass Principal Balances of the Class B-4 and Class B-5
Certificates by the sum of the then-outstanding Class A Non-PO Principal Bal-
ance, the Class M Principal Balance and the Class B Principal Balance.
The "Original Class B-4 Fractional Interest" is the percentage obtained by
dividing the initial Class B Subclass Principal Balance of the Class B-5 Cer-
tificates by the sum of the initial Class A Non-PO Principal Balance, initial
Class M Principal Balance and initial Class B Principal Balance. The Original
Class B-4 Fractional Interest is expected to be approximately 0.20%. The "Cur-
rent Class B-4 Fractional Interest" for any Distribution Date is the percentage
obtained by dividing the then-outstanding Class B Subclass Principal Balance of
the Class B-5 Certificates by the sum of the then-outstanding Class A Non-PO
Principal Balance, the Class M Principal Balance and the Class B Principal Bal-
ance.
Allocation of Amount to be Distributed
The Class A-WIO Certificates are interest-only Certificates and are not enti-
tled to distributions in respect of principal.
S-44
<PAGE>
On each Distribution Date occurring prior to the Cross-Over Date, the Class A
Non-PO Principal Distribution Amount will be allocated among and distributed in
reduction of the Class A Subclass Principal Balances of the Subclasses of Class
A Certificates (other than the Class A Subclass Principal Balance of the Class
A-PO Certificates) as follows:
first, to the Class A-5 Certificates, up to the Class A-5 Priority Amount;
second, to the A-R Certificate until the Class A Subclass Principal Balance
thereof has been reduced to zero;
third, sequentially, to the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates, in that order, until the Class A Subclass Principal Balance of
each such Subclass has been reduced to zero; and
fourth, to the Class A-5 Certificates, without regard to the Class A-5 Prior-
ity Amount until the Class A Subclass Principal Balance thereof has been re-
duced to zero.
The "Class A-5 Priority Amount" for any Distribution Date means the lesser of
(i) the Class A Subclass Principal Balance of the Class A-5 Certificates and
(ii) the sum of (A) the product of (1) the Class A-5 Percentage and (2) the
Scheduled Principal Amount and (B) the product of (1) the Class A-5 Percentage,
(2) the Class A-5 Prepayment Shift Percentage, and (3) the Unscheduled Princi-
pal Amount.
The "Class A-5 Percentage" means the Class A Subclass Principal Balance of
the Class A-5 Certificates divided by the Pool Balance (Non-PO Portion).
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 defi-
nition of "Class A Non-PO Optimal Principal Amount" beginning on page S-38, but
without that amount being multiplied by the Class A Percentage.
The "Unscheduled Principal Amount" means the sum for each outstanding Mort-
gage 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" beginning on page
S-38, but without that amount being multiplied by the Class A Prepayment Per-
centage.
The "Class A-5 Prepayment Shift Percentage" for any Distribution Date will be
the percentage indicated below:
<TABLE>
<CAPTION>
CLASS A-5
PREPAYMENT
DISTRIBUTION DATE OCCURRING IN SHIFT PERCENTAGE
- ------------------------------ ----------------
<S> <C>
April 1997 through March 2002.................................. 0%
April 2002 through March 2003.................................. 30%
April 2003 through March 2004.................................. 40%
April 2004 through March 2005.................................. 60%
April 2005 through March 2006.................................. 80%
April 2006 and thereafter...................................... 100%
</TABLE>
Notwithstanding the foregoing, on each Distribution Date occurring on or af-
ter the Cross-Over Date, the Class A Non-PO Principal Distribution Amount will
be distributed among the Subclasses of Class A Certificates (other than the
Class A-PO Certificates) pro rata in accordance with their respective outstand-
ing Class A Subclass Principal Balances without regard to the priorities set
forth above.
Any amounts distributed on a Distribution Date to the holders of Class A Cer-
tificates of any Subclass in reduction of principal balance will be allocated
among the holders of Class A Certificates of such Subclass pro rata in accor-
dance with their respective Percentage Interests.
Any amounts distributed on any Distribution Date to the holders of the Class
M and Offered Class B Certificates in reduction of principal balance will be
allocated among the holders of each such Class or Subclass pro rata in accor-
dance with their respective Percentage Interests.
S-45
<PAGE>
ADDITIONAL RIGHTS OF THE CLASS A-R CERTIFICATEHOLDER
The Class A-R Certificate will remain outstanding for as long as the Trust
Estate shall exist, whether or not such Subclass is receiving current distribu-
tions of principal or interest. The holder of the Class A-R Certificate 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 1997-5 Certificates, af-
ter distributions in respect of any accrued but unpaid interest on the Series
1997-5 Certificates and after distributions in reduction of principal balance
have reduced the principal balances of the Series 1997-5 Certificates to zero.
It is not anticipated that there will be any assets remaining in the Trust Es-
tate on the final Distribution Date following the distributions of interest and
in reduction of principal balance made on the Series 1997-5 Certificates on
such date.
In addition, the Class A-R Certificateholder will be entitled on each Distri-
bution Date to receive any Pool Distribution Amount remaining after all distri-
butions 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 Liq-
uidated Loans in the related period with respect to which net Liquidation Pro-
ceeds exceed the unpaid principal balance thereof plus accrued interest thereon
at the Mortgage Interest Rate over (ii) the aggregate Realized Losses on Liqui-
dated Loans in the related period with respect to which net Liquidation Pro-
ceeds 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 Distribu-
tion 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 re-
ceived, 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 1997-5 Certificates an amount in cash equal to all de-
linquent 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 be-
lieves that such amounts will be recoverable by it from liquidation proceeds or
other recoveries in respect of the related Mortgage Loan (each, a "Periodic Ad-
vance"). 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 Ad-
ministrator, 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 un-
able to recover such advance from funds of the type referred to in clause (i)
above.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R, CLASS M AND OFFERED CLASS B
CERTIFICATES
The Class A-R Certificate will be subject to the following restrictions on
transfer, and the Class A-R 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
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 Disquali-
fied Organization. The Pooling and Servicing Agreement will provide that no le-
gal or beneficial interest in the Class A-R Certificate may be transferred to
or registered in the name of any person unless (i) the proposed purchaser pro-
vides to the Trust Administrator an affidavit (or, to the extent acceptable to
the Trust Administrator, a representation letter signed under penalty of perju-
ry) to the effect that, among other items, such transferee is not a Disquali-
fied Organization (as defined in the Prospectus) and is not purchasing the
Class A-R 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 or letter is false. Further,
S-46
<PAGE>
such affidavit or letter requires the transferee to affirm that it (i) histori-
cally has paid its debts as they have come due and intends to do so in the fu-
ture, (ii) understands that it may incur tax liabilities with respect to the
Class A-R Certificate in excess of cash flows generated thereby, (iii) intends
to pay taxes associated with holding the Class A-R Certificate as such taxes
become due and (iv) will not transfer the Class A-R 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 Certificate 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 Certificate in connection with the conduct of a trade or business
within the United States and furnishes the transferor and the Trust Administra-
tor 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 na-
tionally recognized tax counsel to the effect that such transfer is in accor-
dance with the requirements of the Code and the regulations promulgated there-
under and that such transfer of the Class A-R Certificate will not be disre-
garded for federal income tax purposes. The term "U.S. Person" means a citizen
or resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, an estate that is subject to United States federal income
tax regardless of the source of its income, or a trust if (A) for taxable years
beginning after December 31, 1996 (or for taxable years ending after August 20,
1996, if the trustee has made an applicable election), a court within the
United States is able to exercise primary supervision over the administration
of such trust, and one or more United States fiduciaries have the authority to
control all substantial decisions of such trust or (B) for all other taxable
years, such trust is subject to United States federal income tax regardless of
the source of its income.
The Pooling and Servicing Agreement will provide that any attempted or pur-
ported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Any transferor or
agent to whom the Trust Administrator provides information as to any applicable
tax imposed on such transferor or agent may be required to bear the cost of
computing or providing such information. See "Certain Federal Income Tax Conse-
quences -- Federal Income Tax Consequences for REMIC Certificates -- Taxation
of Residual Certificates -- Tax-Related Restrictions on Transfer of Residual
Certificates" in the Prospectus.
THE CLASS A-R CERTIFICATE MAY NOT BE PURCHASED BY OR TRANSFERRED TO A PLAN OR
A PERSON ACTING ON BEHALF OF OR INVESTING THE ASSETS OF A PLAN. See "ERISA Con-
siderations" herein and in the Prospectus.
Because the Class M and Offered Class B Certificates are subordinated to the
Class A Certificates, Class M and Offered Class B Certificates may not be
transferred unless the transferee has delivered (i) a representation letter to
the Trust Administrator and the Seller stating either (a) that the transferee
is not a Plan and is not acting on behalf of a Plan or using the assets of a
Plan to effect such purchase or (b) subject to the conditions described herein,
that the source of funds used to purchase the Class M or Offered Class B Cer-
tificates is an "insurance company general account" or (ii) an opinion of coun-
sel and such other documentation as described herein under "ERISA Considera-
tions." See "ERISA Considerations" herein and in the Prospectus.
REPORTS
In addition to the applicable information specified in the Prospectus, the
Master Servicer will include in the statement delivered to holders of Offered
Class A, Class M and Class B Certificates with respect to each Distribution
Date the following information: (i) the amount of such distribution allocable
to interest, the amount of interest currently distributable to each Subclass of
Class A and Class B Certificates and to the Class M Certificates, any Class A
Subclass Interest Shortfall Amount or Class B Subclass Interest Shortfall
Amount arising with respect to each Subclass or any Class M Interest Shortfall
Amount on such Distribution Date, any remaining unpaid Class A Subclass Inter-
est Shortfall Amount or Class B Subclass Interest Shortfall Amount with respect
to each Subclass, or any remaining unpaid Class M Interest Shortfall Amount,
after giving effect to such distribution and any Non-Supported Interest
Shortfall or the interest portion of Realized Losses allocable to such Subclass
or Class with respect to such Distribution Date, (ii) the amount of such dis-
tribution allocable to principal, (iii) the Class A Non-PO Principal Balance,
the Class M Principal Balance, the Class B Principal Balance, the Class A
Subclass Principal Balance of each Subclass of Class A Certificates and the
Class B Subclass Principal Balance of each Subclass of Class B Certificates in
each case after giving effect to the distribution of principal and the alloca-
tion of the principal portion of Realized Losses to such Subclass or Class
S-47
<PAGE>
with respect to such Distribution Date, (iv) the Adjusted Pool Amount, the Ad-
justed 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, Class M
Percentage and Subclass B Percentage of each Subclass of Class B Certificates
for the following Distribution Date (without giving effect to Unscheduled Prin-
cipal Receipts received after the applicable Unscheduled Principal Receipt Pe-
riod for the current Distribution Date that are applied during such Unscheduled
Principal Receipt Period), and (vi) the amount of the remaining Special Hazard
Loss Amount, the Fraud Loss Amount and the Bankruptcy Loss Amount as of the
close of business on such Distribution Date. See "Servicing of the Mortgage
Loans -- Reports to Certificateholders" in the Prospectus.
Copies of the foregoing reports are available upon written request to the
Trust Administrator at its corporate trust office. See "Pooling and Servicing
Agreement -- Trust Administrator" herein.
SUBORDINATION OF CLASS M AND CLASS B CERTIFICATES
The rights of the holders of the Class M Certificates to receive distribu-
tions with respect to the Mortgage Loans in the Trust Estate will be subordi-
nated to such rights of the holders of the Class A Certificates, the rights of
the holders of the Class B Certificates to receive distributions with respect
to the Mortgage Loans in the Trust Estate will be subordinated to such rights
of the holders of the Class A Certificates and the Class M Certificates and the
rights of the holders of the Subclasses of Class B Certificates with higher nu-
merical designations to receive distributions with respect to the Mortgage
Loans in the Trust Estate will be subordinated to such rights of the holders of
Subclasses of Class B Certificates with lower numerical designations, all to
the extent described below. This subordination is intended to enhance the like-
lihood of timely receipt by the holders of the Class A Certificates (to the ex-
tent of the subordination of the Class M and Class B Certificates), the holders
of the Class M Certificates (to the extent of the subordination of the Class B
Certificates) and the holders of a Subclass of Class B Certificates (to the ex-
tent of the subordination of Subclasses of Class B Certificates with higher nu-
merical designations) of the full amount of their scheduled monthly payments of
interest and principal and to afford the holders of the Class A Certificates
(to the extent of the subordination of the Class M and Class B Certificates),
the holders of the Class M Certificates (to the extent of the subordination of
the Class B Certificates) and the holders of the Subclasses of Class B Certifi-
cates (to the extent of the subordination of Subclasses of Class B Certificates
with higher numerical designations) protection against Realized Losses, as more
fully described below. If Realized Losses exceed the credit support provided
through subordination to the Class A Certificates, the Class M Certificates or
a Subclass of Class B Certificates or if Excess Special Hazard Losses, Excess
Fraud Losses or Excess Bankruptcy Losses occur, all or a portion of such losses
will be borne by the Class A Certificates, the Class M Certificates or such
Subclass of Class B Certificates.
The protection afforded to the holders of Class A Certificates by means of
the subordination feature will be accomplished by the preferential right of
such holders to receive, prior to any distribution being made on a Distribution
Date in respect of the Class M and Class B Certificates, the amounts of princi-
pal and interest due the Class A Certificateholders on each Distribution Date
out of the Pool Distribution Amount with respect to such date and, if neces-
sary, by the right of such holders to receive future distributions on the Mort-
gage Loans that would otherwise have been payable to the holders of Class M and
Class B Certificates. The application of this subordination to cover Realized
Losses experienced in periods prior to the periods in which a Subclass of Class
A Certificates is entitled to distributions in reduction of principal balance
will decrease the protection provided by the subordination to any such
Subclass.
The protection afforded to the holders of Class M Certificates by means of
the subordination feature will be accomplished by the preferential right of
such holders to receive, prior to any distribution being made on a Distribution
Date in respect of the Class B Certificates, the amounts of principal (other
than any amount used to pay the Class A-PO Deferred Amount) and interest due
the Class M Certificateholders on each Distribution Date from the Pool Distri-
bution Amount with respect to such date (after all required payments on the
Class A Certificates have been made) and, if necessary, by the right of such
holders to receive future distributions on the Mortgage Loans that would other-
wise have been payable to the holders of the Class B Certificates.
A Subclass of Class B Certificates will be entitled, on each Distribution
Date, to the remaining portion, if any, of the applicable Pool Distribution
Amount, after payment of the Class A Optimal Amount, the Class A-PO Deferred
Amount, the Class M Optimal Amount and the Subclass B Optimal Amount of each
Subclass of
S-48
<PAGE>
Class B Certificates with a lower numerical designation for such date. Amounts
so distributed to Class B Certificateholders will not be available to cover de-
linquencies or Realized Losses in respect of subsequent Distribution Dates.
Allocation of Losses
Realized Losses (other than Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses) will not be allocated to the holders of the Class
A Certificates until the date on which the amount of principal payments on the
Mortgage Loans to which the holders of the Subordinated Certificates are enti-
tled has been reduced to zero as a result of the allocation of losses to the
Subordinated Certificates, i.e., the Distribution Date preceding the Distribu-
tion Date for which the Subordinated Percentage is equal to zero (the "Cross-
Over Date"). Prior to such time, such Realized Losses will be allocated first
to the Subclasses of Class B Certificates sequentially in reverse numerical or-
der, until the Class B Subclass Principal Balance of each such Subclass has
been reduced to zero, and then to the Class M Certificates until the Class M
Principal Balance has been reduced to zero.
The allocation of the principal portion of a Realized Loss (other than a Debt
Service Reduction, Excess Special Hazard Loss, Excess Fraud Loss or Excess
Bankruptcy Loss) will be effected through the adjustment of the principal bal-
ance of the most subordinate Class (or in the case of the Subclasses of Class B
Certificates, the most subordinate Subclass) then outstanding in such amount as
is necessary to cause the sum of the Class A Subclass Principal Balances, the
Class M Principal Balance and the Class B Subclass Principal Balances to equal
the Adjusted Pool Amount.
Allocations to the Class M Certificates or the Subclasses of Class B Certifi-
cates of (i) the principal portion of Debt Service Reductions, (ii) the inter-
est portion of Realized Losses (other than Excess Special Hazard Losses, Excess
Fraud Losses and Excess Bankruptcy Losses), (iii) any interest shortfalls re-
sulting from delinquencies for which the Servicer, the Master Servicer or the
Trust Administrator does not advance, (iv) any interest shortfalls or losses
resulting from the application of the Soldiers' and Sailors' Civil Relief Act
of 1940, as more fully described under "Certain Legal Aspects of the Mortgage
Loans -- Soldiers' and Sailors' Civil Relief Act" in the Prospectus and (v) any
interest shortfalls resulting from the timing of the receipt of Unscheduled
Principal Receipts (other than Prepayments in Full) with respect to Mortgage
Loans will result from the priority of distributions of the Pool Distribution
Amount first to the holders of the Class A Certificates, second to the Class M
Certificates and finally to the Subclasses of Class B Certificates in numerical
order as described above under "-- Distributions."
The allocation of the principal portion of Realized Losses (other than Excess
Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses) in re-
spect 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 Class A Subclass Principal Balance of the Class A-PO
Certificates such that (i) the Class A Non-PO Principal Balance equals the Ad-
justed Pool Amount less the Adjusted Pool Amount (PO Portion) as of the preced-
ing Distribution Date and (ii) the Class A Subclass Principal Balance of the
Class A-PO Certificates equals the Adjusted Pool Amount (PO Portion) as of the
preceding Distribution Date. The principal portion of such Realized Losses al-
located to the Class A Certificates (other than the Class A-PO Certificates)
will be allocated to such outstanding Subclasses of Class A Certificates pro
rata in accordance with their Class A Subclass Principal Balances. 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 (other than
the Class A-PO Certificates) pro rata in accordance with their respective Class
A Subclass 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 respec-
tive 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-PO Certificates), Class M Certificates and Class B Certifi-
cates 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-PO Certificates in proportion to the PO Fraction of such
losses and (ii) with respect to the interest portion of such losses, to the
Class A, Class M and Class B Certificates pro rata based on the interest ac-
crued. The principal portion of any such losses so allocated to the Class A
Certificates (other than
S-49
<PAGE>
the Class A-PO Certificates) will be allocated among the outstanding Subclasses
of Class A Certificates pro rata in accordance with their then-outstanding
Class A Subclass Principal Balances and the interest portion of any such losses
will be allocated among the outstanding Subclasses of Class A Certificates
(other than the Class A-PO Certificates) in accordance with their Class A
Subclass Interest Accrual Amounts, without regard to any reduction pursuant to
this sentence. Any losses allocated to a Subclass of Class A Certificates will
be allocated among the outstanding Class A Certificates within such 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 In-
terest Accrual Amounts, Class M Interest Accrual Amount and Class B Subclass
Interest Accrual Amounts.
As described above, the Pool Distribution Amount for any Distribution Date
will include current receipts (other than certain unscheduled payments in re-
spect of principal) from the Mortgage Loans otherwise payable to holders of the
Class M and Class B Certificates. If the Pool Distribution Amount is not suffi-
cient to cover the amount of principal payable to the holders of the Class A
Certificates on a particular Distribution Date, then the percentage of princi-
pal payments on the Mortgage Loans to which the holders of the Class A Certifi-
cates (other than the Class A-PO Certificates) will be entitled (i.e., the
Class A Percentage) on and after the next Distribution Date will be proportion-
ately increased, thereby reducing, as a relative matter, the respective inter-
est of the Class M and Class B Certificates in future payments of principal on
the Mortgage Loans in the Trust Estate. Such a shortfall could occur, for exam-
ple, 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 allo-
cated solely to the Subclasses of Class B Certificates in reverse numerical or-
der or, following the reduction of the Class B Principal Balance to zero,
solely to the Class M Certificates. Special Hazard Losses in excess of the Spe-
cial Hazard Loss Amount are "Excess Special Hazard Losses." Excess Special Haz-
ard Losses will be allocated among (i) the Class A Certificates (other than the
Class A-PO Certificates), the Class M Certificates and the Class B Certificates
and (ii) to the extent such Excess Special Hazard Losses arise with respect to
Discount Mortgage Loans, the Class A-PO Certificates. If the aggregate of all
Special Hazard Losses incurred in the month preceding the month of the related
Distribution Date (the "Aggregate Current Special Hazard Losses") is less than
or equal to the then-applicable Special Hazard Loss Amount, no Special Hazard
Losses will be regarded as Excess Special Hazard Losses. If Aggregate Current
Special Hazard Losses exceed the then-applicable Special Hazard Loss Amount, a
portion of each Special Hazard Loss will be regarded as an "Excess Special Haz-
ard 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 Spe-
cial Hazard Loss Amount is zero, all Special Hazard Losses will be regarded as
Excess Special Hazard Losses. Upon initial issuance of the Series 1997-5 Cer-
tificates, the "Special Hazard Loss Amount" with respect thereto will be equal
to approximately 1.33% (approximately $1,994,220) of the Cut-Off Date Aggregate
Principal Balance of the Mortgage Loans. As of any Distribution Date, the Spe-
cial Hazard Loss Amount will equal the initial Special Hazard Loss Amount less
the sum of (A) any Special Hazard Losses allocated solely to the Class B or
Class M Certificates and (B) the Adjustment Amount. The "Adjustment Amount" on
each anniversary of the Cut-Off Date will be equal to the amount, if any, by
which the Special Hazard Amount, without giving effect to the deduction of the
Adjustment Amount for such anniversary, exceeds the greater of (i) 1.00% (or,
if greater than 1.00%, the highest percentage of Mortgage Loans by principal
balance in any California zip code) times the aggregate principal balance of
all the Mortgage Loans on such anniversary (ii) twice the principal balance of
the single Mortgage Loan having the largest principal balance, and (iii) that
which is necessary to maintain the original ratings assigned to the Class A and
Class M Certificates by S&P and Fitch and the original ratings assigned to the
Offered Class B Certificates by S&P, as evidenced by letters to that effect de-
livered by S&P and Fitch to the Master Servicer and the Trust Administrator. On
and after the Cross-Over Date, the Special Hazard Loss Amount will be zero.
Fraud Losses, other than Excess Fraud Losses, will be allocated solely to the
Subclasses of Class B Certificates in reverse numerical order or, following the
reduction of the Class B Principal Balance to zero, solely to the Class M Cer-
tificates. Fraud Losses in excess of the Fraud Loss Amount are "Excess Fraud
Losses." Excess Fraud Losses will be allocated among (i) the Class A Certifi-
cates (other than the Class A-PO Certificates),
S-50
<PAGE>
the Class M Certificates and the Class B Certificates and (ii) to the extent
such Excess Fraud Losses arise with respect to Discount Mortgage Loans, the
Class A-PO Certificates. If the aggregate of all Fraud Losses incurred in the
month preceding the month of the related Distribution Date (the "Aggregate Cur-
rent 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 re-
garded as Excess Fraud Losses. Upon initial issuance of the Series 1997-5 Cer-
tificates, the "Fraud Loss Amount" with respect thereto will be equal to ap-
proximately 2.00% (approximately $2,999,063) of the Cut-Off Date Aggregate
Principal Balance of the Mortgage Loans. As of any Distribution Date prior to
the first anniversary of the Cut-Off Date, the Fraud Loss Amount will equal the
initial Fraud Loss Amount minus the aggregate amount of Fraud Losses allocated
solely to the Class B or Class M Certificates through the related Determination
Date. As of any Distribution Date from the first through fifth anniversary of
the Cut-Off Date, the Fraud Loss Amount will be an amount equal to (1) the
lesser of (a) the Fraud Loss Amount as of the most recent anniversary of the
Cut-Off Date and (b) 1.00% of the aggregate principal balance of all of the
Mortgage Loans as of the most recent anniversary of the Cut-Off Date minus (2)
the aggregate amounts allocated solely to the Class B or Class M Certificates
with respect to Fraud Losses since the most recent anniversary of the Cut-Off
Date through the related Determination Date. On and after the Cross-Over Date
or after the fifth anniversary of the Cut-Off Date, the Fraud Loss Amount will
be zero.
Bankruptcy Losses, other than Excess Bankruptcy Losses, will be allocated
solely to the Subclasses of Class B Certificates in reverse numerical order or,
following the reduction of the Class B Principal Balance to zero, solely to the
Class M Certificates. Bankruptcy Losses in excess of the Bankruptcy Loss Amount
are "Excess Bankruptcy Losses." Excess Bankruptcy Losses will be allocated
among (i) the Class A Certificates (other than the Class A-PO Certificates),
the Class M Certificates and the Class B Certificates and (ii) to the extent
such Excess Bankruptcy Losses arise with respect to Discount Mortgage Loans,
the Class A-PO Certificates. If the aggregate of all Bankruptcy Losses incurred
in the month preceding the month of the related Distribution Date (the "Aggre-
gate Current Bankruptcy Losses") is less than or equal to the then applicable
Bankruptcy Loss Amount, no Bankruptcy Losses will be regarded as Excess Bank-
ruptcy Losses. If Aggregate Current Bankruptcy Losses exceed the then-applica-
ble 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 Bank-
ruptcy 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 1997-5 Certif-
icates, the "Bankruptcy Loss Amount" with respect thereto will be equal to ap-
proximately 0.07% (approximately $100,000) of the Cut-Off Date Aggregate Prin-
cipal Balance of the Mortgage Loans. As of any Distribution Date prior to the
first anniversary of the Cut-Off Date, the Bankruptcy Loss Amount will equal
the initial Bankruptcy Loss Amount minus the aggregate amount of Bankruptcy
Losses allocated solely to the Class B or Class M Certificates through the re-
lated Determination Date. As of any Distribution Date on or after the first an-
niversary of the Cut-Off Date, the Bankruptcy Loss Amount will equal the ex-
cess, 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 Ser-
vicing 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 Bank-
ruptcy Loss Amount and the related coverage levels described above may be re-
duced or modified upon written confirmation from S&P and Fitch that such reduc-
tion or modification will not adversely affect the then-current ratings as-
signed to the Class A and Class M Certificates by S&P and Fitch and the then-
current ratings assigned to the Offered Class B Certificates by S&P. Such a re-
duction or modification may adversely affect the coverage provided by subordi-
nation 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 applica-
ble 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
S-51
<PAGE>
representations and warranties made regarding the related Mortgage Loan and
when (A) the related Mortgage Loan is not in default with regard to the pay-
ments due thereunder or (B) delinquent payments of principal and interest under
the related Mortgage Loan and any premiums on any applicable Standard Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by such Servicer, in either case
without giving effect to any Debt Service Reduction.
Since the aggregate initial principal balance of the Class M and Class B Cer-
tificates will be approximately $3,749,545, the risk of Special Hazard Losses,
Fraud Losses and Bankruptcy Losses will be separately borne by the Class B Cer-
tificates and, after the principal balance of the Class B Certificates has been
reduced to zero, by the Class M Certificates to a lesser extent (i.e., only up
to the Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy Loss
Amount, respectively) than the risk of other Realized Losses, which will be al-
located first to the Class B Certificates and then the Class M Certificates to
the full extent of their initial principal balances. See "The Trust Estates --
Mortgage Loans -- Representations and Warranties" and "-- Insurance Policies,"
"Certain Legal Aspects of the Mortgage Loans -- Environmental Considerations"
and "Servicing of the Mortgage Loans -- Enforcement of Due-on-Sale Clauses; Re-
alization Upon Defaulted Mortgage Loans" in the Prospectus.
S-52
<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, resi-
dential first mortgage loans having original terms to stated maturity ranging
from approximately 10 years to approximately 15 years, which may include loans
secured by shares ("Co-op Shares") issued by private non-profit housing corpo-
rations ("Cooperatives"), and the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specified units in such Coopera-
tives' buildings. The Mortgage Loans are expected to include 494 promissory
notes, to have an aggregate unpaid principal balance as of the Cut-Off Date
(the "Cut-Off Date Aggregate Principal Balance") of approximately $149,953,144
to be secured by first liens (the "Mortgages") on one- to four-family residen-
tial properties (the "Mortgaged Properties") and to have the additional charac-
teristics described below and in the Prospectus.
As of the Cut-Off Date, it is expected that none of the Mortgage Loans will
be Buy-Down Loans. As of the Cut-Off Date, it is expected that one of the Mort-
gage Loans, representing approximately 0.02% of the Cut-Off Date Aggregate
Principal Balance of the Mortgage Loans, will be secured by Co-op Shares. 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 De-
faulted Mortgage Loans" in the Prospectus.
It is expected that six of the Mortgage Loans, representing approximately
1.07% of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans,
will be Subsidy Loans. See "The Trust Estates -- Mortgage Loans" and "The Mort-
gage Loan Programs -- Mortgage Loan Underwriting" in the Prospectus.
It is expected that 41 of the Mortgage Loans, representing approximately
7.77% of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans,
will be Mortgage Loans originated in connection with the relocation of employ-
ees of various corporate employers which participated in Norwest Mortgage's or
PHMC's relocation program and of various nonparticipant employers ("Relocation
Mortgage Loans"). See "The Mortgage Loan Programs -- Mortgage Loan Production
Sources" 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 $24,340 or more than approxi-
mately $997,111, and the average unpaid principal balance of the Mortgage Loans
is expected to be approximately $303,549. The latest stated maturity date of
any of the Mortgage Loans is expected to be March 1, 2012; 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 origi-
nation, 474 of the
- -------------------
(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 prin-
cipal 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 nec-
essary 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 1997-5 Certificates are issued,
although the Cut-Off Date Aggregate Principal Balance, the range of Mort-
gage 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 con-
stitute the Trust Estate on the date of initial issuance of the Series
1997-5 Certificates vary materially from those described herein, revised
information regarding the Mortgage Loans will be made available to purchas-
ers 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-53
<PAGE>
Mortgaged Properties, which secure approximately 96.17% of the Cut-Off Date Ag-
gregate Principal Balance of the Mortgage Loans, are expected to be owner occu-
pied primary residences and 20 of the Mortgaged Properties, which secure ap-
proximately 3.83% of the Cut-Off Date Aggregate Principal Balance of the Mort-
gage Loans, are expected to be second homes. See "The Mortgage Loan Programs --
Mortgage Loan Underwriting" in the Prospectus.
As of the Cut-Off Date, there were 128 Discount Mortgage Loans having an ag-
gregate unpaid principal balance of approximately $37,442,907, a range of un-
paid principal balances of approximately $64,799 to approximately $993,793, an
average unpaid principal balance of approximately $292,523, a range of Mortgage
Interest Rates from 6.500% to 7.250% per annum, a weighted average Mortgage In-
terest Rate of approximately 7.075% per annum, a range of remaining terms to
stated maturity of 118 months to 180 months, a weighted average remaining term
to stated maturity of approximately 178 months, a range of original Loan-to-
Value Ratios of 25.10% to 90.00%, a weighted average original Loan-to-Value Ra-
tio of approximately 69.28% and the following geographic concentration of Mort-
gaged Properties securing Mortgage Loans in excess of 5.00% of the aggregate
unpaid principal balance of the Discount Mortgage Loans: approximately 25.62%
in California, 7.38% in New Jersey, 5.44% in Illinois, 5.34% in New York and
5.31% in Virginia.
As of the Cut-Off Date, there were 366 Mortgage Loans that were not Discount
Mortgage Loans (the "Premium Mortgage Loans") having an aggregate unpaid prin-
cipal balance of approximately $112,510,237, a range of unpaid principal bal-
ances of approximately $24,340 to approximately $997,111, an average unpaid
principal balance of approximately $307,405, a range of Mortgage Interest Rates
from 7.350% to 8.875% per annum, a weighted average Mortgage Interest Rate of
approximately 7.701% per annum, a range of remaining terms to stated maturity
of 116 months to 180 months, a weighted average remaining term to stated matu-
rity of approximately 178 months, a range of original Loan-to-Value Ratios of
18.07% to 95.00%, a weighted average original Loan-to-Value Ratio of approxi-
mately 67.87% and the following geographic concentration of Mortgaged Proper-
ties securing Mortgage Loans in excess of 5.00% of the aggregate unpaid princi-
pal balance of the Premium Mortgage Loans: approximately 21.77% in California,
6.62% in Florida and 5.34% in New Jersey.
Certain geographic regions, including California, have, in recent years, ex-
perienced and such regions or others in the future may experience natural di-
sasters, including, without limitation, earthquakes, fires, floods and hurri-
canes. Any deterioration in housing prices in the states in which the Mortgaged
Properties are located and any deterioration in the 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. A
concentration of the Mortgage Loans in such states may therefore result in a
greater risk of loss than had such concentration not been present. Such losses,
if they occur, may have an adverse effect on the yield to maturity of the Of-
fered Certificates and more particularly on the Class M Certificates and the
Offered Class B Certificates, especially the Class B-2 Certificates.
As to Mortgaged Properties in regions that have recently experienced natural
disasters, neither the Seller nor Norwest Mortgage has undertaken the physical
inspection of such Mortgaged Properties. As a result, there can be no assurance
that material damage to any Mortgaged Property in an affected region has not
occurred. In the Pooling and Servicing Agreement, the Seller will represent and
warrant that, as of the date of issuance of the Certificates, each Mortgaged
Property is undamaged by flood, water, fire, earthquake or earth movement,
windstorm, tornado or similar casualty (excluding casualty from the presence of
hazardous wastes or hazardous substances, as to which the Seller makes no rep-
resentation) so as to adversely affect the value of such Mortgaged Property as
security for such Mortgage Loan or the use for which such premises were intend-
ed. In the event of a breach of such representation with respect to a Mortgaged
Property which materially and adversely affects the interests of
Certificateholders in the related Mortgage Loan, the Seller will be obligated
to repurchase or substitute for such Mortgage Loan, as described under "The
Mortgage Loan Programs -- Representations and Warranties" and "The Pooling and
Servicing Agreement -- Assignment of Mortgage Loans to the Trustee" in the Pro-
spectus. Repurchase of any such Mortgage Loan will affect in varying degrees
the yields and weighted average lives of the Subclasses and Classes of Offered
Certificates and could adversely affect the yield of any Offered Certificates
purchased at a premium.
S-54
<PAGE>
PHMC ACQUISITION
The Mortgage Loans will have been acquired by the Seller from Norwest Mort-
gage. On May 7, 1996 Norwest Mortgage and an affiliate acquired from PHMC cer-
tain mortgage loans and a substantial portion of PHMC's mortgage servicing
portfolio (such transaction, the "PHMC Acquisition"). The Mortgage Loans in-
cluded 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 enti-
ties (each, a "Norwest Mortgage Correspondent") which either originated the
Mortgage Loans or acquired the Mortgage Loans pursuant to mortgage loan pur-
chase programs operated by such Norwest Mortgage 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.
MORTGAGE LOAN UNDERWRITING
Approximately 97.69% (by Cut-Off Date Aggregate Principal Balance) of the
Mortgage Loans were originated in conformity with the underwriting standards
described in the Prospectus under the heading "The Mortgage Loan Programs --
Mortgage Loan Underwriting -- Norwest Mortgage Underwriting" (the "Underwrit-
ing Standards") as applied by Norwest Mortgage, PHMC, or by eligible origina-
tors 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. The remaining approximate 2.31%
(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.
See "The Mortgage Loan Programs -- Mortgage Loan Underwriting" in the Prospec-
tus.
S-55
<PAGE>
MORTGAGE LOAN DATA
Set forth below is a description of certain additional expected characteris-
tics of the Mortgage Loans as of the Cut-Off Date (except as otherwise indicat-
ed).
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE MORTGAGE PRINCIPAL PRINCIPAL
INTEREST RATE LOANS BALANCE BALANCE
- ------------- --------- --------------- -------------
<S> <C> <C> <C>
6.500%............. 1 ____$377,489.46 0.25%
6.625%............. 3 602,861.80 0.40
6.750%............. 9 2,699,182.97 1.80
6.875%............. 17 5,014,226.86 3.34
7.000%............. 23 6,292,873.18 4.20
7.100%............. 1 274,765.29 0.18
7.125%............. 28 8,201,837.52 5.47
7.200%............. 1 445,213.65 0.30
7.250%............. 45 13,534,456.40 9.03
7.350%............. 1 283,250.38 0.19
7.375%............. 62 20,385,973.47 13.59
7.450%............. 1 484,533.25 0.32
7.500%............. 67 22,566,780.99 15.05
7.550%............. 1 89,457.04 0.06
7.625%............. 60 19,077,272.62 12.72
7.650%............. 1 153,079.05 0.10
7.700%............. 1 305,240.41 0.20
7.750%............. 46 14,232,885.98 9.49
7.875%............. 44 13,506,771.68 9.01
7.900%............. 1 270,155.42 0.18
7.950%............. 1 133,416.91 0.09
8.000%............. 25 8,380,149.07 5.59
8.100%............. 2 142,892.91 0.10
8.125%............. 21 4,901,291.34 3.27
8.200%............. 1 74,356.83 0.05
8.250%............. 12 3,423,399.69 2.28
8.300%............. 1 59,636.94 0.04
8.375%............. 7 2,118,552.75 1.41
8.400%............. 1 24,340.59 0.02
8.500%............. 5 1,222,136.16 0.82
8.625%............. 1 215,617.49 0.14
8.750%............. 3 361,523.93 0.24
8.875%............. 1 97,522.30 0.07
--- --------------- ------
Total........... 494 _149,953,144.33$ 100.00%
=== =============== ======
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Inter est Rate of the
Mortgage Loans is expected to be approximately 7.544% per annum. The Net Mort
gage Interest Rate of each Mort gage 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 for such Mortgage Loan. As of the Cut
Off Date, the weighted average Net Mortgage In terest Rate of the Mortgage Loans
is expected to be approximately 7.278% per annum.
MORTGAGE LOAN DOCUMENTATION
LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
DOCUMENTATION LEVEL LOANS BALANCE BALANCE
- ------------------- --------- --------------- -------------
<S> <C> <C> <C>
Full
Documentation..... 377 _122,440,225.01$ 81.66%
Income
Verification...... 3 727,192.01 0.48
Asset
Verification...... 60 11,681,204.69 7.79
Preferred
Processing........ 54 15,104,522.62 10.07
--- --------------- ------
Total........... 494 _149,953,144.33$ 100.00%
=== =============== ======
</TABLE>
Documentation levels vary depend ing upon several factors, includ ing 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 proc
essed with "full documentation." In the case of "preferred processing," neither
asset nor income verifications were ob tained. In most instances, a ver
ification of the borrower's em ployment was obtained. However, for all of the
Mortgage Loans, a credit report on the borrower and a property appraisal were ob
tained. See "The Mortgage Loan Programs -- Mortgage Loan Under writing" in the
Prospectus.
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
REMAINING STATED MORTGAGE PRINCIPAL PRINCIPAL
TERM (MONTHS) LOANS BALANCE BALANCE
- ------------------- --------- --------------- -------------
<S> <C> <C> <C>
116................ 1 ____$342,479.23 0.23%
117................ 1 329,431.77 0.22
118................ 1 217,397.86 0.14
142................ 1 277,603.57 0.19
165................ 1 280,749.26 0.19
168................ 1 500,492.86 0.33
169................ 2 277,756.95 0.19
170................ 1 226,915.72 0.15
171................ 1 97,522.30 0.07
173................ 2 615,193.87 0.41
174................ 8 2,437,632.82 1.63
175................ 13 3,447,013.75 2.30
176................ 18 4,553,863.36 3.04
177................ 51 14,265,849.59 9.51
178................ 169 51,872,559.45 34.59
179................ 173 55,456,431.97 36.97
180................ 50 14,754,250.00 9.84
--- --------------- ------
Total........... 494 _149,953,144.33$ 100.00%
=== =============== ======
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to stated maturity
of the Mort-gage Loans is expected to be ap-proximately 178 months.
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
YEAR OF ORIGINATION LOANS BALANCE BALANCE
- ------------------- --------- --------------- -------------
<S> <C> <C> <C>
1995............... 1 ____$280,749.26 0.19%
1996............... 274 80,804,130.77 53.88
1997............... 219 68,868,264.30 45.93
--- --------------- ------
Total........... 494 _149,953,144.33$ 100.00%
=== =============== ======
</TABLE>
It is expected that the earliest month and year of origination of any Mortgage
Loan was November 1995 and the latest month and year of origination was February
1997.
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
PROPERTY LOANS BALANCE BALANCE
- -------- --------- --------------- -------------
<S> <C> <C> <C>
Single-family
detached........... 455 _140,188,131.27$ 93.50%
Two- to four-family
units.............. 0 0.00 0.00
Condominiums
High-rise (greater
than four
stories).......... 7 1,817,227.27 1.21
Low-rise (four
stories or less).. 13 2,971,159.51 1.98
Planned unit
developments....... 16 4,621,797.20 3.08
Townhouses......... 2 320,742.87 0.21
Cooperative Units.. 1 34,086.21 0.02
--- --------------- ------
Total........... 494 _149,953,144.33$ 100.00%
=== =============== ======
</TABLE>
S-56
<PAGE>
GEOGRAPHIC DISTRIBUTION OF
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
GEOGRAPHIC AREA LOANS BALANCE BALANCE
- --------------- --------- --------------- -------------
<S> <C> <C> <C>
Alabama............ 3 _____932,186.28$ 0.62%
Arizona............ 11 4,584,933.21 3.06
Arkansas........... 3 810,015.92 0.54
California......... 95 34,084,064.49 22.75
Colorado........... 23 6,624,110.39 4.42
Connecticut........ 6 1,437,390.74 0.96
Delaware........... 1 250,000.00 0.17
District of
Columbia.......... 3 824,544.21 0.55
Florida............ 27 7,885,894.20 5.26
Georgia............ 23 6,543,660.11 4.36
Hawaii............. 2 717,865.22 0.48
Idaho.............. 2 661,679.91 0.44
Illinois........... 19 5,593,330.79 3.73
Indiana............ 1 239,298.72 0.16
Iowa............... 3 997,665.24 0.67
Kentucky........... 1 273,711.46 0.18
Louisiana.......... 4 1,084,553.06 0.72
Maine.............. 1 266,393.81 0.18
Maryland........... 10 3,176,780.77 2.12
Massachusetts...... 18 4,981,428.17 3.32
Michigan........... 11 3,445,245.49 2.30
Minnesota.......... 26 7,246,606.00 4.83
Missouri........... 4 1,057,620.45 0.71
Montana............ 2 630,346.72 0.42
Nebraska........... 1 218,149.30 0.15
Nevada............. 5 1,631,813.15 1.09
New Hampshire...... 3 699,923.98 0.47
New Jersey......... 31 8,764,628.97 5.84
New Mexico......... 4 973,943.50 0.65
New York........... 30 7,457,181.66 4.97
North Carolina..... 12 3,750,249.46 2.50
Ohio............... 12 3,440,097.96 2.29
Oklahoma........... 5 1,774,512.16 1.18
Oregon............. 12 2,896,352.40 1.93
Pennsylvania....... 4 1,253,445.42 0.84
Rhode Island....... 2 780,480.10 0.52
South Carolina..... 3 858,751.55 0.57
South Dakota....... 2 546,607.98 0.36
Tennessee.......... 5 1,777,799.62 1.19
Texas.............. 25 6,737,122.58 4.49
Utah............... 7 2,106,335.04 1.40
Vermont............ 2 606,160.79 0.40
Virginia........... 15 4,700,070.15 3.13
Washington......... 12 3,574,608.53 2.38
Wisconsin.......... 3 1,055,584.67 0.70
--- --------------- ------
Total........... 494 _149,953,144.33$ 100.00%
=== =============== ======
</TABLE>
No more than approximately 1.17% 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.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
ORIGINAL LOAN-TO- MORTGAGE PRINCIPAL PRINCIPAL
VALUE RATIO LOANS BALANCE BALANCE
- ---------------------------------------- --------- --------------- -------------
<S> <C> <C> <C>
50% or less............................. 69 __19,505,047.22$ 13.01%
50.01-55.00%............................ 20 4,593,439.39 3.06
55.01-60.00%............................ 36 10,275,982.75 6.85
60.01-65.00%............................ 28 9,190.856.34 6.13
65.01-70.00%............................ 82 27,601,598.19 18.41
70.01-75.00%............................ 85 24,980,493.67 16.66
75.01-80.00%............................ 148 45,919,281.70 30.62
80.01-85.00%............................ 5 1,676,418.59 1.12
85.01-90.00%............................ 20 5,967,884.57 3.98
90.01-95.00%............................ 1 242,141.91 0.16
--- --------------- ------
Total................................ 494 _149,953,144.33$ 100.00%
=== =============== ======
</TABLE>
As of the Cut-Off Date, the mini mum and maximum Loan-to-Value Ra tios at
origination of the Mort gage Loans are expected to be 18.07% and 95.00%,
respectively, and the weighted average Loan-to Value Ratio at origination of the
Mortgage Loans is expected to be approximately 68.22%. 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 ob tained by the
originator from an appraiser at the time of origina tion and (ii) the sale price
for such property. See "The Trust Es tates -- 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 Ra tios shown above. See "Risk Fac tors -- Risks
of the Mortgage Loans" in the Prospectus. It is expected that 3 of the Mortgage
Loans having Loan-to-Value Ratios at origination in excess of 80%, representing
approximately 0.72% (by Cut-Off Date Aggregate Prin cipal Balance) of the
Mortgage Loans, were originated without primary mortgage insurance.
FICO SCORES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF WEIGHTED
AGGREGATE DATE AVERAGE
RANGE OF NUMBER OF UNPAID AGGREGATE LOAN-TO-
FICO MORTGAGE PRINCIPAL PRINCIPAL VALUE
SCORES LOANS BALANCE BALANCE RATIO
-------- --------- --------------- ------------- --------
<S> <C> <C> <C> <C>
250-300........................ 0 ___________0.00$ 0.00% 0.00%
301-350........................ 0 0.00 0.00 0.00
351-400........................ 0 0.00 0.00 0.00
401-450........................ 0 0.00 0.00 0.00
451-500........................ 0 0.00 0.00 0.00
501-550........................ 1 284,439.78 0.19 77.57
551-600........................ 4 786,796.54 0.52 56.60
601-650........................ 31 9,133,252.11 6.09 71.02
651-700........................ 100 31,170,473.94 20.79 67.91
701-750........................ 167 50,457,353.92 33.65 69.70
751-800........................ 176 54,493,159.99 36.34 66.75
801-850........................ 13 3,255,086.45 2.17 67.70
851-900........................ 0 0.00 0.00 0.00
Not Available.................. 2 372,581.60 0.25 60.87
--- --------------- ------ -----
Total........................ 494 _149,953,144.33$ 100.00% 68.22%
=== =============== ====== =====
</TABLE>
The weighted average FICO Score is expected to be 728. "FICO Scores" are
statistical credit scores obtained by many mortgage lenders in connection with
the loan application to help assess a borrower's credit-worthiness. FICO Scores
are generated by mod els developed by a third party and are made available to
lenders through three national credit bu reaus. The models were derived by
analyzing data on consumers in order to establish patterns which are believed to
be indicative of the borrower's probability of de fault. The FICO Score is based
on a borrower's historical credit data, including, among other things, payment
history, delin quencies on accounts, levels of outstanding indebtedness, length
of credit history, types of cred it, and bankruptcy experience. FICO Scores
range from approxi mately 250 to approximately 900, with higher scores
indicating an individual with a more favorable credit history compared to an in
dividual with a lower score. How ever, a FICO Score purports only to be a
measurement of the rela tive degree of risk a borrower represents to a lender,
i.e., that a borrower with a higher score is statistically expected to be less
likely to default in payment than a borrower with a lower score. In addition, it
should be noted that FICO Scores were developed to indicate a level of default
probability over a two-year period which does not correspond to the life of a
mort gage loan. Furthermore, FICO Scores were not developed specif ically for
use in connection with mortgage loans, but for consumer loans in general.
Therefore, a FICO Score does not take into consideration the affect of mort gage
loan characteristics on the probability of repayment by the borrower. The FICO
Scores set forth in the table above were ob tained at either the time of
origination of the Mortgage Loan or more recently. Neither the Seller nor
Norwest Mortgage make any representations or warranties as to the actual
performance of any Mortgage Loan or that a par ticular FICO Score should be re
lied upon as a basis for an ex pectation that the borrower will repay the
Mortgage Loan according to its terms. See "The Mortgage Loan Programs --
Mortgage Loan Underwriting" in the Prospectus."
S-57
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
ORIGINAL MORTGAGE NUMBER OF UNPAID AGGREGATE
LOAN PRINCIPAL MORTGAGE PRINCIPAL PRINCIPAL
BALANCE LOANS BALANCE BALANCE
- ------------------- --------- --------------- -------------
<S> <C> <C> <C>
Less than or equal
to $200,000........ 51 ___5,738,974.16$ 3.83%
$200,001-$250,000.. 133 30,526,826.32 20.36
$250,001-$300,000.. 116 32,345,867.41 21.57
$300,001-$350,000.. 77 24,917,699.01 16.62
$350,001-$400,000.. 36 13,556,961.99 9.04
$400,001-$450,000.. 33 14,052,439.24 9.37
$450,001-$500,000.. 18 8,682,628.38 5.79
$500,001-$550,000.. 9 4,722,461.90 3.15
$550,001-$600,000.. 6 3,470,699.13 2.31
$600,001-$650,000.. 7 4,523,335.49 3.02
$800,001-$850,000.. 2 1,653,262.41 1.10
$850,001-$900,000.. 1 854,789.15 0.57
$900,001-$950,000.. 1 922,206.39 0.61
$950,001-
$1,000,000........ 4 3,984,993.35 2.66
--- --------------- ------
Total........... 494 _149,953,144.33$ 100.00%
=== =============== ======
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans is expected to be approximately $303,549. 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 62.28% and
80.00%, respectively. See "The Trust Estates -- Mortgage Loans" in the
Prospectus.
ORIGINATORS OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
ORIGINATOR LOANS BALANCE BALANCE
- ---------- --------- --------------- -------------
<S> <C> <C> <C>
NMI or Affiliate... 288 _$87,389,747.14 58.28%
Other Originators.. 206 62,563,397.19 41.72
--- --------------- ------
Total........... 494 _149,953,144.33$ 100.00%
=== =============== ======
</TABLE>
No single "Other Originator" is expected to have accounted for more than
5.00% of the Cut-Off Date Aggregate Principal Balance.
PURPOSES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
LOAN PURPOSE LOANS BALANCE BALANCE
- ------------ --------- --------------- -------------
<S> <C> <C> <C>
Purchase........... 214 __64,739,074.00$ 43.17%
Equity Take Out
Refinance.......... 59 16,926,876.26 11.29
Rate/Term
Refinance......... 221 68,287,194.07 45.54
--- --------------- ------
Total........... 494 _149,953,144.33$ 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 prin
cipal balance of a previous mort gage loan of the mortgagor with respect to a
Mortgaged Property and to pay origination and clos ing costs associated with
such refinancing. However, in the case of a Mortgage Loan made for "eq uity take
out" refinance purpos es, all or a portion of the pro ceeds are generally
retained by the mortgagor for uses unrelated to the Mortgaged Property. The
amount of such proceeds retained by the mortgagor may be substan tial. See "The
Mortgage Loan Servicer-- Mortgage Loan Under writing."
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 1997-5
Certificates, to substitute new Mortgage Loans therefor. Any Mortgage Loan so
substituted must, among other things, have an unpaid principal balance equal to
or less than the Scheduled Principal Balance of the Mortgage Loan for which it
is being substituted (after giving effect to the scheduled principal payment
due in the month of substitution on the Mortgage Loan for which a new Mortgage
Loan is being substituted), a Loan-to-Value Ratio less than or equal to, and a
Mortgage Interest Rate equal to that of the Mortgage Loan for which it is being
substituted. See "Prepayment and Yield Considerations" herein and "The Pooling
and Servicing Agreement -- Assignment of Mortgage Loans to the Trustee" in the
Prospectus.
OPTIONAL REPURCHASE OF DEFAULTED MORTGAGE LOANS
Subject to certain limitations, the Seller may, in its sole discretion, re-
purchase 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 -- Op-
tional 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 "Pre-
payment and Yield Considerations" herein and "Servicing of the Mortgage
Loans -- Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mort-
gage Loans" in the Prospectus.
S-58
<PAGE>
DELINQUENCY AND FORECLOSURE EXPERIENCE
The following tables set forth certain information concerning recent
delinquency, foreclosure and loan loss experience on (i) the conventional
mortgage loans included in various mortgage pools underlying all series of The
Prudential Home Mortgage Securities Company, Inc.'s or NASCOR's mortgage pass-
through certificates or mortgage loans owned by third-party, non-governmental
entities included in Norwest Mortgage's servicing portfolio and serviced from
Norwest Mortgage's servicing center located in Frederick, Maryland, which
mortgage loans either (A) were originated by Norwest Mortgage for its own
account or the account of an affiliate, (B) were acquired by Norwest Mortgage
for its own account or the account of an affiliate, or (C) are loans as to
which Norwest Mortgage acquired the servicing rights or as to which Norwest
Mortgage acts as subservicer (collectively, the "NMI Frederick Portfolio
Loans"), (ii) the NMI Frederick Portfolio Loans which are fixed interest rate
mortgage loans (the "Fixed NMI Frederick Portfolio Loans"), including, in both
clause (i) and this clause (ii) Relocation Mortgage Loans, (iii) the Fixed NMI
Frederick Portfolio Loans, other than Relocation Mortgage Loans, having
original terms to maturity of approximately 15 years (the "Fixed 15-Year Non-
Relocation NMI Frederick Portfolio Loans"), (iv) the conventional mortgage
loans having an original principal balance in excess of the principal balance
acceptable for purchase by FNMA or FHLMC ("Jumbo Loans") included in Norwest
Mortgage's servicing portfolio and serviced from servicing centers other than
in Frederick, Maryland (the "NMI Non-Frederick Portfolio Loans") and (v) the
NMI Non-Frederick Portfolio Loans which are fixed interest rate Jumbo Loans
having original terms to maturity of approximately 15 years (the "Fixed 15-Year
NMI Non-Frederick Portfolio Loans"), including in both clause (iv) and this
clause (v) Relocation Mortgage Loans. Mortgage loans previously included in
PHMC's mortgage servicing portfolio prior to the PHMC Acquisition became
serviced or subserviced by Norwest Mortgage on May 7, 1996 and, to the extent
described above, are included in the NMI Frederick Portfolio Loans. Prior to
May 7, 1996 such mortgage loans were serviced by PHMC. See "Description of the
Mortgage Loans" herein and "The Mortgage Loan Programs--Mortgage Loan
Underwriting" in the Prospectus. The delinquency, foreclosure and loan loss
experience represents the recent experience of Norwest Mortgage and, in the
case of NMI Frederick Portfolio Loans prior to May 7, 1996, that of PHMC. There
can be no assurance that the delinquency, foreclosure and loan loss experience
set forth with respect to the NMI Frederick Portfolio Loans or NMI Non-
Frederick Portfolio Loans, which include both fixed and adjustable interest
rate mortgage loans and loans having a variety of original terms to stated
maturity including Relocation Mortgage Loans and non-relocation mortgage loans,
and the Fixed NMI Frederick Portfolio Loans, the Fixed 15-Year NMI Non-
Frederick Portfolio Loans, or the Fixed 15-Year Non-Relocation NMI Frederick
Portfolio Loans, each of which includes loans having a variety of payment
characteristics, such as Subsidy Loans, Buy-Down Loans and Balloon Loans, will
be representative of the results that may be experienced with respect to the
Mortgage Loans included in the Trust Estate.
Historically, Relocation Mortgage Loans, which constitute a significant
percentage of the NMI Frederick Portfolio Loans, have experienced a
signficantly lower rate of delinquency and foreclosure than other mortgage
loans included in the NMI Frederick Portfolio Loans, the NMI Non-Frederick
Portfolio Loans, the Fixed NMI Frederick Portfolio Loans and the Fixed 15-Year
NMI Non-Frederick Portfolio Loans. There can be no assurance that the future
experience on the Mortgage Loans contained in the Trust Estate, all of which
are fixed interest rate mortgage loans having original terms to stated maturity
ranging from approximately 10 to approximately 15 years and approximately 7.77%
by Cut-Off Date Aggregate Principal Balance of which are Relocation Mortgage
Loans, will be comparable to that of the NMI Frederick Portfolio Loans, the NMI
Non-Frederick Portfolio Loans, the Fixed NMI Frederick Portfolio Loans, the
Fixed 15-Year NMI Non-Frederick Portfolio Loans or the Fixed 15-Year Non-
Relocation NMI Frederick Portfolio Loans.
Delinquencies, foreclosures and loan losses generally are expected to occur
more frequently after the first full year of the life of mortgage loans.
Accordingly, because a large number of mortgage loans serviced by Norwest
Mortgage have been recently originated, the current level of delinquencies,
foreclosures and loan losses may not be representative of the levels which may
be experienced over the lives of such mortgage loans. If the volume of Norwest
Mortgage's new loan originations and acquisitions does not continue to grow at
the rate experienced in recent years, the levels of delinquencies, foreclosures
and loan losses as percentages of the portfolio of NMI Frederick Portfolio
Loans and NMI Non-Frederick Portfolio Loans could rise significantly above the
rates indicated in the following tables.
S-59
<PAGE>
TOTAL NMI FREDERICK PORTFOLIO LOANS
<TABLE>
<CAPTION>
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- ----------- -------- ----------- -------- -----------
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total NMI Frederick
Portfolio Loans........ 145,339 $37,213,000 147,478 $36,537,000 142,566 $34,734,000
======= =========== ======= =========== ======= ===========
Period of Delinquency(1)
30 to 59 days.......... 1,165 $ 303,741 1,502 $ 359,137 1,574 $ 365,341
60 to 89 days.......... 294 75,871 310 75,162 309 73,349
90 days or more........ 697 217,595 277 77,103 362 94,275
------- ----------- ------- ----------- ------- -----------
Total Delinquent Loans.. 2,156 $ 597,207 2,089 $ 511,402 2,245 $ 532,965
======= =========== ======= =========== ======= ===========
Percent of NMI Frederick
Portfolio Loans........ 1.48% 1.60% 1.42% 1.40% 1.57% 1.53%
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Foreclosures(2)......... $277,406 $346,096 $294,843
Foreclosure Ratio(3).... 0.75% 0.95% 0.85%
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Gain (Loss)(4)...... $(95,087) $(150,948) $(112,566)
Net Gain (Loss) Ra-
tio(5)................. (0.26)% (0.41)% (0.32)%
FIXED NMI FREDERICK PORTFOLIO LOANS
<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 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Fixed NMI Freder-
ick Portfolio Loans.... 112,820 $28,295,000 119,734 $29,152,000 120,471 $28,964,000
======= =========== ======= =========== ======= ===========
Period of Delinquency(1)
30 to 59 days.......... 781 $ 195,686 1,073 $ 241,976 1,150 $ 251,566
60 to 89 days.......... 192 46,754 200 44,225 217 47,229
90 days or more........ 424 127,441 171 46,094 219 56,197
------- ----------- ------- ----------- ------- -----------
Total Delinquent Loans.. 1,397 $ 369,881 1,444 $ 332,295 1,586 $ 354,992
======= =========== ======= =========== ======= ===========
Percent of Fixed NMI
Frederick Portfolio
Loans.................. 1.24% 1.31% 1.21% 1.14% 1.32% 1.23%
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Foreclosures(2)......... $151,448 $186,359 $161,960
Foreclosure Ratio(3).... 0.54% 0.64% 0.56%
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Gain (Loss)(4)...... $(78,946) $(115,100) $(80,410)
Net Gain (Loss) Ra-
tio(5)................. (0.28)% (0.39)% (0.28)%
</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 proceed-
ings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure proceed-
ings 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 port-
folio for which foreclosure proceedings had been instituted but not com-
pleted 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-60
<PAGE>
FIXED 15-YEAR NON-RELOCATION NMI FREDERICK PORTFOLIO LOANS
<TABLE>
<CAPTION>
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT OF BY NO. AMOUNT OF BY NO. AMOUNT OF
OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS
-------- ---------- -------- ---------- -------- -----------
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- ------------------- --------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Fixed 15-Year Non-
relocation NMI
Frederick Portfolio
Loans.................. 29,585 $6,868,000 29,622 $6,489,000 29,098 $ 6,120,000
====== ========== ====== ========== ====== ===========
Period of Delinquency(1)
30 to 59 days.......... 126 $ 28,864 184 $ 36,723 201 $ 39,323
60 to 89 days.......... 24 5,451 37 6,810 28 5,204
90 days or more........ 47 13,550 20 5,780 38 8,515
------ ---------- ------ ---------- ------ -----------
Total Delinquent Loans.. 197 $ 47,865 241 $ 49,313 267 $ 53,042
====== ========== ====== ========== ====== ===========
Percent of Fixed 15-Year
Non-relocation NMI
Frederick Portfolio
Loans.................. 0.67% 0.70% 0.81% 0.76% 0.92% 0.87%
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- ------------------- --------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Foreclosures(2)......... $10,204 $16,821 $15,904
Foreclosure Ratio(3).... 0.15% 0.26% 0.26%
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- ------------------- --------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Gain (Loss)(4)...... $(3,080) $(6,781) $(3,684)
Net Gain (Loss) Ra-
tio(5)................. (0.04)% (0.10)% (0.06)%
TOTAL NMI NON-FREDERICK PORTFOLIO LOANS
<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 DECEMBER 31, 1996
------------------- ------------------- --------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total NMI Non-Frederick
Portfolio Loans........ 15,516 $4,348,072 27,984 $7,811,431 39,792 _10,874,939
====== ========== ====== ========== ====== ===========
Period of Delinquency(1)
30 to 59 days.......... 125 $ 38,300 330 $ 96,145 501 ____138,209
60 to 89 days.......... 56 9,404 68 21,389 73 21,109
90 days or more........ 31 9,972 97 30,867 83 25,494
------ ---------- ------ ---------- ------ -----------
Total Delinquent Loans.. 212 $ 57,676 495 $ 148,401 657 $ 184,812
====== ========== ====== ========== ====== ===========
Percent of NMI Non-Fred-
erick Portfolio Loans.. 1.37% 1.33% 1.77% 1.90% 1.65% 1.70%
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- ------------------- --------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Foreclosures(2)......... $9,755 $30,626 $40,385
Foreclosure Ratio(3).... 0.22% 0.39% 0.37%
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- ------------------- --------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Gain (Loss)(4)...... $(982) $(1,530) $(474)
Net Gain (Loss) Ra-
tio(5)................. (0.02)% (0.02)% (0.00)%
</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 proceed-
ings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure proceed-
ings 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 port-
folio for which foreclosure proceedings had been instituted but not com-
pleted 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-61
<PAGE>
FIXED 15-YEAR NMI NON-FREDERICK PORTFOLIO LOANS
<TABLE>
<CAPTION>
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT OF BY NO. AMOUNT OF BY NO. AMOUNT OF
OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS
-------- --------- -------- --------- -------- ----------
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ ------------------ -------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Fixed 15-Year NMI
Non-Frederick Portfolio
Loans.................. 1,631 $446,811 3,113 $819,650 4,740 $1,232,569
===== ======== ===== ======== ===== ==========
Period of Delinquency(1)
30 to 59 days.......... 5 $ 1,476 17 $ 4,057 32 $ 8,674
60 to 89 days.......... 0 0 4 833 0 0
90 days or more........ 0 0 2 229 0 0
----- -------- ----- -------- ----- ----------
Total Delinquent Loans.. 5 $ 1,476 23 $ 5,119 32 $ 8,674
===== ======== ===== ======== ===== ==========
Percent of Fixed 15-Year
NMI Non-Frederick Port-
folio Loans............ 0.31% 0.33% 0.74% 0.62% 0.68% 0.70%
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ ------------------ -------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Foreclosures(2)......... $ 0 $1,501 $991
Foreclosure Ratio(3).... 0.00% 0.18% 0.08%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Gain (Loss)(4)...... * * *
Net Gain (Loss) Ra-
tio(5)................. * * *
</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 proceed-
ings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure proceed-
ings 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 port-
folio for which foreclosure proceedings had been instituted but not com-
pleted 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.
* Not available.
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, unemploy-
ment or change in employment (or in the case of self-employed mortgagors or
mortgagors relying on commission income, fluctuations in income), marital sepa-
ration and the mortgagor's equity in the related mortgaged property. In addi-
tion, delinquency, foreclosure and loan loss experience may be sensitive to ad-
verse economic conditions, either nationally or regionally, may exhibit sea-
sonal variations and may be influenced by the level of interest rates and ser-
vicing 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 mort-
gaged properties are concentrated in certain geographic areas. Furthermore, the
level of foreclosures reported is affected by the length of time legally re-
quired to complete the foreclosure process and take title to the related prop-
erty, which varies from jurisdiction to jurisdiction. The changes in the delin-
quency, foreclosure and loan loss experience of Norwest Mortgage's servicing
portfolio during the periods set forth in the preceding tables may be attribut-
able to factors such as those described above, although there can be no assur-
ance 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.
S-62
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of distributions in reduction of the principal balance of any
Subclass or Class of the Offered Certificates, the aggregate amount of distri-
butions on any Subclass or Class of the Offered Certificates and the yield to
maturity of any Subclass or Class of the Offered Certificates purchased at a
discount or premium will be directly related to the rate of payments of princi-
pal 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 pre-
payments and those resulting from refinancing) thereon by mortgagors, liquida-
tions of defaulted Mortgage Loans, repurchases by the Seller of Mortgage Loans
as a result of defective documentation or breaches of representations and war-
ranties 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 Pool-
ing 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 dispropor-
tionate percentage of principal prepayments on the Mortgage Loans (including
liquidations and repurchases of Mortgage Loans) will be distributed, to the ex-
tent of the Non-PO Fraction, to the holders of the Class A Certificates (other
than the Class A-PO Certificates) 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-PO Certificates in proportion to the interest of
the Class A-PO Certificates in such Discount Mortgage Loan represented by the
PO Fraction. As a result of the method of calculating the Class A-5 Priority
Amount and the priorities for the allocation of the Class A Non-PO Principal
Distribution Amount, it is expected that, absent an exceptionally high rate of
principal prepayment on the Mortgage Loans, no principal prepayments will be
made on the Class A-5 Certificates during the first five years following the
issuance of the Series 1997-5 Certificates. Thereafter, while the percentage of
principal prepayments allocated to the Class A-5 Certificates during the four
years thereafter will gradually increase, such percentage, until the tenth year
following the issuance of the Series 1997-5 Certificates, will be dispropor-
tionately lower than the percentage of principal prepayments allocated to the
other Class A Certificates (other than the Class A-PO Certificates). See "De-
scription of the Certificates -- Principal (Including Prepayments) -- Alloca-
tion of Amount to be Distributed." Prepayments (which, as used herein, include
all unscheduled payments of principal, including payments as the result of liq-
uidations, purchases and repurchases) of the Mortgage Loans in the Trust Estate
will result in distributions to Certificateholders then entitled to distribu-
tions in respect of principal of amounts which would otherwise be distributed
over the remaining terms of such Mortgage Loans. Since the rate of prepayment
on the Mortgage Loans will depend on future events and a variety of factors (as
described more fully below and in the Prospectus under "Prepayment and Yield
Considerations"), no assurance can be given as to such rate or the rate of
principal payments on any Subclass or Class of the Offered Certificates or the
aggregate amount of distributions on any Subclass or Class of the Offered Cer-
tificates.
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 (in-
cluding 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 mort-
gage 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 refi-
nanced loan prior to the pay-off of such loan, or other financial incentives.
See "Prepayment and Yield Considerations -- Weighted Average Life of Certifi-
cates" 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 pay-
ment of the mortgage loan resulting in partial prepayments.
S-63
<PAGE>
Other factors affecting prepayment of mortgage loans include changes in mort-
gagors' housing needs, job transfers, unemployment or, in the case of self-em-
ployed mortgagors or mortgagors relying on commission income, substantial fluc-
tuations in income, significant declines in real estate values and adverse eco-
nomic conditions either generally or in particular geographic areas, mortga-
gors' 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 pay-
ments 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 matu-
rity of the Offered Certificates will be affected by the extent to which (i)
the Seller elects to repurchase, rather than substitute for, Mortgage Loans
which are found by the Trustee to have defective documentation or with respect
to which the Seller has breached a representation or warranty or (ii) a
Servicer elects to encourage the refinancing of any defaulted Mortgage Loan
rather than to permit an assumption thereof by a mortgagor. See "Servicing of
the Mortgage Loans -- Enforcement of Due-on-Sale Clauses; Realization Upon De-
faulted 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 1997-5 Certificates. See "Prepayment and Yield Considerations" in
the Prospectus.
THE YIELD TO MATURITY OF THE OFFERED CERTIFICATES WILL BE SENSITIVE IN VARY-
ING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAY-
MENTS, WHICH MAY BE MADE AT ANY TIME WITHOUT PENALTY) ON THE MORTGAGE LOANS.
INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE ASSOCIATED RISKS, IN-
CLUDING, IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT, PARTICU-
LARLY THE CLASS A-PO CERTIFICATES, THE RISK THAT A SLOWER THAN ANTICIPATED RATE
OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE
LOANS OR, IN THE CASE OF THE CLASS A-PO CERTIFICATES, THE DISCOUNT MORTGAGE
LOANS, COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED AND, IN
THE CASE OF OFFERED CERTIFICATES PURCHASED AT A PREMIUM THAT A FASTER THAN AN-
TICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON
THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICI-
PATED. INVESTORS PURCHASING OFFERED CERTIFICATES AT A PREMIUM SHOULD ALSO CON-
SIDER 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 INVEST-
ORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. THE YIELD ON THE CLASS A-PO
CERTIFICATES WILL BE INFLUENCED PRIMARILY BY PRINCIPAL PAYMENTS WITH RESPECT TO
DISCOUNT MORTGAGE LOANS.
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 av-
erage 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 pay-
ments 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 in-
crease) in the rate of principal payments.
The yield to maturity on the Class M Certificates will be more sensitive than
the yield to maturity on the Class A Certificates to losses due to defaults on
the Mortgage Loans (and the timing thereof), to the extent not covered by the
Class B Certificates, because the entire amount of such losses will be alloca-
ble to the Class M Certificates prior to the Class A Certificates, except as
otherwise provided herein. To the extent not covered by Periodic Advances, de-
linquencies on Mortgage Loans may also have a relatively greater effect on the
yield to investors in the Class M Certificates. Amounts otherwise distributable
to holders of the Class M Certificates will be made available to protect the
holders of the Class A Certificates against interruptions in distributions due
to certain mortgagor delinquencies. Such delinquencies, to the extent not cov-
ered by the Class B Certificates, even if subsequently cured, may affect the
timing of the receipt of distributions by the holders of Class M Certificates,
because the entire amount of those delinquencies would be borne by the Class M
Certificates prior to the Class A Certificates.
The yield to maturity on the Subclasses of Class B Certificates with higher
numerical designations will generally be more sensitive to losses than the
Subclasses with lower numerical designations, and the yield to maturity on the
Class B Certificates in the aggregate will generally be more sensitive to
losses than the other
S-64
<PAGE>
Classes of the Series 1997-5 Certificates, because the entire amount of such
losses (except for the portion of Excess Special Hazard Losses, Excess Fraud
Losses and Excess Bankruptcy Losses allocated to the Class A Certificates,
Class M Certificates and Subclasses of Class B Certificates with lower numeri-
cal designations) will be allocable to the Subclasses of Class B Certificates
in reverse numerical order, except as provided herein. To the extent not cov-
ered by Periodic Advances, delinquencies on Mortgage Loans will also have a
relatively greater effect (i) on the yield to maturity on the Subclasses of
Class B Certificates with higher numerical designations and (ii) on the yield
to maturity on the Class B Certificates in the aggregate than on the Class A
Certificates and Class M Certificates. Amounts otherwise distributable to hold-
ers of the Class B Certificates will be made available to protect the holders
of the Class A and Class M Certificates against interruptions in distributions
due to certain mortgagor delinquencies. Such delinquencies, even if subse-
quently cured, may affect the timing of the receipt of distributions by the
holders of the Class B Certificates.
The actual yield to maturity experienced by an investor may also be affected
by the occurrence of interest shortfalls resulting from Unscheduled Principal
Receipts to the extent, if any, to which such interest shortfalls are not cov-
ered by Compensating Interest or the subordination of, (i) in the case of the
Class A Certificates (other than the Class A-PO Certificates), the Class M and
Class B Certificates, (ii) in the case of the Class M Certificates, the Class B
Certificates and, (iii) in the case of a Subclass of Class B Certificates, the
Subclass or Subclasses of Class B Certificates having higher numerical designa-
tions. See "Description of the Certificates --Interest" and "Servicing of the
Mortgage Loans -- Anticipated Changes in Servicing."
The yield to maturity on the Offered Certificates and more particularly on
the Class M Certificates and the Offered Class B Certificates, especially the
Class B-2 Certificates, may be affected by the geographic concentration of the
Mortgaged Properties securing the Mortgage Loans, and the yield to maturity on
the Class A-PO Certificates may be particularly affected by the geographic con-
centration of the Mortgaged Properties securing the Discount Mortgage Loans. In
recent periods, California, the New York metropolitan area, the Washington D.C.
metropolitan area and several other regions in the United States have experi-
enced significant declines in housing prices. In addition, California and sev-
eral other regions have experienced natural disasters, including earthquakes,
floods and hurricanes, which may adversely affect property values. See "De-
scription of the Mortgage Loans." Any deterioration in housing prices in Cali-
fornia, as well as New Jersey and Florida 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 pay-
ments on the Mortgage Loans, may increase the likelihood of losses on the Mort-
gage Loans. Such losses, if they occur, may have an adverse effect on the yield
to maturity of the Offered Certificates and more particularly on the Class M
Certificates and the Offered Class B Certificates, especially the Class B-2
Certificates.
No representation is made as to the rate of principal payments on the Mort-
gage Loans or as to the yield to maturity of any Subclass or Class of Offered
Certificates. An investor is urged to make an investment decision with respect
to any Subclass or Class of Offered Certificates based on the anticipated yield
to maturity of such Subclass or Class of Offered Certificates resulting from
its purchase price and such investor's own determination as to anticipated
Mortgage Loan prepayment rates under a variety of scenarios. The extent to
which any Subclass or Class of Offered Certificates is purchased at a discount
or a premium and the degree to which such Subclass or Class is sensitive to the
timing of prepayments will determine the extent to which the yield to maturity
of such Subclass or Class may vary from the anticipated yield. An investor
should carefully consider the associated risks, including, in the case of any
Subclass or Class of Offered Certificates purchased at a discount, particularly
the Class A-PO Certificates, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans or, in the case of the Class A-PO Cer-
tificates, on the Discount Mortgage Loans, could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of any
Subclass or Class of Offered Certificates purchased at a premium, 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 princi-
pal balance of the Offered Certificates, may coincide with periods of low pre-
vailing 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-
PO Certificates, the anticipated yield thereon. Conversely, slower rates of
prepayments on the Mortgage Loans, and therefore of
S-65
<PAGE>
amounts distributable in reduction of principal balance of the Offered Certifi-
cates, may coincide with periods of high prevailing interest rates. During such
periods, the amount of principal distributions available to an investor for re-
investment at such high prevailing interest rates may be relatively small.
As indicated under "Federal Income Tax Considerations" herein, the Class A-R
Certificateholder's REMIC taxable income and the tax liability thereon may ex-
ceed, and may substantially exceed, cash distributions to such holder during
certain periods. There can be no assurance as to the amount by which such tax-
able income or such tax liability will exceed cash distributions in respect of
the Class A-R Certificate 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 CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN WOULD BE THE CASE IF THE
CLASS A-R CERTIFICATE WERE TAXED AS A DEBT INSTRUMENT, OR MAY BE NEGATIVE.
As referred to herein, the weighted average life of a Subclass or Class of
Offered Certificates refers to the average amount of time that will elapse from
the date of issuance of such Subclass or Class until each dollar in reduction
of the principal balance of such Subclass or Class is distributed to the in-
vestor. The weighted average life of each Subclass or Class of the Offered Cer-
tificates 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 mort-
gage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such mort-
gage loans in the first month of the life of the mortgage loans and an addi-
tional 0.2% per annum in each month thereafter until the thirtieth month. Be-
ginning 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, "250% SPA" assumes prepay-
ment rates equal to 250% of SPA. SPA does not purport to be a historical de-
scription 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 on the basis of the character-
istics of the Mortgage Loans that are expected to be included in the Trust Es-
tate, as described under "Description of the Mortgage Loans." The tables have
been prepared assuming, among other things, the following (the "Structuring As-
sumptions"): (i) 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 preced-
ing the month of such payment, its Mortgage Interest Rate and its remaining
term to stated maturity, so that such scheduled payments would amortize the re-
maining balance by its remaining term to maturity, (ii) scheduled monthly pay-
ments of the principal and interest on the Mortgage Loans will be timely re-
ceived on the first day of each month (with no defaults), commencing in April
1997, (iii) the Seller does not repurchase any Mortgage Loan, as described un-
der "Description of the Mortgage Loans -- Mandatory Repurchase or Substitution
of Mortgage Loans" herein, and the Seller does not exercise its option to pur-
chase the Mortgage Loans and thereby cause a termination of the Trust Estate,
(iv) principal prepayments in full on the Mortgage Loans will be received on
the last day of each month commencing in March 1997 at the respective constant
percentages of SPA set forth in the tables and there are no partial principal
prepayments or Prepayment Interest Shortfalls, (v) the Series 1997-5 Certifi-
cates will be issued on March 27, 1997 and (vi) distributions to
Certificateholders will be made on the 25th day of each month, commencing in
April 1997.
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 may be dif-
ferences between the characteristics of the mortgage loans ultimately included
in the Trust Estate and the Mortgage Loans which are assumed to be included, as
described above. Any difference may have an effect upon the actual percentages
of initial Class A Subclass Principal Balance of the Subclasses of Class A Cer-
tificates, initial principal balance of the Class M Certificates and initial
Class B Subclass Principal Balance of the Subclasses of Class B Certificates
outstanding, the actual weighted average lives of the Subclasses of Class A
Certificates, the Class M Certificates and the Subclasses of Class B Certifi-
cates and the date on which the Class A Subclass Principal Balance of any
Subclass of Class A Certificates, the principal balance of the Class M
S-66
<PAGE>
Certificates and the Class B Subclass Principal Balance of any Subclass of Of-
fered Class B Certificates are reduced to zero.
Based upon the foregoing assumptions, the following tables indicate the
weighted average life of each Subclass and Class of Offered Certificates, and
set forth the percentages of the initial Class A Subclass Principal Balance of
each Subclass of Offered Class A Certificates, the initial principal balance of
the Class M Certificates and the initial Class B Subclass Principal Balance of
each Subclass of Offered Class B Certificates that would be outstanding after
each of the dates shown at the constant percentages of SPA presented.
S-67
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS OR CLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES OF FOLLOWING PERCENTAGES OF
SPA SPA
DISTRIBUTION -------------------------- ---------------------------
DATE 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
- ------------- ----- ----- ---- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100
March 1998 80 68 51 33 21 100 100 100 100 100
March 1999 58 21 0 0 0 100 100 89 73 62
March 2000 35 0 0 0 0 100 89 59 32 16
March 2001 10 0 0 0 0 100 72 33 2 0
March 2002 0 0 0 0 0 95 57 13 0 0
March 2003 0 0 0 0 0 86 44 0 0 0
March 2004 0 0 0 0 0 76 32 0 0 0
March 2005 0 0 0 0 0 65 22 0 0 0
March 2006 0 0 0 0 0 54 12 0 0 0
March 2007 0 0 0 0 0 42 4 0 0 0
March 2008 0 0 0 0 0 29 0 0 0 0
March 2009 0 0 0 0 0 15 0 0 0 0
March 2010 0 0 0 0 0 0 0 0 0 0
March 2011 0 0 0 0 0 0 0 0 0 0
March 2012 0 0 0 0 0 0 0 0 0 0
WAL 2.34 1.39 0.99 0.81 0.73 9.15 5.86 3.49 2.62 2.30
<CAPTION>
CLASS A-3 CLASS A-4
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES OF FOLLOWING PERCENTAGES OF
SPA SPA
DISTRIBUTION -------------------------- ---------------------------
DATE 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
- ------------- ----- ----- ---- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100
March 1998 100 100 100 100 100 100 100 100 100 100
March 1999 100 100 100 100 100 100 100 100 100 100
March 2000 100 100 100 100 100 100 100 100 100 100
March 2001 100 100 100 100 19 100 100 100 100 100
March 2002 100 100 100 0 0 100 100 100 100 0
March 2003 100 100 94 0 0 100 100 100 12 0
March 2004 100 100 42 0 0 100 100 100 0 0
March 2005 100 100 8 0 0 100 100 100 0 0
March 2006 100 100 0 0 0 100 100 79 0 0
March 2007 100 100 0 0 0 100 100 57 0 0
March 2008 100 78 0 0 0 100 100 40 0 0
March 2009 100 38 0 0 0 100 100 26 0 0
March 2010 97 1 0 0 0 100 100 15 0 0
March 2011 13 0 0 0 0 100 46 6 0 0
March 2012 0 0 0 0 0 0 0 0 0 0
WAL 13.60 11.75 6.96 4.54 3.81 14.55 13.97 10.78 5.57 4.48
<CAPTION>
CLASS A-5 CLASS A-R
CERTIFICATES AT THE CERTIFICATE AT THE
FOLLOWING PERCENTAGES OF FOLLOWING PERCENTAGES OF
SPA SPA
DISTRIBUTION -------------------------- ---------------------------
DATE 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
- ------------- ----- ----- ---- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100
March 1998 96 96 96 96 96 0 0 0 0 0
March 1999 92 92 92 92 92 0 0 0 0 0
March 2000 88 88 88 88 88 0 0 0 0 0
March 2001 83 83 83 83 83 0 0 0 0 0
March 2002 78 78 78 78 71 0 0 0 0 0
March 2003 72 71 69 66 44 0 0 0 0 0
March 2004 66 63 59 47 27 0 0 0 0 0
March 2005 60 55 48 32 17 0 0 0 0 0
March 2006 53 46 37 21 10 0 0 0 0 0
March 2007 45 37 27 14 6 0 0 0 0 0
March 2008 37 29 19 9 4 0 0 0 0 0
March 2009 28 21 12 5 2 0 0 0 0 0
March 2010 19 13 7 3 1 0 0 0 0 0
March 2011 9 6 3 1 * 0 0 0 0 0
March 2012 0 0 0 0 0 0 0 0 0 0
WAL 8.79 8.30 7.71 6.87 5.95 0.08 0.08 0.08 0.08 0.08
</TABLE>
- -------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of net 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 net 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-68
<PAGE>
PERCENTAGE OF INITIAL SUBCLASS OR CLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS M, CLASS B-1 AND
CLASS A-PO CLASS B-2
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES OF FOLLOWING PERCENTAGES OF
SPA SPA
DISTRIBUTION --------------------------------- ---------------------------------
DATE 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
- ------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial...... 100 100 100 100 100 100 100 100 100 100
March 1998... 96 94 92 90 88 96 96 96 96 96
March 1999... 92 87 79 72 68 92 92 92 92 92
March 2000... 87 77 64 53 45 88 88 88 88 88
March 2001... 82 69 52 38 30 83 83 83 83 83
March 2002... 77 60 41 27 20 78 78 78 78 78
March 2003... 71 52 32 19 13 72 71 69 66 65
March 2004... 65 45 25 13 8 66 63 59 55 52
March 2005... 58 38 19 9 5 60 55 48 42 38
March 2006... 51 31 14 6 3 53 46 37 30 25
March 2007... 44 25 10 4 2 45 37 27 19 15
March 2008... 36 20 7 2 1 37 29 19 12 9
March 2009... 28 14 5 1 1 28 21 12 7 5
March 2010... 19 9 3 1 * 19 13 7 4 2
March 2011... 9 4 1 * * 9 6 3 1 1
March 2012... 0 0 0 0 0 0 0 0 0 0
WAL.......... 8.67 6.80 4.98 3.88 3.38 8.79 8.30 7.71 7.24 6.98
</TABLE>
- -------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of net 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 net reduction of principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass or Class.
S-69
<PAGE>
Interest accrued on the Class A, Class M and Offered Class B Certificates
will be reduced by the amount of any interest portions of Realized Losses allo-
cated to such Certificates as described under "Description of the Certifi-
cates -- Interest" herein. The yield on the Class A Certificates, the Class M
Certificates and the Offered Class B Certificates will be less than the yield
otherwise produced by their respective Pass-Through Rates and the prices at
which such Certificates are purchased because the interest which accrues on the
Mortgage Loans during each month will not be passed through to
Certificateholders until the 25th day of the month following the end of such
month (or if such 25th day is not a business day, the following business day).
The Seller intends to file certain additional yield tables and other computa-
tional materials with respect to one or more Subclasses or Classes 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 assump-
tions may be based on assumptions that differ from the Structuring Assumptions.
Accordingly, such tables and other materials may not be relevant to or appro-
priate for investors other than those specifically requesting them.
SENSITIVITY OF THE CLASS A-PO CERTIFICATES
THE YIELD TO AN INVESTOR IN THE CLASS A-PO CERTIFICATES WILL BE HIGHLY SENSI-
TIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON
THE DISCOUNT 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 DISCOUNT MORTGAGE LOANS WILL HAVE A NEGATIVE EFFECT ON THE YIELD TO AN
INVESTOR IN THE CLASS A-PO CERTIFICATES. THE DISCOUNT MORTGAGE LOANS WILL HAVE
LOWER NET MORTGAGE INTEREST RATES THAN THE OTHER MORTGAGE LOANS. IN GENERAL,
MORTGAGE LOANS WITH LOWER MORTGAGE INTEREST RATES MAY TEND TO PREPAY AT A
SLOWER RATE OF PAYMENT IN RESPECT OF PRINCIPAL THAN MORTGAGE LOANS WITH RELA-
TIVELY HIGHER MORTGAGE INTEREST RATES, IN RESPONSE TO CHANGES IN MARKET INTER-
EST RATES. AS A RESULT, THE DISCOUNT MORTGAGE LOANS MAY PREPAY AT A SLOWER RATE
OF PAYMENT IN RESPECT OF PRINCIPAL THAN THE OTHER MORTGAGE LOANS, RESULTING IN
A LOWER YIELD ON THE CLASS A-PO CERTIFICATES THAN WOULD BE THE CASE IF THE DIS-
COUNT MORTGAGE LOANS PREPAID AT THE SAME RATE AS THE OTHER MORTGAGE LOANS.
The following table indicates the sensitivity to the various rates of prepay-
ments on the Discount Mortgage Loans of the pre-tax yields to maturity on a
corporate bond equivalent ("CBE") basis of the Class A-PO Certificates. Such
calculations are based on distributions made in accordance with "Description of
the Certificates" above, on the Structuring Assumptions and on the further as-
sumptions that the Class A-PO Certificates will be purchased on March 27, 1997
at an aggregate purchase price of 73.00% of the initial Class A Subclass Prin-
cipal Balance of the Class A-PO Certificates.
SENSITIVITY OF THE PRE-TAX YIELDS TO MATURITY ON THE CLASS A-PO CERTIFICATES TO
PREPAYMENTS
<TABLE>
<CAPTION>
PERCENTAGES OF SPA
--------------------------------------
0% 100% 250% 400% 500%
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield to Maturity (CBE)...... 3.81% 4.98% 6.94% 8.98% 10.33%
</TABLE>
The pre-tax yields to maturity set forth in the preceding table were calcu-
lated by (i) determining the monthly discount rates which, when applied to the
assumed stream of cash flows to be paid on the Class A-PO 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-PO Certificates of
73.00% 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 re-
invest funds received by them as distributions on the Class A-PO Certificates
and consequently does not purport to reflect the return on any investment in
the Class A-PO Certificates when such reinvestment rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding ta-
ble, it is highly unlikely that the Discount Mortgage Loans will prepay at a
constant rate until maturity, that all of the Discount Mortgage Loans will pre-
pay at the same rate or that the Discount Mortgage Loans will not experience
any losses. The Mortgage Loans ultimately included in the Trust Estate may dif-
fer from those currently expected to be included in the
S-70
<PAGE>
Trust Estate, and thereafter may be changed as a result of permitted substitu-
tions. As a result of these factors, the pre-tax yields to maturity on the
Class A-PO Certificates are likely to differ from those shown in such table,
even if all of the Discount Mortgage Loans prepay at the indicated percentages
of SPA.
HISTORIC LOSS EXPERIENCE OF SECURITIZED MORTGAGE LOANS
The historic experience regarding the cumulative amount of losses and the
frequency of liquidations experienced on securitized(/1/) conventional mortgage
loans having original terms to stated maturity of approximately 15 years ("15
Year Mortgage Loans") have varied based on the year of origination as set forth
below.
<TABLE>
<CAPTION>
LIQUIDATION LOSS
YEAR OF FREQUENCY SEVERITY
ORIGINATION PERCENTAGE(A) PERCENTAGE(B)
----------- ------------- -------------
<S> <C> <C>
1989............................................. 5.11% 48.80%
1990............................................. 1.83% 29.25%
1991............................................. 0.65% 28.84%
1992............................................. 0.28% 26.94%
1993............................................. 0.13% 20.61%
1994............................................. 0.00% 0.00%
1995............................................. 0.00% 0.00%
1996............................................. 0.00% 0.00%
</TABLE>
- -------------------
(a) The liquidation frequency percentage is determined by dividing the original
principal balance of liquidated 15 Year Mortgage Loans originated during
such year by the original principal balance of 15 Year Mortgage Loans orig-
inated during such year.
(b) The loss severity percentage is determined by dividing the amount of losses
resulting from liquidated 15 Year Mortgage Loans originated during such
year by the original principal balance of liquidated 15 Year Mortgage Loans
originated during such year.
The loss severity percentages for the more recent years of origination may
not be representative of the loss severity percentages in the future for the
indicated years of origination in part because the severity of loss on a liqui-
dated mortgage loan is generally expected to increase as the length of time in-
creases from the initial delinquency of such mortgage loan to the final dispo-
sition of the mortgaged property. In addition, it is possible that because the
more recent loss severity percentages resulted from relatively low levels of
liquidations (which do not include those mortgage loans currently delinquent
but not yet liquidated) such percentages may not be representative of future
loss severity percentages arising from the liquidation of a larger number of
mortgage loans. The frequency of liquidations of the Mortgage Loans and the
amount of loss experienced as a result thereof may vary significantly from the
historic experience set forth above in part because the underwriting standards
applied at origination of the 15 Year Mortgage Loans have changed over time and
may differ from those applied at origination of the Mortgage Loans. Similarly,
servicing practices with respect to delinquent 15 Year Mortgage Loans have
changed over time. In addition, delinquencies, foreclosures and loan losses
generally are expected to occur with increasing frequency after the first full
year of the life of a mortgage loan. Many factors contribute to the severity of
losses, particularly the length of time from the initial delinquency of such
mortgage loan to the final disposition of the mortgaged property and the state
in which the mortgaged property is located. The Seller and Norwest Mortgage
make no representation that the actual losses and liquidation frequency experi-
enced on the Mortgage Loans currently serviced by Norwest Mortgage, on the
Mortgage Loans generally (which include Mortgage Loans serviced by Other
Servicers) or on the Mortgage Loans originated by Norwest Mortgage or a Norwest
Mortgage Correspondent will in any way correspond to the historic experience
with respect to the 15 Year Mortgage Loans.
- -------------------
(1) Mortgage loans included in a mortgage pool underlying a series of The Pru-
dential Home Mortgage Securities Company, Inc.'s mortgage pass-through cer-
tificates (a "PHMSC Pool") or mortgage loans included in a mortgage pool
underlying a series of NASCOR's mortgage pass-through certificates. Cur-
rently, the 15 Year Mortgage Loans are primarily serviced or subserviced by
Norwest Mortgage, though prior to the PHMC Acquisition, PHMC was the pri-
mary servicer of those 15 Year Mortgage Loans included in the PHMSC Pools.
Certain of the 15 Year Mortgage Loans are serviced by third-party servicers
unaffiliated with either Norwest Mortgage or PHMC.
S-71
<PAGE>
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS B-1 AND CLASS B-2 CERTIFICATES
Defaults on mortgage loans may be measured relative to a default standard or
model. The model used in this Prospectus Supplement, the standard default as-
sumption ("SDA"), represents an assumed rate of default each month relative to
the then-outstanding performing principal balance of a pool of new mortgage
loans. A default assumption of 100% SDA assumes constant default rates of 0.02%
per annum of the then-outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional 0.02% per
annum in each month thereafter until the 30th month. Beginning in the 30th
month and in each month thereafter through the 60th month of the life of the
mortgage loans, 100% SDA assumes a constant default rate of 0.60% per annum
each month. Beginning in the 61st month and in each month thereafter through
the 120th month of the life of the mortgage loans, 100% SDA assumes that the
constant default rate declines each month by 0.0095% per annum, and that the
constant default rate remains at 0.03% per annum in each month after the 120th
month. For the purposes of the following tables, it is assumed that there is no
delay between the default and liquidation of the mortgage loans. As used in the
following tables, "0% SDA" assumes default rates equal to 0% of SDA (no de-
faults). Correspondingly, "25% SDA" assumes default rates equal to 25% of SDA,
and so forth. SDA does not purport to be a historical description of default
experience or a prediction of the anticipated rate of default of any pool of
mortgage loans, including the Mortgage Loans.
The following tables indicate the sensitivity of the pre-tax yield to matu-
rity on the Class B-1 and Class B-2 Certificates to various rates of prepayment
and varying levels of aggregate Realized Losses. The tables set forth below are
based upon, among other things, the Structuring Assumptions (other than the as-
sumption that no defaults shall have occurred with respect to the Mortgage
Loans) and the additional assumptions that liquidations (other than those sce-
narios indicated as 0% of SDA (no defaults)) occur monthly on the last day of
the preceding month (other than on a Due Date) at the percentages of SDA set
forth in the table.
In addition, it was assumed that (i) Realized Losses on liquidations of 20%
or 40% of the outstanding principal balance of such liquidated Mortgage Loans,
as indicated in the tables below (referred to as a "Loss Severity Percentage")
will occur at the time of liquidation, (ii) there are no Special Hazard Losses,
Fraud Losses or Bankruptcy Losses and (iii) the Class B-1 and Class B-2 Certif-
icates are purchased on March 27, 1997 at assumed purchase prices equal to
98.0% and 97.0%, respectively, of the Class B Subclass Principal Balances
thereof plus accrued interest from March 1, 1997 to (but not including) March
27, 1997.
It is unlikely that the Mortgage Loans will have the precise characteristics
referred to herein or that they will prepay or liquidate at any of the rates
specified. The assumed percentages of SDA and SPA shown in the tables below are
for illustrative purposes only and the Seller makes no representations with re-
spect to the reasonableness of such assumptions or that the actual rates of
prepayment and liquidation and loss severity experience of the Mortgage Loans
will in any way correspond to any of the assumptions made herein. Consequently,
there can be no assurance that the pre-tax yield to maturity of the Class B-1
and Class B-2 Certificates will correspond to any of the pre-tax yields to ma-
turity shown below.
S-72
<PAGE>
The pre-tax yields to maturity set forth in the following tables were calcu-
lated by determining the monthly discount rates which, when applied to the as-
sumed streams of cash flows to be paid on the Class B-1 and Class B-2 Certifi-
cates, would cause the discounted present value of such assumed streams of cash
flows to equal the aggregate assumed purchase prices of the Class B-1 and Class
B-2 Certificates set forth above. In all cases, monthly rates were then con-
verted to the semi-annual corporate bond equivalent yields shown below. Im-
plicit in the use of any discounted present value or internal rate of return
calculations such as these is the assumption that intermediate cash flows are
reinvested at the discount rate or internal rate of return. Thus, these calcu-
lations do not take into account the different interest rates at which invest-
ors may be able to reinvest funds received by them as distributions on the
Class B-1 and Class B-2 Certificates. Consequently, these yields do not purport
to reflect the total return on any investment in the Class B-1 and Class B-2
Certificates when such reinvestment rates are considered.
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-1 CERTIFICATES TO
PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF SPA
PERCENTAGE SEVERITY -------------------------------------------
OF SDA PERCENTAGE 0% 100% 250% 400% 500%
- ------------------------- ---------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0%..................... N/A 7.36% 7.37% 7.38% 7.40% 7.40%
25%..................... 20% 7.36% 7.37% 7.38% 7.40% 7.40%
25%..................... 40% 7.37% 7.38% 7.39% 7.40% 7.40%
50%..................... 20% 7.37% 7.38% 7.39% 7.40% 7.40%
50%..................... 40% 7.32% 7.40% 7.39% 7.40% 7.41%
75%..................... 20% 7.34% 7.39% 7.39% 7.40% 7.41%
75%..................... 40% 7.30% 7.35% 7.40% 7.40% 7.41%
100%..................... 20% 7.32% 7.40% 7.39% 7.40% 7.41%
100%..................... 40% 3.29% 7.01% 7.41% 7.41% 7.41%
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-2
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<CAPTION>
LOSS PERCENTAGE OF SPA
PERCENTAGE SEVERITY -------------------------------------------
OF SDA PERCENTAGE 0% 100% 250% 400% 500%
- ------------------------- ---------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0%..................... N/A 7.53% 7.55% 7.57% 7.59% 7.60%
25%..................... 20% 7.53% 7.56% 7.57% 7.59% 7.60%
25%..................... 40% 7.49% 7.56% 7.58% 7.59% 7.60%
50%..................... 20% 7.49% 7.56% 7.58% 7.59% 7.60%
50%..................... 40% 7.43% 7.52% 7.58% 7.60% 7.61%
75%..................... 20% 7.45% 7.57% 7.58% 7.60% 7.61%
75%..................... 40% 0.29% 6.93% 7.59% 7.60% 7.61%
100%..................... 20% 7.43% 7.53% 7.58% 7.60% 7.61%
100%..................... 40% (28.21)% (19.57)% 6.10% 7.61% 7.61%
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-Off
Date.
AGGREGATE REALIZED LOSSES
<CAPTION>
LOSS PERCENTAGES OF SPA
PERCENTAGE SEVERITY -------------------------------------------
OF SDA PERCENTAGE 0% 100% 250% 400% 500%
- ------------------------- ---------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
25%..................... 20% 0.15 0.13 0.10 0.08 0.07
25%..................... 40% 0.31 0.26 0.20 0.16 0.13
50%..................... 20% 0.31 0.26 0.20 0.16 0.13
50%..................... 40% 0.61 0.51 0.40 0.31 0.27
75%..................... 20% 0.46 0.38 0.30 0.23 0.20
75%..................... 40% 0.92 0.77 0.59 0.46 0.40
100%..................... 20% 0.61 0.51 0.39 0.31 0.27
100%..................... 40% 1.22 1.02 0.79 0.62 0.53
</TABLE>
S-73
<PAGE>
Notwithstanding the assumed percentages of SDA, Loss Severity Percentages and
prepayment rates reflected in the preceding tables, it is highly unlikely that
the Mortgage Loans will be prepaid or that the Realized Losses will be incurred
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yields to maturity on
the Class B-1 and Class B-2 Certificates are likely to differ from those shown
in the tables. There can be no assurance that the Mortgage Loans will prepay at
any particular rate or that Realized Losses will be incurred at any particular
level or that the yields on the Class B-1 and Class B-2 Certificates will con-
form to any of the yields described herein.
Investors are urged to make their investment decisions based on their deter-
minations as to anticipated rates of prepayment and Realized Losses under a va-
riety of scenarios. Investors in Class B-1 and Class B-2 Certificates should
fully consider the risk that Realized Losses on the Mortgage Loans could result
in the failure of such investors to fully recover their investments.
S-74
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Series 1997-5 Certificates will be issued pursuant to a Pooling and Ser-
vicing Agreement to be dated as of the date of initial issuance of the Series
1997-5 Certificates (the "Pooling and Servicing Agreement") among the Seller,
the Master Servicer, the Trust Administrator and the Trustee. Reference is made
to the Prospectus for important additional information regarding the terms and
conditions of the Pooling and Servicing Agreement and the Series 1997-5 Certif-
icates. 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 Mort-
gage 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 Mort-
gaged Properties acquired on behalf of the Certificateholders by foreclosure or
by deed in lieu of foreclosure after the date of original issuance of the Cer-
tificates and (iv) the rights of the Trust Administrator to receive the pro-
ceeds of all insurance policies and performance bonds, if any, required to be
maintained pursuant to the Pooling and Servicing Agreement.
DISTRIBUTIONS
Distributions (other than the final distribution in retirement of the Offered
Certificates of each Class or Subclass) will be made by check mailed to the ad-
dress 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
each Distribution Date by wire transfer in immediately available funds, pro-
vided that the Master Servicer, or the paying agent acting on behalf of the
Master Servicer, shall have been furnished with appropriate wiring instructions
not less than seven business days prior to the related Distribution Date. The
final distribution in respect of each Class or Subclass of Offered Certificates
will be made only upon presentation and surrender of the related Certificate at
the office or agency appointed by the Trust Administrator specified in the no-
tice 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 re-
ceive 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 provid-
ing for the action, consent or approval of the holders of all Series 1997-5
Certificates evidencing specified Voting Interests in the Trust Estate, the
holders of the Class A Certificates will collectively be entitled to a percent-
age (the "Class A Voting Interest") of the aggregate Voting Interest repre-
sented by all Series 1997-5 Certificates equal to the sum of (A) the product of
(i) the then applicable Class A Percentage and (ii) the ratio obtained by di-
viding the Pool Balance (Non-PO Portion) by the sum of the Pool Balance (Non-PO
Portion) and the Pool Balance (PO Portion) (the "Non-PO Voting Interest") and
(B) the Pool Balance (PO Portion) divided by the sum of the Pool Balance (Non-
PO Portion) and the Pool Balance (PO Portion); the holders of the Class M Cer-
tificates will collectively be entitled to the then applicable percentage of
the aggregate Voting Interest represented by all Series 1997-5 Certificates
equal to the product of (i) the ratio obtained by dividing the Class M Princi-
pal Balance by the sum of the Class A Non-PO Principal Balance, the Class M
Principal Balance and the Class B Principal Balance and (ii) the Non-PO Voting
Interest; and the holders of the Class B Certificates will collectively be en-
titled to the balance of the aggregate Voting Interest represented by all Se-
ries 1997-5 Certificates (the "Class B Voting Interest"). The aggregate Voting
Interest of each Subclass of Class A Certificates (other than the Class A-WIO
and Class A-PO Certificates) on any date will be equal to the product of (a)
99% of the portion 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 by the Class A Non-PO Principal Balance on
such date. The aggregate Voting Interest of the Class A-WIO Certificate on any
date will be equal to 1% of the Class A Voting Interest represented by clause
(A) above. The aggregate Voting Interest of the Class A-PO Certificates on any
S-75
<PAGE>
date will be equal to the portion of the Class A Voting Interest on such date
represented by clause (B) above. The aggregate Voting Interest of each Subclass
of Class B Certificates on any date will be equal to the product of (a) the
Class B Voting Interest on such date and (b) the fraction obtained by dividing
the Class B Subclass Principal Balance of such Subclass on such date by the
Class B Principal Balance on such date. Each Certificateholder of a Class or
Subclass will have a Voting Interest equal to the product of the Voting Inter-
est to which such Class or Subclass is collectively entitled and the Percentage
Interest in such Class or Subclass represented by such holder's Certificates.
With respect to any provisions of the Pooling and Servicing Agreement providing
for action, consent or approval of each Class or Subclass of Certificates or
specified Classes or Subclasses of Certificates, each Certificateholder of a
Class or Subclass will have a Voting Interest in such Class or Subclass equal
to such holder's Percentage Interest in such Class or Subclass. Unless Defini-
tive Certificates are issued as described above, Beneficial Owners of Book-En-
try Certificates may exercise their voting rights only through Participants.
TRUSTEE
The Trustee for the Series 1997-5 Certificates will be Firstar Trust Company,
a banking corporation organized under the laws of the State of Wisconsin. The
Corporate Trust Office of the Trustee is located at 615 East Michigan Street,
Lewis Center, 4th Floor, Milwaukee, Wisconsin 53202. The Trustee will be re-
sponsible for monitoring the compliance of the Master Servicer with the Pooling
and Servicing Agreement and the Underlying Servicing Agreements. See "The Pool-
ing and Servicing Agreement -- The Trustee" in the Prospectus.
TRUST ADMINISTRATOR
First Union National Bank of North Carolina will act as Trust Administrator
for the Series 1997-5 Certificates. The corporate trust office of the Trust Ad-
ministrator is located at 230 South Tryon Street, Charlotte, North Carolina
28288. The Trust Administrator will perform certain administrative functions on
behalf of the Trustee and will act as the initial paying agent, certificate
registrar and custodian. In addition, the Trust Administrator will be required
to make Periodic Advances to the limited extent described herein with respect
to the Mortgage Loans serviced by Norwest Mortgage if Norwest Mortgage, as
Servicer, fails to make a Periodic Advance required by the related Underlying
Servicing Agreement. See "Description of the Certificates -- Periodic Advances"
herein.
MASTER SERVICER
Norwest Bank will act as "Master Servicer" of the Mortgage Loans and, in that
capacity, will supervise the servicing of the Mortgage Loans, cause the Mort-
gage 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 en-
titled to a "Master Servicing Fee" payable monthly equal to the product of (i)
1/12th of 0.016% (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 certifi-
cates. Pursuant to such an agreement, such holder may instruct the Master
Servicer to instruct the Servicers, to the extent provided in the applicable
Underlying Servicing Agreement to commence or delay foreclosure proceedings
with respect to delinquent Mortgage Loans. Such commencement or delay at such
holder's direction will be taken by the Master Servicer only after such holder
deposits a specified amount of cash with the Master Servicer. Such cash will be
available for distribution to Certificateholders if Liquidation Proceeds are
less than they otherwise may have been had the Servicers acted pursuant to
their normal servicing procedures.
S-76
<PAGE>
OPTIONAL TERMINATION
At its option, the Seller may purchase from the Trust Estate all of the Mort-
gage Loans, and thereby effect early retirement of the Series 1997-5 Certifi-
cates, on any Distribution Date when the Pool Scheduled Principal Balance is
less than 10% of the Cut-Off Date Aggregate Principal Balance. Any such pur-
chase will be made only in connection with a "qualified liquidation" of the
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-R Certificate. See "Description of the Certificates --Additional Rights
of the Class A-R Certificateholder" herein and "The Pooling and Servicing
Agreement --Termination; Purchase of Mortgage Loans" in the Prospectus. The ex-
ercise 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) ex-
ercise 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 89.01% (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 Admin-
istrator, 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 Mort-
gage 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. .................... 89.01%
First Union Mortgage Corporation........... 4.11%
National City Mortgage Company............. 2.83%
Citicorp Mortgage Inc. .................... 2.07%
First Bank National Assoc. ................ 0.58%
Suntrust Mortgage Inc. .................... 0.57%
Countrywide Home Loans, Inc. .............. 0.52%
The Huntington Mortgage Company............ 0.24%
Cimarron Mortgage Corp. ................... 0.07%
------
Total.................................... 100.00%
======
</TABLE>
Certain information with respect to the loan servicing experience of Norwest
Mortgage is set forth under "Delinquency and Foreclosure Experience."
The Mortgage Loans serviced by Norwest Mortgage are serviced either from
Norwest Mortgage's servicing center located in Frederick, Maryland (the
"Norwest Frederick-Serviced Loans") or from one of several other regional ser-
vicing centers (the "Norwest Non-Frederick-Serviced Loans"). As of the Cut-Off
Date, it is expected that 295 of the Mortgage Loans in the Trust Estate, repre-
senting approximately 59.01% of the Cut-Off Date Aggregate Principal Balance of
the Mortgage Loans will be Norwest Frederick-Serviced Loans and 147 of the
Mortgage Loans in the Trust Estate, representing approximately 30.00% of the
Cut-Off Date Aggregate Principal Balance of the Mortgage Loans will be Norwest
Non-Frederick-Serviced Loans.
S-77
<PAGE>
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, ad-
vances 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 Ser-
vicing 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 Ac-
counts 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 appli-
cable 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 un-
der "-- Anticipated Changes in Servicing," all Unscheduled Principal Re-
ceipts 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 addi-
tional 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 Ac-
count.
UNSCHEDULED PRINCIPAL RECEIPTS
The Pooling and Servicing Agreement specifies, as to each type of Unscheduled
Principal Receipt, a period (as to each type of Unscheduled Principal Receipt,
the "Unscheduled Principal Receipt Period") during which all Unscheduled Prin-
cipal 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 appli-
cable Remittance Date (such period a "Mid-Month Receipt Period").
With respect to the Norwest Frederick-Serviced Loans, the Unscheduled Princi-
pal Receipt Period with respect to all types of Unscheduled Principal Receipts
is a Mid-Month Receipt Period. With respect to the Norwest Non-Frederick-Serv-
iced Loans and Mortgage Loans serviced by Other Servicers, the Unscheduled
Principal Receipt Period with respect to all types of Unscheduled Principal Re-
ceipts is a Prior Month Receipt Period.
S-78
<PAGE>
ANTICIPATED CHANGES IN SERVICING
Changes in Timing of Remittances of Unscheduled Principal Receipts in Full
and Elimination of Month End Interest. The Pooling and Servicing Agreement will
provide that the Master Servicer may (but is not required), from time to time
and without the consent of any Certificateholder, the Trustee or the Trust Ad-
ministrator, require Norwest Mortgage as Servicer under the related Underlying
Servicing Agreement to, or enter into an amendment to any applicable Underlying
Servicing Agreement to require any Other Servicer to, remit Unscheduled Princi-
pal Receipts in full to the Master Servicer for deposit into the Certificate
Account daily on a specified business day following receipt thereof which will
generally result in a deposit earlier than on the following Remittance Date. In
conjunction with any such change, the applicable Servicer would be relieved of
its obligation to remit Month End Interest and certain other conforming changes
may be made. Such changes would have an effect on the amount of Compensating
Interest as described herein under the heading "Description of the Certifi-
cates -- Interest." Further, the Pooling and Servicing Agreement will provide
that the Master Servicer may (but is not required to), without the consent of
any Certificateholder, the Trustee or the Trust Administrator, require Norwest
Mortgage or any successor thereto under the applicable Underlying Servicing
Agreement to make remittances to the Certificate Account (other than any remit-
tances 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 as-
surance 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 to),
from time to time and without the consent of any Certificateholder, the Trustee
or the Trust Administrator, (i) direct Norwest Mortgage as Servicer under the
related Underlying Servicing Agreement to change the Unscheduled Principal Re-
ceipt Period applicable to any type of Unscheduled Principal Receipt within the
parameters described in (i), (ii) and (iii) below or (ii) with respect to any
Other Servicer, enter into an amendment to any applicable Underlying Servicing
Agreement for the purpose of changing the Unscheduled Principal Receipt Period
applicable to any type of Unscheduled Principal Receipt within the parameters
described in (iv) below and making any necessary conforming changes incident
thereto. In connection therewith, (i) the Unscheduled Principal Receipt Period
for the Norwest Non-Frederick-Serviced Loans may be changed (to achieve consis-
tency 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 Re-
ceipt 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-Serv-
iced Loans may be changed to the Target Regime; and (iv) the Unscheduled Prin-
cipal Receipt Periods for the Mortgage Loans serviced by Other Servicers may be
changed to the Target Regime.
Because Unscheduled Principal Receipts will result in interest shortfalls to
the extent that they are not distributed to Certificateholders in the month in
which they are received by the applicable Servicer, changing the applicable
Unscheduled Principal Receipt Period from a Mid-Month Receipt Period to a Prior
Month Receipt Period may have the effect of increasing the amount of interest
shortfalls with respect to the applicable type of Unscheduled Principal Re-
ceipt. 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 "Ser-
vicing Fee Rate") of the scheduled principal balance (as defined in the Under-
lying Servicing Agreements) of such Mortgage Loan as of the first day of each
month. The Servicing Fee Rate for each Mortgage Loan will be a fixed percentage
rate per annum. The Servicing Fee Rate for each Mortgage Loan is 0.25% per an-
num. In addition to the Servicing Fees, late payment fees, loan assumption fees
and prepayment fees with
S-79
<PAGE>
respect to the Mortgage Loans, and any interest or other income earned on col-
lections with respect to the Mortgage Loans pending remittance to the Certifi-
cate Account, will be paid to, or retained by, the Servicers as additional ser-
vicing compensation. No Fixed Retained Yield (as defined in the Prospectus)
will be retained with respect to any of the Mortgage Loans.
The Master Servicer will pay all routine expenses, including fees of the
Trustee and Trust Administrator incurred in connection with its responsibili-
ties under the Pooling and Servicing Agreement, subject to certain rights of
reimbursement as described in the Prospectus. The servicing fees and other ex-
penses of the REMIC will be allocated to the holder of the Class A-R Certifi-
cate who is an individual, estate or trust (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. See "Certain
Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Limitations on Deduction of Certain Expenses" in the Prospec-
tus.
SERVICER DEFAULTS
The Trustee will have the right pursuant to the Underlying Servicing Agree-
ments 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 cer-
tain of the Servicer's servicing obligations under such Underlying Servicing
Agreement, including the obligation to make Periodic Advances (limited as pro-
vided herein under the heading "Pooling and Servicing Agreement -- Periodic Ad-
vances"), 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 "Ser-
vicing 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 pur-
chase, ownership and disposition of the Offered Certificates.
An election will be made to treat the Trust Estate, and the Trust Estate will
qualify, as a REMIC for federal income tax purposes. The Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5 and Class A-PO Certificates, the Class M Cer-
tificates and the Class B-1 and Class B-2 Certificates (collectively, the "Reg-
ular Certificates"), together with the Class A-WIO, Class B-3, Class B-4 and
Class B-5 Certificates, will be designated as the regular interests in the
REMIC, and the Class A-R Certificate will be designated as the residual inter-
est in the REMIC. The Class A-R Certificate is a "Residual Certificate" for
purposes of the Prospectus. The assets of the REMIC will include the Mortgage
Loans, together with the amounts held by the Master Servicer in a separate ac-
count in which collections on the Mortgage Loans will be deposited (the "Cer-
tificate Account"), the hazard insurance policies and primary mortgage insur-
ance policies, if any, relating to the Mortgage Loans and any property that se-
cured a Mortgage Loan that is acquired by foreclosure or deed in lieu of fore-
closure.
The Offered Certificates will be treated as "loans . . . secured by an
interest in real property which is . . . residential real property" for do-
mestic 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 re-
quired to report income on such Certificates in accordance with the accrual
method of accounting.
The Class A-PO 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-3, Class A-4, Class M,
S-80
<PAGE>
Class B-1 and Class B-2 Certificates will be issued with original issue dis-
count in an amount equal to the excess of their initial principal balances
(plus 2 days of interest at the Pass-Through Rates thereon) over their respec-
tive issue prices (including accrued interest). It is also anticipated that the
Class A-1 Certificates will be issued at a premium and that the Class A-2 and
Class A-5 Certificates will be issued with de minimis original issue discount
for federal income tax purposes. Finally, it is anticipated that the Class A-
WIO Certificates, the Class B-3, Class B-4 and Class B-5 Certificates, which
are not offered hereby, will be issued with original issue discount for federal
income tax purposes.
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 and whether the original issue discount is considered de minimis will
be calculated using 250% of SPA. No representation is made as to the actual
rate at which the Mortgage Loans will prepay.
RESIDUAL CERTIFICATE
The holder of the Class A-R Certificate must include the taxable income or
loss of the REMIC in determining its federal taxable income. The Class A-R Cer-
tificate will remain outstanding for federal income tax purposes until there
are no Certificates of any other Class outstanding. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT THE CLASS A-R CERTIFICATEHOLDER'S REMIC TAXABLE INCOME AND THE
TAX LIABILITY THEREON MAY EXCEED, AND MAY SUBSTANTIALLY EXCEED, CASH DISTRIBU-
TIONS TO SUCH HOLDER 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 REMIC includible by the holder of the Class A-R Certificate will
be treated as "excess inclusion" income, resulting in (i) the inability of such
holder to use net operating losses to offset such income from the REMIC, (ii)
the treatment of such income as "unrelated business taxable income" to certain
holders who are otherwise tax-exempt, and (iii) the treatment of such income as
subject to 30% withholding tax to certain non-U.S. investors, with no exemption
or treaty reduction.
The Class A-R Certificate will be considered a "noneconomic residual inter-
est," 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 Certificate 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 Certificate in excess of cash flows generated thereby,
(iii) intends to pay taxes associated with holding the Class A-R Certificate as
such taxes become due and (iv) will not transfer the Class A-R 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 Certificate generally may not be transferred to certain persons who
are not U.S. Persons (as defined herein). See "Description of the Certifi-
cates -- Restrictions on Transfer of the Class A-R, Class M and Offered Class B
Certificates" herein and "Certain Federal Income Tax Consequences -- Federal
Income Tax Consequences for REMIC Certificates," "-- Taxation of Residual Cer-
tificates -- Limitations on Offset or Exemption of REMIC Income" and "-- Tax-
Related Restrictions on Transfer of Residual Certificates -- Noneconomic Resid-
ual Interests" in the Prospectus.
An individual, trust or estate that holds the Class A-R 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 of the 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 ad-
dition, some portion of a purchaser's basis, if any, in the Class A-R Certifi-
cate may not be recovered until termination of the REMIC. Furthermore, the fed-
eral income tax consequences of any consideration paid to a transferee on a
transfer of the Class A-R 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 Certificate
should consult its tax advisors.
S-81
<PAGE>
DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS, THE EFFECTIVE AFTER-
TAX RETURN OF THE CLASS A-R CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN WOULD
BE THE CASE IF THE CLASS A-R CERTIFICATE WERE TAXED AS A DEBT INSTRUMENT, OR
MAY BE NEGATIVE.
See "Certain Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
The Class A-R Certificate may not be purchased by or transferred to any per-
son 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 acting on behalf of or investing the assets of such Plan. Accord-
ingly, the following discussion does not purport to discuss the considerations
under ERISA, Code Section 4975 or Similar Law with respect to the purchase, ac-
quisition or resale of the Class A-R Certificate and for purposes of the fol-
lowing discussion all references to the Offered Certificates are deemed to ex-
clude the Class A-R Certificate.
In addition, under current law the purchase and holding of the Class M or Of-
fered Class B Certificates by or on behalf of a Plan may result in "prohibited
transactions" within the meaning of ERISA and Code Section 4975 or Similar Law.
Transfer of the Class M or Offered Class B Certificates will not be made unless
the transferee (i) executes a representation letter in form and substance sat-
isfactory to the Trust Administrator stating that (a) it is not, and is not
acting on behalf of, any such Plan or using the assets of any such Plan to ef-
fect such purchase or (b) if it is an insurance company, that the source of
funds used to purchase the Class M or Offered Class B Certificates is an "in-
surance company general account" (as such term is defined in Section V(e) of
Prohibited Transaction Class Exemption 95-60 ("PTE 95-60"), 60 Fed. Reg. 35925
(July 12, 1995)) and there is no Plan with respect to which the amount of such
general account's reserves and liabilities for the contract(s) held by or on
behalf of such Plan and all other Plans maintained by the same employer (or af-
filiate thereof as defined in Section V(a)(1) of PTE 95-60) or by the same em-
ployee organization exceeds 10% of the total of all reserves and liabilities of
such general account (as such amounts are determined under Section I(a) of PTE
95-60) at the date of acquisition or (ii) provides (A) an opinion of counsel in
form and substance satisfactory to the Trust Administrator that the purchase or
holding of the Class M or Offered Class B Certificates by or on behalf of such
Plan will not result in the assets of the Trust Estate being deemed to be "plan
assets" and subject to the prohibited transaction provisions of ERISA and the
Code or Similar Law and will not subject the Seller, the Master Servicer or the
Trust Administrator to any obligation in addition to those undertaken in the
Pooling and Servicing Agreement and (B) such other opinions of counsel, offi-
cers' certificates and agreements as the Seller, or the Master Servicer may re-
quire in connection with such transfer. The Class M and Offered Class B Certif-
icates will contain a legend describing such restrictions on transfer and the
Pooling and Servicing Agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Accordingly, the following
discussion does not purport to discuss the considerations under ERISA, Code
Section 4975 or Similar Law with respect to the purchase, acquisition or resale
of the Class M or Offered Class B Certificates and for purposes of the follow-
ing discussion all references to the Offered Certificates are deemed to exclude
the Class M and Offered Class B Certificates.
As described in the Prospectus under "ERISA Considerations," ERISA and the
Code impose certain duties and restrictions on ERISA Plans and certain persons
who perform services for ERISA Plans. Comparable duties and restrictions may
exist under Similar Law on governmental plans and certain persons who perform
services for governmental plans. For example, unless exempted, investment by an
ERISA Plan in the Offered Certificates may constitute a prohibited transaction
under ERISA, the Code or Similar Law. There are certain exemptions issued by
the United States Department of Labor (the "DOL") that may be applicable to an
investment by an ERISA Plan in the Offered Certificates, including the individ-
ual administrative exemption described below and Prohibited Transaction Class
Exemption 83-1 ("PTE 83-1"). For a further discussion of the individual admin-
istrative 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.
S-82
<PAGE>
On May 17, 1990, the DOL issued to Morgan Stanley an individual administra-
tive exemption, Prohibited Transaction Exemption 90-24, 55 Fed. Reg. 20548 (the
"Morgan Stanley Exemption") and on December 5, 1990, the DOL issued to DLJ an
individual administrative exemption, Prohibited Transaction Exemption 90-83, 55
Fed. Reg. 50250 (the "DLJ Exemption" and together with the Morgan Stanley Ex-
emption, the "Exemptions" and each, an "Exemption"), from certain of the pro-
hibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by an ERISA Plan of certificates in pass-
through trusts that meet the conditions and requirements of the Exemption. The
Exemption might apply to the acquisition, holding and resale of the Offered
Certificates by an ERISA Plan, provided that specified conditions are met.
Among the conditions which would have to be satisfied for the Exemption to
apply to the acquisition by an ERISA Plan of the Offered Certificates is the
condition that the ERISA Plan investing in the Offered Certificates be an "ac-
credited investor" as defined in Rule 501(a)(1) of Regulation D of the Securi-
ties 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 pro-
vided in the Exemption or the availability of any other prohibited transaction
exemptions (including PTE 83-1), and whether the conditions of any such exemp-
tion will be applicable to the Offered Certificates and a fiduciary of a gov-
ernmental plan should make its own determination as to the need for and avail-
ability of any exemptive relief under Similar Law. Any fiduciary of an ERISA
Plan considering whether to purchase an Offered Certificate should also care-
fully review with its own legal advisors the applicability of the fiduciary
duty and prohibited transaction provisions of ERISA, the Code and Similar Law
to such investment. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Offered Class A and Class M Certificates constitute "mortgage related se-
curities" 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 or-
ganization. As such, the Offered Class A and Class M Certificates are legal in-
vestments for certain entities to the extent provided in the Enhancement Act.
However, institutions subject to the jurisdiction of the Office of the Comp-
troller 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 authori-
ties should review applicable rules, supervisory policies and guidelines of
these agencies before purchasing any of the Offered Class A and Class M Certif-
icates, as certain Subclasses of the Offered Class A Certificates or the Class
M Certificates may be deemed to be unsuitable investments under one or more of
these rules, policies and guidelines and whether certain restrictions may apply
to investments in other Subclasses of the Offered Class A Certificates or the
Class M Certificates. It should also be noted that certain states recently have
enacted, or have proposed enacting, legislation limiting to varying extents the
ability of certain entities (in particular insurance companies) to invest in
mortgage related securities. Investors should consult with their own legal ad-
visors in determining whether and to what extent Offered Class A and Class M
Certificates constitute legal investments for such investors. See "Legal In-
vestment" in the Prospectus.
The Class B-1 and Class B-2 Certificates will not constitute "mortgage re-
lated securities" under the Enhancement Act. The appropriate characterization
of the Class B-1 and Class B-2 Certificates under various legal investment re-
strictions, and thus the ability of investors subject to these restrictions to
purchase the Class B-1 and Class B-2 Certificates, may be subject to signifi-
cant interpretative uncertainties. All investors whose investment authority is
subject to legal restrictions should consult their own legal advisors to deter-
mine whether, and to what extent, the Class B-1 and Class B-2 Certificates will
constitute legal investments for them. See "Legal Investment" in the Prospec-
tus.
SECONDARY MARKET
There will not be any market for the Offered Certificates prior to the issu-
ance thereof. Each Underwriter intends to act as a market maker in the Offered
Certificates purchased by such Underwriter subject to applicable provisions of
federal and state securities laws and other regulatory requirements, but is un-
der 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
S-83
<PAGE>
does develop, that it will provide holders of Offered Certificates with liquid-
ity of investment at any particular time or for the life of the Offered Certif-
icates. 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 "Descrip-
tion of Certificates--Reports" upon written request to the Trust Administrator
at the Corporate Trust Office.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated July
12, 1996 and the terms agreement dated February 25, 1997 (together, the "Morgan
Stanley Underwriting Agreement") among Norwest Mortgage, the Seller and Morgan
Stanley & Co. Incorporated ("Morgan Stanley"), as underwriter, and the under-
writing agreement dated July 12, 1996 and the terms agreement dated February
25, 1997 (together, the "DLJ Underwriting Agreement") among Norwest Mortgage,
the Seller and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as
underwriter, the Offered Class A Certificates (other than the Class A-PO Cer-
tificates), the Class M Certificates and the Offered Class B Certificates are
being purchased from the Seller by Morgan Stanley and the Class A-PO Certifi-
cates are being purchased from the Seller by DLJ, in each case upon issuance
thereof. Each of Morgan Stanley and DLJ is referred to herein as an "Underwrit-
er," and each of the Morgan Stanley Underwriting Agreement and the DLJ Under-
writing Agreement is referred to herein as an "Underwriting Agreement." Morgan
Stanley is committed to purchase all of the Offered Class A Certificates (other
than the Class A-PO Certificates), the Class M Certificates and the Offered
Class B Certificates if any such Certificates are purchased, and DLJ is commit-
ted to purchase all of the Class A-PO Certificates if any such Certificates are
purchased. Each Underwriter has advised the Seller that it proposes to offer
the Offered Certificates purchased by such Underwriter, from time to time, for
sale in negotiated transactions or otherwise at prices determined at the time
of sale. Proceeds to the Seller from the sale of the Offered Certificates are
expected to be approximately 99.96% of the initial aggregate principal balance
of the Offered Class A Certificates (other than the Class A-PO Certificates),
approximately 68.25% of the aggregate initial principal balance of the Class A-
PO Certificates, approximately 99.34% of the aggregate principal balance of the
Class M Certificates, approximately 98.79% of the aggregate initial principal
balance of the Class B-1 Certificates and approximately 97.43% of the aggregate
initial principal balance of the Class B-2 Certificates plus, in each case,
other than the case of the Class A-PO Certificates, accrued interest thereon at
the rate of 7.000% per annum, from March 1, 1997 to (but not including) March
27, 1997, before deducting expenses payable by the Seller. Neither Underwriter
is an affiliate of the Seller. Morgan Stanley has advised the Seller that it
has not allocated the purchase price paid to the Seller for the Subclasses of
Offered Class A Certificates purchased by it among such Subclasses. Each Under-
writer and any dealers that participate with such Underwriter in the distribu-
tion of the Offered Certificates purchased by such Underwriter 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 under-
writing discounts or commissions, under the Securities Act.
Each Underwriting Agreement provides that the Seller or Norwest Mortgage will
indemnify the applicable Underwriter against certain civil liabilities under
the Securities Act or contribute to payments which such Underwriter may be re-
quired 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 Under-
writers by Brown & Wood LLP, New York, New York.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered Certificates
will be applied by the Seller to the purchase from Norwest Mortgage of the
Mortgage Loans underlying the Series 1997-5 Certificates.
S-84
<PAGE>
RATINGS
It is a condition to the issuance of the Offered Class A Certificates, other
than the Class A-PO Certificates, that each Subclass will have been rated "AAA"
by S&P. It is a condition to the issuance of the Class A-PO 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. It
is a condition to the issuance of the Offered Class A Certificates that each
Subclass will have been rated "AAA" by Fitch. It is a condition to the issuance
of the Class M Certificates that they will have been rated at least "AA" by S&P
and Fitch. It is a condition to the issuance of the Class B-1 and Class B-2
Certificates that they will have been rated "A" and "BBB," respectively, by
S&P. 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 rat-
ing 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 likeli-
hood 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 mort-
gage 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 under-
lying mortgages. In addition, it should be noted that in some structures a de-
fault 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 like-
lihood 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 S&P and Fitch, although data
with respect to the Mortgage Loans may have been provided to other rating agen-
cies 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 S&P and Fitch.
S-85
<PAGE>
INDEX OF SIGNIFICANT
PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
15 Year Mortgage Loans.............. S-71
Adjusted Pool Amount................ S-34
Adjusted Pool Amount (PO Portion)... S-34
Adjustment Amount................... S-50
Aggregate Current Bankruptcy
Losses............................. S-51
Aggregate Current Fraud Losses...... S-51
Aggregate Current Special Hazard
Losses............................. S-50
Available Master Servicing
Compensation....................... S-35
Bankruptcy Loss..................... S-39
Bankruptcy Loss Amount.............. S-51
Beneficial Owner.................... S-29
Book-Entry Certificates............. S-3
Bulk Purchase Underwritten Loans.... S-14
CBE................................. S-70
Cede................................ S-29
Certificate Account................. S-80
Certificateholder................... S-4
Certificates........................ S-8
Class A-WIO Notional Amount......... S-33
Class A Certificates................ Cover
Class A Non-PO Distribution Amount.. S-32
Class A Non-PO Optimal Amount....... S-36
Class A Non-PO Optimal Principal
Amount............................. S-38
Class A Non-PO Principal Amount..... S-38
Class A Non-PO Principal Balance.... S-34
Class A Non-PO Principal
Distribution Amount................ S-38
Class A Optimal Amount.............. S-36
Class A Percentage.................. S-18
Class A Prepayment Percentage....... S-18
Class A Principal Balance........... S-34
Class A Subclass Interest Accrual
Amount............................. S-32
Class A Subclass Interest Shortfall
Amount............................. S-36
Class A Subclass Principal Balance.. S-33
Class A Voting Interest............. S-75
Class A-5 Percentage................ S-45
Class A-5 Prepayment Shift
Percentage......................... S-45
Class A-5 Priority Amount........... S-45
Class A-PO Deferred Amount.......... S-41
Class A-PO Distribution Amount...... S-40
Class A-PO Optimal Principal
Amount............................. S-40
Class B Certificates................ Cover
Class B Principal Balance........... S-34
Class B Subclass Distribution
Amount............................. S-32
Class B Subclass Interest Accrual
Amount............................. S-33
Class B Subclass Interest Shortfall
Amount............................. S-37
Class B Subclass Principal Balance.. S-34
Class B Voting Interest............. S-75
Class B-1 Principal Distribution
Amount............................. S-42
Class B-2 Principal Distribution
Amount............................. S-42
Class M Certificates................ Cover
Class M Distribution Amount......... S-32
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Class M Interest Accrual Amount...................................... S-33
Class M Interest Shortfall Amount.................................... S-37
Class M Optimal Amount............................................... S-37
Class M Optimal Principal Amount..................................... S-41
Class M Percentage................................................... S-43
Class M Prepayment Percentage........................................ S-43
Class M Principal Balance............................................ S-34
Class M Principal Distribution Amount................................ S-41
Closing Date......................................................... S-14
Code................................................................. S-27
Compensating Interest................................................ S-16
Co-op Shares......................................................... S-53
Cooperatives......................................................... S-53
Cross-Over Date...................................................... S-49
Current Class B-1 Fractional Interest................................ S-44
Current Class B-2 Fractional Interest................................ S-44
Current Class B-3 Fractional Interest................................ S-44
Current Class B-4 Fractional Interest................................ S-44
Current Class M Fractional Interest.................................. S-44
Curtailment Interest Shortfalls...................................... S-36
Cut-Off Date Aggregate Principal Balance............................. S-53
Debt Service Reduction............................................... S-39
Deficient Valuation.................................................. S-39
Definitive Certificates.............................................. S-12
Determination Date................................................... S-29
Discount Mortgage Loans.............................................. S-3
Disqualified Organization............................................ S-4
Distribution Date.................................................... S-2
DLJ.................................................................. Cover
DLJ Exemption........................................................ S-83
DLJ Underwriting Agreement........................................... S-84
DOL.................................................................. S-82
DTC.................................................................. S-12
Enhancement Act...................................................... S-27
ERISA................................................................ S-27
ERISA Plan........................................................... S-82
Excess Bankruptcy Loss............................................... S-51
Excess Bankruptcy Losses............................................. S-51
Excess Fraud Loss.................................................... S-51
Excess Fraud Losses.................................................. S-50
Excess Special Hazard Loss........................................... S-50
Excess Special Hazard Losses......................................... S-50
Exemption............................................................ S-83
FICO Scores.......................................................... S-57
Fitch................................................................ S-9
Fixed 15-Year NMI Non-Frederick Portfolio Loans...................... S-59
Fixed 15-Year Non-Relocation NMI Frederick Portfolio Loans........... S-59
Fixed NMI Frederick Portfolio Loans.................................. S-59
Fraud Loss........................................................... S-39
</TABLE>
S-86
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Fraud Loss Amount.................. S-51
Jumbo Loans........................ S-59
Liquidated Loan.................... S-39
Liquidated Loan Loss............... S-39
Loss Severity Percentage........... S-72
Master Servicer.................... S-2
Master Servicing Fee............... S-76
Master Servicing Fee Rate.......... S-76
Mid-Month Receipt Period........... S-78
Month End Interest................. S-35
Morgan Stanley..................... Cover
Morgan Stanley Exemption........... S-83
Morgan Stanley Underwriting
Agreement......................... S-84
Mortgage Loans..................... S-2
Mortgaged Properties............... S-53
Mortgages.......................... S-53
NASCOR............................. Cover
Net Foreclosure Profits............ S-46
Net Mortgage Interest Rate......... S-34
Net Partial Liquidation Proceeds... S-31
NMI Frederick Portfolio Loans...... S-59
NMI Non-Frederick Portfolio Loans.. S-59
Non-PO Fraction.................... S-18
Non-PO Voting Interest............. S-75
Non-Supported Interest Shortfalls.. S-16
Norwest Bank....................... S-2
Norwest Frederick-Serviced Loans... S-77
Norwest Mortgage................... S-2
Norwest Mortgage Correspondent..... S-2
Norwest Non-Frederick-Serviced
Loans............................. S-77
Offered Certificates............... Cover
Offered Class A Certificates....... Cover
Offered Class B Certificates....... Cover
Original Subordinated Principal
Balance........................... S-40
Original Class B-1 Fractional
Interest.......................... S-44
Original Class B-2 Fractional
Interest.......................... S-44
Original Class B-3 Fractional
Interest.......................... S-44
Original Class B-4 Fractional
Interest.......................... S-44
Original Class M Fractional
Interest.......................... S-44
Original Subordinated Principal
Balance........................... S-40
Other Servicers.................... S-77
Partial Liquidation Proceeds....... S-31
Pass-Through Rate.................. S-16
Percentage Interest................ S-32
Periodic Advance................... S-46
PHMC............................... S-2
PHMC Acquisition................... S-13
PHMC Correspondent................. S-8
PHMSC Pool......................... S-71
Plan............................... S-27
PO Fraction........................ S-19
Pool Balance (Non-PO Portion)...... S-11
Pool Balance (PO Portion).......... S-11
Pool Distribution Amount........... S-29
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Pool Distribution Amount Allocation.................................. S-31
Pooling and Servicing Agreement...................................... S-75
Premium Mortgage Loans............................................... S-33
Prepayments in Full.................................................. S-35
Prepayment Interest Shortfalls....................................... S-35
Prior Month Receipt Period........................................... S-78
Prospectus........................................................... S-8
PTE 83-1............................................................. S-82
PTE 95-60............................................................ S-82
Realized Loss........................................................ S-39
Record Date.......................................................... S-29
Regular Certificates................................................. S-80
REMIC................................................................ S-26
Relocation Mortgage Loans............................................ S-53
Remittance Date...................................................... S-30
REO Property......................................................... S-77
Residual Certificate................................................. S-81
Scheduled Principal Amount........................................... S-45
Scheduled Principal Balance.......................................... S-38
S&P.................................................................. S-9
SDA.................................................................. S-72
Securities Act....................................................... S-83
Seller............................................................... S-2
Senior Certificates.................................................. S-9
Series 1997-5 Certificates........................................... Cover
Servicer............................................................. S-2
Servicers............................................................ S-77
Servicer Custodial Account........................................... S-78
Servicing Fee Rate................................................... S-79
Similar Law.......................................................... S-27
SPA.................................................................. S-66
Special Hazard Loss.................................................. S-39
Special Hazard Loss Amount........................................... S-50
Structuring Assumptions.............................................. S-66
Subclass............................................................. Cover
Subclass B Optimal Amount............................................ S-37
Subclass B Optimal Principal Amount.................................. S-42
Subclass B Percentage................................................ S-43
Subclass B Prepayment Percentage..................................... S-43
Subordinated Certificates............................................ S-9
Subordinated Percentage.............................................. S-40
Subordinated Prepayment Percentage................................... S-40
Target Regime........................................................ S-79
Trust Administrator.................................................. S-9
Trust Estate......................................................... S-2
Trustee.............................................................. S-9
U.S. Person.......................................................... S-47
Underlying Servicing Agreement....................................... S-8
Underwriters......................................................... Cover
Underwriting Agreement............................................... S-84
Underwriting Standards............................................... S-14
Unscheduled Principal Amount......................................... S-45
Unscheduled Principal Receipt Period................................. S-78
Unscheduled Principal Receipts....................................... S-30
</TABLE>
S-87
<PAGE>
NORWEST ASSET SECURITIES CORPORATION
("NASCOR")
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
--------------
Norwest Asset Securities Corporation (the "Seller" or "NASCOR") may sell
from time to time, under this Prospectus and applicable Prospectus
Supplements, Mortgage Pass-Through Certificates (the "Certificates"), issuable
in series (each, a "Series") consisting of one or more classes (each, a
"Class") of Certificates. Any Class of Certificates may be divided into two or
more subclasses (each, a "Subclass").
The Certificates of a Series will represent beneficial ownership interests
in a separate trust formed by the Seller. The property of each such trust (for
each Series, the "Trust Estate") will be comprised primarily of fixed or
adjustable interest rate, conventional, first mortgage loans (the "Mortgage
Loans"), secured by one- to four-family residential properties. The Mortgage
Loans will have been acquired by the Seller from its affiliate, Norwest
Mortgage, Inc. ("Norwest Mortgage"), and will have been underwritten either to
Norwest Mortgage's underwriting standards, to the underwriting standards of a
Pool Insurer (as defined herein) or to such other standards as are described
in the applicable Prospectus Supplement. All of the Mortgage Loans will be
serviced by Norwest Mortgage individually or together with one or more other
servicers (each, a "Servicer"). Norwest Bank Minnesota, National Association
("Norwest Bank"), an affiliate of Norwest Mortgage, will act as master
servicer with respect to each Trust Estate (in such capacity, the "Master
Servicer").
Each Series of Certificates may include one or more Classes of Certificates
(the "Subordinated Certificates") that are subordinate in right of
distributions or otherwise to one or more of the other Classes of such Series
(the "Senior Certificates"). If specified in the applicable Prospectus
Supplement, the relative interests of the Senior Certificates and the
Subordinated Certificates of a Series in the Trust Estate may be subject to
adjustment from time to time on the basis of distributions received in respect
thereof and losses allocated to the Subordinated Certificates. If and to the
extent specified in the Prospectus Supplement, credit support may be provided
for any Series of Certificates, or any Classes or Subclasses thereof, in the
form of a limited guarantee, financial guaranty insurance policy, surety bond,
letter of credit, mortgage pool insurance policy, reserve fund, cross-support
or other form of credit enhancement as described herein or therein.
Except for the Seller's limited obligations in connection with certain
breaches of its representations and warranties, certain undertakings and
obligations of the Master Servicer and Norwest Mortgage's obligations as
Servicer, the Certificates will not represent obligations of the Seller, the
Master Servicer or Norwest Mortgage, or any affiliate of the Seller, the
Master Servicer or Norwest Mortgage.
If specified in the applicable Prospectus Supplement, an election will be
made to treat the Trust Estate (or one or more segregated pools of assets
therein) underlying a Series of Certificates as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes. See "Certain
Federal Income Tax Consequences."
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market
will develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life
of the Certificates.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
--------------
The Certificates may be sold from time to time through one or more different
methods, including through underwriting syndicates led by one or more managing
underwriters or through one or more underwriters acting alone. See "Plan of
Distribution." Affiliates of the Seller may from time to time act as agents or
underwriters in connection with the sale of the Certificates.
This Prospectus may not be used to consummate sales of Certificates unless
accompanied by the Prospectus Supplement relating to the offering of such
Certificates.
--------------
THE DATE OF THIS PROSPECTUS IS MARCH 19, 1997
<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 Suite 1300, 7 World Trade Center, New York, New York
10048 and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661-2511. 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,
7485 New Horizon Way, Frederick, Maryland 21703, telephone number (301) 846-
8881.
ADDITIONAL DETAILED INFORMATION
The Seller intends to offer by subscription detailed mortgage loan
information in machine readable format updated on a monthly basis (the
"Detailed Information") with respect to each outstanding Series of
Certificates. The Detailed Information will reflect payments made on the
individual mortgage loans, including prepayments in full and in part made on
such mortgage loans, as well as the liquidation of any such mortgage loans,
and will identify various characteristics of the mortgage loans. Subscribers
of the Detailed Information are expected to include a number of major
investment brokerage firms as well as financial information service firms.
Some of such firms, including certain investment brokerage firms as well as
Bloomberg L.P. through the "The Bloomberg(R)" service and Merrill Lynch
Mortgage Capital Inc. through the "CMO Passport(R)" 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, 7485 New Horizon Way, Frederick, Maryland 21703, telephone number
(301) 846-8881.
2
<PAGE>
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, 7485 New Horizon
Way, Frederick, Maryland 21703, 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............................................................. 9
Credit Enhancement....................................................... 9
Periodic Advances........................................................ 10
Forms of Certificates.................................................... 10
Optional Purchase of Defaulted Mortgage Loans............................ 10
Optional Purchase of All Mortgage Loans.................................. 11
ERISA Limitations........................................................ 11
Tax Status............................................................... 11
Legal Investment......................................................... 11
Rating................................................................... 11
Risk Factors............................................................... 12
Limited Liquidity........................................................ 12
Limited Obligations...................................................... 12
Limitations, Reduction and Substitution of Credit Enhancement............ 12
Risks of the Mortgage Loans.............................................. 12
Yield and Prepayment Considerations...................................... 13
Book-Entry System for Certain Classes and Subclasses of Certificates..... 13
The Trust Estates.......................................................... 14
General.................................................................. 14
Mortgage Loans........................................................... 14
Fixed Rate Loans....................................................... 15
Adjustable Rate Loans.................................................. 15
Graduated Payment Loans................................................ 16
Subsidy Loans.......................................................... 16
Buy-Down Loans......................................................... 17
Balloon Loans.......................................................... 17
Pledged Asset Mortgage Loans........................................... 17
The Seller................................................................. 17
Norwest Mortgage........................................................... 18
Norwest Bank............................................................... 18
The Mortgage Loan Programs................................................. 19
Mortgage Loan Production Sources......................................... 19
Acquisition of Mortgage Loans from Correspondents........................ 19
Mortgage Loan Underwriting............................................... 20
Norwest Mortgage Underwriting.......................................... 20
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pool Certification Underwriting....................................... 23
Representations and Warranties.......................................... 24
Description of the Certificates........................................... 28
General................................................................. 28
Definitive Form......................................................... 28
Book-Entry Form......................................................... 29
Distributions to Certificateholders..................................... 30
General............................................................... 30
Distributions of Interest............................................. 31
Distributions of Principal............................................ 32
Other Credit Enhancement................................................ 33
Limited Guarantee..................................................... 34
Financial Guaranty Insurance Policy or Surety Bond.................... 34
Letter of Credit...................................................... 34
Pool Insurance Policies............................................... 34
Special Hazard Insurance Policies..................................... 34
Mortgagor Bankruptcy Bond............................................. 34
Reserve Fund.......................................................... 34
Cross Support......................................................... 35
Prepayment and Yield Considerations....................................... 35
Pass-Through Rates...................................................... 35
Scheduled Delays in Distributions....................................... 35
Effect of Principal Prepayments......................................... 35
Weighted Average Life of Certificates................................... 36
Servicing of the Mortgage Loans........................................... 37
The Master Servicer..................................................... 37
The Servicers........................................................... 38
Payments on Mortgage Loans.............................................. 39
Periodic Advances and Limitations Thereon............................... 41
Collection and Other Servicing Procedures............................... 42
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage
Loans.................................................................. 42
Insurance Policies...................................................... 44
Fixed Retained Yield, Servicing Compensation and Payment of Expenses.... 45
Evidence as to Compliance............................................... 45
Certain Matters Regarding the Master Servicer............................. 46
The Pooling and Servicing Agreement....................................... 47
Assignment of Mortgage Loans to the Trustee............................. 47
Optional Purchases...................................................... 48
Reports to Certificateholders........................................... 48
List of Certificateholders.............................................. 49
Events of Default....................................................... 49
Rights Upon Event of Default............................................ 50
Amendment............................................................... 50
Termination; Optional Purchase of Mortgage Loans........................ 51
The Trustee............................................................. 51
Certain Legal Aspects of the Mortgage Loans............................... 52
General................................................................. 52
Foreclosure............................................................. 52
Foreclosure on Shares of Cooperatives................................... 53
Rights of Redemption.................................................... 54
Anti-Deficiency Legislation and Other Limitations on Lenders............ 54
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Soldiers' and Sailors' Civil Relief Act and Similar Laws................ 55
Environmental Considerations............................................ 56
"Due-on-Sale" Clauses................................................... 57
Applicability of Usury Laws............................................. 58
Enforceability of Certain Provisions.................................... 58
Certain Federal Income Tax Consequences................................... 59
Federal Income Tax Consequences for REMIC Certificates.................. 59
General................................................................. 59
Status of REMIC Certificates............................................ 59
Qualification as a REMIC................................................ 60
Taxation of Regular Certificates........................................ 61
General............................................................... 61
Original Issue Discount............................................... 62
Acquisition Premium................................................... 64
Variable Rate Regular Certificates.................................... 64
Market Discount....................................................... 65
Premium............................................................... 65
Election to Treat All Interest Under the Constant Yield Method........ 66
Treatment of Losses................................................... 66
Sale or Exchange of Regular Certificates.............................. 67
Taxation of Residual Certificates....................................... 67
Taxation of REMIC Income.............................................. 67
Basis and Losses...................................................... 68
Treatment of Certain Items of REMIC Income and Expense................ 69
Original Issue Discount and Premium................................... 69
Market Discount....................................................... 69
Premium............................................................... 69
Limitations on Offset or Exemption of REMIC Income.................... 69
Tax-Related Restrictions on Transfer of Residual Certificates......... 70
Disqualified Organizations............................................ 70
Noneconomic Residual Interests........................................ 71
Foreign Investors..................................................... 72
Sale or Exchange of a Residual Certificate............................ 72
Mark to Market Regulations............................................ 72
Taxes That May Be Imposed on the REMIC Pool............................. 73
Prohibited Transactions............................................... 73
Contributions to the REMIC Pool After the Startup Day................. 73
Net Income from Foreclosure Property.................................. 73
Liquidation of the REMIC Pool........................................... 73
Administrative Matters.................................................. 74
Limitations on Deduction of Certain Expenses............................ 74
Taxation of Certain Foreign Investors................................... 74
Regular Certificates.................................................. 74
Residual Certificates................................................. 75
Backup Withholding...................................................... 75
Reporting Requirements.................................................. 75
Federal Income Tax Consequences for Certificates as to Which No REMIC
Election is Made....................................................... 76
General............................................................... 76
Tax Status............................................................ 76
Premium and Discount.................................................. 77
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Premium................................................................ 77
Original Issue Discount................................................ 77
Market Discount........................................................ 77
Recharacterization of Servicing Fees................................... 77
Sale or Exchange of Certificates....................................... 78
Stripped Certificates.................................................... 78
General................................................................ 78
Status of Stripped Certificates........................................ 79
Taxation of Stripped Certificates...................................... 80
Original Issue Discount................................................ 80
Sale or Exchange of Stripped Certificates.............................. 80
Purchase of More Than One Class of Stripped Certificates............... 80
Possible Alternative Characterizations................................. 80
Reporting Requirements and Backup Withholding............................ 81
Taxation of Certain Foreign Investors.................................... 81
ERISA Considerations....................................................... 81
General.................................................................. 81
Certain Requirements Under ERISA......................................... 82
General................................................................ 82
Parties in Interest/Disqualified Persons............................... 82
Delegation of Fiduciary Duty........................................... 82
Administrative Exemptions................................................ 83
Individual Administrative Exemptions................................... 83
PTE 83-1............................................................... 84
Exempt Plans............................................................. 84
Unrelated Business Taxable Income--Residual Certificates................. 84
Legal Investment........................................................... 85
Plan of Distribution....................................................... 86
Use of Proceeds............................................................ 87
Legal Matters.............................................................. 87
Rating..................................................................... 87
Index of Significant Definitions........................................... 88
</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. See the "Index of Significant Definitions" beginning on page 88.
Title of Securities...... Mortgage Pass-Through Certificates (Issuable in
Series).
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
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."
8
<PAGE>
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 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
9
<PAGE>
Senior Certificates of the same Series to the extent
and in the manner specified in the applicable
Prospectus 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
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 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 Certificates--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, 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 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."
10
<PAGE>
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 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.
11
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of
any Series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for
the life of the Certificates of any Series. The Prospectus Supplement for any
Series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates, however no
underwriter will be obligated to do so. Unless specified in the applicable
Prospectus Supplement, the Certificates will not be listed on any securities
exchange.
LIMITED OBLIGATIONS
Except for any related insurance policies and any reserve fund or credit
enhancement described in the applicable Prospectus Supplement, Mortgage Loans
included in the related Trust Estate will be the sole source of payments on
the Certificates of a Series. The Certificates of any Series will not
represent an interest in or obligation of NASCOR, Norwest Mortgage, Norwest
Bank, the Trustee or any of their affiliates, except for NASCOR's limited
obligations with respect to certain breaches of its representations and
warranties, Norwest Mortgage's obligations as Servicer and Norwest Bank's
obligations as Master Servicer. Neither the Certificates of any Series nor the
related Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, NASCOR, Norwest Mortgage, Norwest Bank, the
Trustee, any of their affiliates or any other person. Consequently, in the
event that payments on the Mortgage Loans are insufficient or otherwise
unavailable to make all payments required on the Certificates, there will be
no recourse to NASCOR, Norwest Mortgage, Norwest Bank, the Trustee or, except
as specified in the applicable Prospectus Supplement, any other entity.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
With respect to each Series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the underlying
Mortgage Loans. Credit enhancement will be provided in one or more of the
forms referred to herein, including, but not limited to: subordination of
other Classes of Certificates of the same Series; a limited guarantee; a
financial guaranty insurance policy; a surety bond; a letter of credit; a pool
insurance policy; a special hazard insurance policy; a mortgagor bankruptcy
bond; a reserve fund; cross-support; and any combination thereof. See
"Description of the Certificates--Other Credit Enhancement" herein. Regardless
of the form of credit enhancement provided, the amount of coverage will be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such credit enhancements
may provide only very limited coverage as to certain types of losses, and may
provide no coverage as to certain other types of losses. All or a portion of
the credit enhancement for any Series of Certificates will generally be
permitted to be reduced, terminated or substituted for, in the sole discretion
of the Master Servicer, if each applicable Rating Agency indicates that the
then current rating thereof will not be adversely affected. In the event
losses exceed the amount of coverage provided by any credit enhancement or
losses of a type not covered by any credit enhancement occur, such losses will
be borne by the holders of the related Certificates (or certain Classes
thereof). The rating of any Series of Certificates by any applicable Rating
Agency may be lowered following the initial issuance thereof as a result of
the downgrading of the obligations of any applicable credit support provider,
or as a result of losses on the related Mortgage Loans in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
Neither NASCOR, Norwest Mortgage, Norwest Bank, nor any of their affiliates
will have any obligation to replace or supplement any credit enhancement, or
to take any other action to maintain any rating of any Class of Certificates.
See "Description of the Certificates--Other Credit Enhancement."
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
12
<PAGE>
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,
homeowner mobility and the ability of the borrower to obtain refinancing. 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 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
13
<PAGE>
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 (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.
14
<PAGE>
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
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
15
<PAGE>
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 or other shorter
period. Mortgage loans incorporating such graduated payment features may
include (i) "Graduated Pay Mortgage Loans," pursuant to which amounts
constituting Deferred Interest are added to the principal balances of such
mortgage loans, (ii) "Tiered Payment Mortgage Loans," pursuant to which, if
the amount of interest accrued in any month exceeds the current scheduled
payment for such month, such excess amounts are paid from a subsidy account
(usually funded by a home builder or family member) established at closing and
(iii) "Growing Equity Mortgage Loans," for which the monthly payments increase
at a rate which has the effect of amortizing the loan over a period shorter
than the stated term.
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") 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
16
<PAGE>
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-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.
g. Pledged Asset Mortgage Loans. If so specified in the applicable
Prospectus Supplement, a Trust Estate may contain fixed rate mortgage loans
having original terms to stated maturity of not more than 30 years which are
either (i) secured by a security interest in additional collateral (normally
securities) owned by the borrower or (ii) supported by a third party guarantee
(usually a parent of the borrower); which is in turn secured by a security
interest in collateral (usually securities) owned by such guarantor (any such
loans, "Pledged Asset Mortgage Loans," and any such collateral, "Additional
Collateral"). Generally, the amount of such Additional Collateral will not
exceed 30% of the amount of such loan, and the requirement to maintain
Additional Collateral will terminate when the principal amount of the loan is
paid down to a predetermined amount.
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 7485 New Horizon Way,
Frederick, Maryland 21703. 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
17
<PAGE>
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. ("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.
On January 7, 1997, a complaint was served on PHMC with respect to an
individual and purported class action filed by The Capitol Life Insurance
Company (the "plaintiff") in the Superior Court of New Jersey against PHMC. The
Prudential Home Mortgage Securities Company, Inc. ("PHMSC") and certain of
their affiliates and 100 unnamed "Doe defendants" (collectively, the
"defendants"). The complaint alleges, among other things, that the defendants
made false and misleading statements and/or omissions of material fact and
fraudulently concealed material facts in connection with the purchase in 1993
by the plaintiff of certain of PHMSC's Subordinated Mortgage Securities, Series
1992-A. The complaint alleges and implies that, in connection therewith,
certain false and misleading statements were made to the plaintiffs by then-
officers and employees of PHMC or PHMSC, certain of whom may now be officers or
employees of the Seller or Norwest Mortgage. The Seller has been advised by a
representative of PHMC and PHMSC that PHMC and PHMSC will deny the allegations
in their answers to the complaint and intend to vigorously defend the action.
Based on the foregoing, the Seller does not believe that this litigation will
have an adverse effect on any Series of Certificates.
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.
18
<PAGE>
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 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 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
19
<PAGE>
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 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 portion of the Credit Score related to borrower credit history is
generally based on computer models developed by a third party. These models
evaluate information available from three major credit reporting bureaus
regarding historical patterns of consumer credit behavior in relation to
default experience for similar types of borrower profiles. A particular
borrower's credit patterns are then considered in order to derive a "FICO
Score" which indicates a level of default probability over a two-year period.
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
20
<PAGE>
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
payments (if any), living expenses and financial obligations. A mortgage
verification involves obtaining information regarding the borrower's payment
history with respect to any existing mortgage the applicant may have. This
verification is accomplished by either having the present lender complete a
verification of mortgage form, evaluating the information on the credit report
concerning the applicant's payment history for the existing mortgage,
communicating, either verbally or in writing, with the applicant's present
lender or analyzing cancelled checks provided by the applicant. Verifications
of income, assets or mortgages may be waived under certain programs offered by
Norwest Mortgage, but Norwest Mortgage's underwriting guidelines require, in
most instances, a verbal or written verification of employment to be obtained.
In some cases, employment histories may be obtained through V.I.E., Inc., an
affiliate of Norwest Mortgage, that obtains employment data from state
unemployment insurance departments or other state agencies. In addition, the
loan applicant may be eligible for a loan approval process permitting limited
documentation. The above referenced reduced documentation options and waivers
limit the amount of documentation required for an underwriting decision and
have the effect of increasing the relative importance of the credit report and
the appraisal. Documentation requirements vary based upon a number of factors,
including the purpose of the loan, the amount of the loan, the ratio of the
loan amount to the property value and the mortgage loan production source.
Norwest Mortgage accepts alternative methods of verification, in those
instances where verifications are part of the underwriting decision; for
example, salaried income may be substantiated either by means of a form
independently prepared and signed by the applicant's employer or by means of
the applicant's most recent paystub and W-2. In cases where two or more persons
have jointly applied for a mortgage loan, the gross incomes and expenses of all
of the applicants, including nonoccupant co-mortgagors, are combined and
considered as a unit.
In general, except for borrowers meeting certain standards who apply for
loans with certain qualifying characteristics under Norwest Mortgage's
"retention program" applicable to then-current borrowers, borrowers applying
for loans must demonstrate that the ratio of their total monthly housing debt
to their monthly gross income, and the ratio of their total monthly debt to
their monthly gross income do not exceed certain maximum levels. Such maximum
levels vary and under the "retention program" may not be applied, depending on
a number of factors including Loan-to-Value Ratio, a borrower's credit history,
a borrower's liquid net worth, the potential of a borrower for continued
employment advancement or income growth, the ability of the borrower to
accumulate assets or to devote a greater portion of income to basic needs such
as housing expense, a borrower's Credit Score and the type of loan for which
the borrower is applying. These calculations are based on the amortization
schedule and the interest rate of the related loan, with each ratio being
computed on the basis of the proposed monthly mortgage payment. In the case of
adjustable-rate mortgage loans, the interest rate used to determine a
mortgagor's monthly payment for purposes of such ratios may, in certain cases,
be the initial mortgage interest rate or another interest rate, which, in
either case, is lower than the sum of the index rate that would have been
applicable at origination plus the applicable margin. In evaluating
applications for Subsidy Loans and Buy-Down Loans, such ratios are determined
by including in the applicant's total monthly housing expense and total monthly
debt the proposed monthly mortgage payment reduced by the amount expected to be
applied on a monthly basis under the related subsidy agreement or buy-down
agreement or, in certain cases, the mortgage payment that would result from an
interest
21
<PAGE>
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 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.
Norwest originates mortgage loans with Loan-to-Value Ratios in excess of 80%
either with or without the requirement to obtain primary mortgage insurance. In
cases for which such primary mortgage insurance is obtained, the excess over
75% (or such
22
<PAGE>
lower percentage as Norwest Mortgage may require at origination) will be
covered by primary mortgage insurance from an approved primary mortgage
insurance company 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%. However, Norwest Mortgage does not require primary mortgage
insurance on loans that have Loan-to-Value Ratios exceeding 80% if such loans
are secured by primary residences or second homes (excluding cooperatives).
Each loan originated without primary mortgage insurance will have been made at
an interest rate that was higher than the rate would have been if the Loan-to-
Value Ratios was 80% or less or if primary mortgage insurance was obtained. The
Prospectus Supplement will specify the number and percentage of Mortgage Loans
contained in the Trust Estate for a particular Series of Certificates with
Loan-to-Value Ratios at origination in excess of 80% which were originated
without primary mortgage insurance.
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 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
23
<PAGE>
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, UGRIC permits a maximum 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 and for adjustable rate loans with Loan-to-Value Ratios of 75%
or less. Maximum ratios of 28% and 33%, respectively, are permitted for
adjustable rate loans with Loan-to-Value Ratios above 75%. 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. GEMICO's underwriting process relies on a combination of
its own proprietory credit score model (which includes factors related to a
borrower's credit history as well as specific loan attributes) and the
consideration of borrower debt-to-income ratios. Depending upon the credit
score, GEMICO will permit maximum ratios, as described in clauses (i) and (ii)
above, of 40% and 50%, respectively.
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.
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,
24
<PAGE>
such representations and warranties (whether made by the Seller or another
party) will generally include the following with respect to the Mortgage
Loans, or each Mortgage Loan, as the case may be:
(i) the information set forth in the schedule of Mortgage Loans appearing
as an exhibit to such Pooling and Servicing Agreement is correct in all
material respects at the date or dates respecting which such information is
furnished as specified therein;
(ii) immediately prior to the transfer and assignment contemplated by the
Pooling and Servicing Agreement, the Seller is the sole owner and holder of
the Mortgage Loan, free and clear of any and all liens, pledges, charges or
security interests of any nature and has full right and authority to sell
and assign the same;
(iii) the Mortgage is a valid, subsisting and enforceable first lien on
the related Mortgaged Property, and the Mortgaged Property is free and
clear of all encumbrances and liens having priority over the first lien of
the Mortgage except for liens for real estate taxes and special assessments
not yet due and payable and liens or interests arising under or as a result
of any federal, state or local law, regulation or ordinance relating to
hazardous wastes or hazardous substances; and, if the Mortgaged Property is
a condominium unit, any lien for common charges permitted by statute or
home owners association fees; and, if the Mortgaged Property consists of
shares of a cooperative housing corporation, any lien for amounts due to
the cooperative housing corporation for unpaid assessments or charges or
any lien of any assignment of rents or maintenance expenses secured by the
real property owned by the cooperative housing corporation; and any
security agreement, chattel mortgage or equivalent document related to, and
delivered to the Trustee or a custodian with, any Mortgage establishes in
the Seller a valid first lien on the property described therein and the
Seller has full right to sell and assign the same to the Trustee;
(iv) neither the Seller nor any prior holder of the Mortgage or the
related Mortgage Note has modified the Mortgage in any material respect;
satisfied, cancelled or subordinated the Mortgage or the related Mortgage
Note in whole or in part; or released the Mortgaged Property in whole or in
part from the lien of the Mortgage; or executed any instrument of release,
cancellation, modification or satisfaction, except in each case as
reflected in a document delivered by the Seller to the Trustee or a
custodian together with the related Mortgage;
(v) all taxes, governmental assessments, insurance premiums, and water,
sewer and municipal charges previously due and owing have been paid, or an
escrow of funds in an amount sufficient to pay for every such item which
remains unpaid has been established to the extent permitted by law; and the
Seller has not advanced funds or received any advance of funds by a party
other than the mortgagor, directly or indirectly (except pursuant to any
Buy-Down Loan or Subsidy Loan arrangement), for the payment of any amount
required by the Mortgage, except for interest accruing from the date of the
related Mortgage Note or date of disbursement of the Mortgage Loan
proceeds, whichever is later, to the date which precedes by 30 days the
first Due Date under the related Mortgage Note;
(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;
25
<PAGE>
(x) to the best of the Seller's knowledge, all inspections, licenses and
certificates required to be made or issued with respect to all occupied
portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including, but not limited to, certificates of
occupancy and fire underwriting certificates, have been made or obtained
from the appropriate authorities;
(xi) all payments required to be made up to the Due Date immediately
preceding the Cut-Off Date for such Mortgage Loan under the terms of the
related Mortgage Note have been made and no Mortgage Loan had more than one
delinquency in the 12 months preceding the Cut-Off Date;
(xii) the Mortgage Note, the related Mortgage and other agreements
executed in connection therewith are genuine, and each is the legal, valid
and binding obligation of the maker thereof, enforceable in accordance with
its terms except as such enforcement may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement
of creditors' rights generally and by general equity principles (regardless
of whether such enforcement is considered in a proceeding in equity or at
law); and, to the best of the Seller's knowledge, all parties to the
Mortgage Note and the Mortgage had legal capacity to execute the Mortgage
Note and the Mortgage and each Mortgage Note and Mortgage has been duly and
properly executed by the mortgagor;
(xiii) any and all requirements of any federal, state or local law with
respect to the origination of the Mortgage Loans including, without
limitation, truth-in-lending, real estate settlement procedures, consumer
credit protection, equal credit opportunity or disclosure laws applicable
to the Mortgage Loans have been complied with;
(xiv) the proceeds of the Mortgage Loans have been fully disbursed, there
is no requirement for future advances thereunder and any and all
requirements as to completion of any on-site or off-site improvements and
as to disbursements of any escrow funds therefor have been complied with,
except for escrow funds for exterior items which could not be completed due
to weather; and all costs, fees and expenses incurred in making, closing or
recording the Mortgage Loan have been paid, except recording fees with
respect to Mortgages not recorded as of the date of the Pooling and
Servicing Agreement;
(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
26
<PAGE>
of insurance which was available under the Flood Disaster Protection Act of
1973; and each Mortgage obligates the mortgagor thereunder to maintain all
such insurance at the mortgagor's cost and expense;
(xvii) to the best of the Seller's knowledge, there is no default,
breach, violation or event of acceleration existing under any Mortgage or
the related Mortgage Note and no event which, with the passage of time or
with notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event of acceleration; and the
Seller has not waived any default, breach, violation or event of
acceleration; no foreclosure action is threatened or has been commenced
with respect to the Mortgage Loan;
(xviii) no Mortgage Note or Mortgage is subject to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, nor will the operation of any of the terms of the Mortgage Note or
Mortgage, or the exercise of any right thereunder, render such Mortgage
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;
(xxiv) each Mortgage Loan is a "Qualified Mortgage" within the meaning of
Section 860G of the Code; and
(xxv) with respect to each Mortgage where a lost note affidavit has been
delivered to the Trustee in place of the related Mortgage Note, the related
Mortgage Note is no longer in existence.
No representations or warranties are made by the Seller or any other party as
to the environmental condition of such Mortgaged Property; the absence,
presence or effect of hazardous wastes or hazardous substances on any Mortgaged
Property; any casualty resulting from the presence or effect of hazardous
wastes or hazardous substances on, near or emanating from such Mortgaged
Property; the impact on Certificateholders of any environmental condition or
presence of any substance on or near such Mortgaged Property; or the compliance
of any Mortgaged Property with any environmental laws, nor is any agent, person
or entity otherwise affiliated with the Seller authorized or able to make any
such representation, warranty or assumption of liability relative to any such
Mortgaged Property. 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.
27
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Series of Certificates will include one or more Classes, each of which
may be divided into two or more Subclasses. Any references herein to the
characteristics of a Class of Certificates may also describe the
characteristics of a Subclass of Certificates. In addition, any Class or
Subclass of Certificates may consist of two or more non-severable components,
each of which may exhibit any of the principal or interest payment
characteristics described herein with respect to a Class of Certificates. A
Series may include one or more Classes of Certificates entitled, to the extent
of funds available, to (i) principal and interest distributions in respect of
the related Mortgage Loans, (ii) principal distributions, with no interest
distributions, (iii) interest distributions, with no principal distributions or
(iv) such other distributions as are described in the applicable Prospectus
Supplement.
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.
28
<PAGE>
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 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.
29
<PAGE>
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Master Servicer, or a paying agent on
behalf of the Master Servicer, to Cede, as nominee for DTC.
DTC has advised the Seller that it will take any action permitted to be taken
by a Certificateholder under the Pooling and Servicing Agreement only at the
direction of one or more DTC Participants to whose accounts with DTC the Book-
Entry Certificates are credited. Additionally, DTC has advised the Seller that
it will take such actions with respect to specified Voting Interests only at
the direction of and on behalf of DTC Participants whose holdings of Book-Entry
Certificates evidence such specified Voting Interests. DTC may take conflicting
actions with respect to Voting Interests to the extent that DTC Participants
whose holdings of Book-Entry Certificates evidence such Voting Interests
authorize divergent action.
Neither the Seller, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held
by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of DTC, a DTC Participant or an Indirect DTC Participant in whose
name Book-Entry Certificates are registered, the ability of the Beneficial
Owners of such Book-Entry Certificates to obtain timely payment and, if the
limits of applicable insurance coverage by the Securities Investor Protection
Corporation are exceeded or if such coverage is otherwise unavailable, ultimate
payment, of amounts distributable with respect to such Book-Entry Certificates
may be impaired.
The Book-Entry Certificates will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i) the Trustee is advised in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Book-Entry Certificates and the Trustee is unable to locate a
qualified successor, (ii) the Master Servicer, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of a
dismissal or resignation of the Master Servicer under the Pooling and Servicing
Agreement, Beneficial Owners representing not less than 51% of the Voting
Interests of the outstanding Book-Entry Certificates advise the Trustee through
DTC, in writing, that the continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the Beneficial Owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Beneficial Owners through
DTC Participants of the availability of Definitive Certificates. Upon surrender
by DTC of the physical certificates representing the Book-Entry Certificates
and receipt of instructions for re-registration, the Trustee will reissue the
Book- Entry Certificates as Definitive Certificates to Beneficial Owners. The
procedures relating to payment on and transfer of Certificates initially issued
as Definitive Certificates will thereafter apply to those Book-Entry
Certificates that have been reissued as Definitive Certificates.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
General. On each Distribution Date, each holder of a Certificate of a Class
will be entitled to receive its Certificate's Percentage Interest of the
portion of the Pool Distribution Amount (as defined below) allocated to such
Class. The undivided percentage interest (the "Percentage Interest")
represented by any Certificate of a Subclass or any Class in distributions to
such Subclass or Class will be 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
30
<PAGE>
Periodic Advances with respect to payments due to be received on the Mortgage
Loans on the Due Date preceding such Distribution Date, but excluding the
following:
(a) amounts received as late payments of principal or interest respecting
which one or more unreimbursed Periodic Advances has been made;
(b) that portion of Liquidation Proceeds with respect to a Mortgage Loan
which represents any unreimbursed Periodic Advances;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent (i) the Fixed Retained Yield, if any, (ii) the
applicable Servicing Fee, (iii) the applicable Master Servicing Fee, (iv)
the Trustee's fee and (v) any other amounts described in the applicable
Prospectus Supplement;
(d) all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such Distribution
Date occurs;
(e) all proceeds (including Liquidation Proceeds other than, in certain
cases as specified in the applicable Prospectus Supplement, Liquidation
Proceeds which were received prior to the related Servicer's determination
that no further recoveries on a defaulted Mortgage Loan will be forthcoming
("Partial Liquidation Proceeds")) of any Mortgage Loans, or property
acquired in respect thereof, that were liquidated, foreclosed, purchased or
repurchased pursuant to the applicable Pooling and Servicing Agreement,
which proceeds were received on or after the Due Date occurring in the
month in which such Distribution Date occurs and all principal prepayments
in full, partial principal prepayments and Partial Liquidation Proceeds
received by the related Servicer on or after the Determination Date (or, in
certain cases as specified in the applicable Prospectus Supplement, the Due
Date) occurring in the month in which such Distribution Date occurs, and
all related payments of interest on such amounts;
(f) that portion of Liquidation Proceeds which represents any unpaid
Servicing Fees, Master Servicing Fee or any Trustee Fee to which the
related Servicer, the Trustee or the Master Servicer, respectively, is
entitled and any unpaid Fixed Retained Yield;
(g) if an election has been made to treat the applicable Trust Estate as
a REMIC, any Net Foreclosure Profits with respect to such Distribution
Date;
(h) all amounts representing certain expenses reimbursable to the Master
Servicer or any Servicer and other amounts permitted to be withdrawn by the
Master Servicer from the Certificate Account, in each case pursuant to the
applicable Pooling and Servicing Agreement;
(i) all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees and payments of interest related to principal
prepayments received on or after the first day of the month in which a
Distribution Date occurs and prior to the Determination Date in the month
of such Distribution Date which the related Servicer is entitled to retain
pursuant to the applicable Underlying Servicing Agreement;
(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
31
<PAGE>
Rate" for each Mortgage Loan in a given period will equal the mortgage interest
rate for such Mortgage Loan in such period, as specified in the related
mortgage note (the "Mortgage Interest Rate"), less the portion thereof, if any,
not contained in the Trust Estate (the "Fixed Retained Yield"), and less
amounts payable to the Servicers for servicing the Mortgage Loan (the
"Servicing Fee"), the fee payable to the Master Servicer (the "Master Servicing
Fee"), the fee payable to the Trustee (the "Trustee Fee") and any related
expenses specified in the applicable Prospectus.
Interest will accrue on the principal balance (or notional amount, as
described below) of each Class of Certificates entitled to interest at the
Pass-Through Rate for such Class indicated in the applicable Prospectus
Supplement (which may be a fixed rate or an adjustable rate) from the date and
for the periods specified in such Prospectus Supplement. To the extent the Pool
Distribution Amount is available therefor, interest accrued during each such
specified period on each Class of Certificates entitled to interest (other than
a Class that provides for interest that accrues, but is not currently payable,
referred to hereafter as "Accrual Certificates") will be distributable on the
Distribution Dates specified in the applicable Prospectus Supplement until the
principal balance (or notional amount) of such Class has been reduced to zero.
Distributions allocable to interest on each Certificate that is not entitled to
distributions allocable to principal will generally be calculated based on the
notional amount of such Certificate. The notional amount of a Certificate will
not evidence an interest in or entitlement to distributions allocable to
principal but will be solely for convenience in expressing the calculation of
interest and for certain other purposes.
With respect to any Class of Accrual Certificates, any interest that has
accrued but is not paid on a given Distribution Date will be added to the
principal balance of such Class of Certificates on that Distribution Date.
Distributions of interest on each Class of Accrual Certificates will commence
only after the occurrence of the events or the existence of the circumstance
specified in such Prospectus Supplement and, prior to such time, or in the
absence of such circumstances, the principal balance of such Class will
increase on each Distribution Date by the amount of interest that accrued on
such Class during the preceding interest accrual period but that was not
required to be distributed to such Class on such Distribution Date. Any such
Class of Accrual Certificates will thereafter accrue interest on its
outstanding principal balance as so adjusted.
Distributions of Principal. The principal balance of any Class of
Certificates entitled to distributions of principal will generally be the
original principal balance of such Class specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Certificates as allocable to principal and any losses on the related Mortgage
Loans allocated to such Class of Certificates and (i) in the case of Accrual
Certificates, increased by all interest accrued but not then distributable on
such Accrual Certificates and (ii) in the case of a Series of Certificates
representing 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
32
<PAGE>
and interest due them and to provide limited protection to the holders of the
Senior Certificates against losses due to mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a Series of
Certificates for which credit enhancement is provided through subordination by
the subordination feature described above will be effected by (i) the
preferential right of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates on each Distribution
Date, current distributions on the related Mortgage Loans of principal and
interest due them on each Distribution Date out of the funds available for
distribution on such date in the related Certificate Account, (ii) by the right
of such holders to receive future distributions on the Mortgage Loans that
would otherwise have been payable to the holders of Subordinated Certificates
and/or (iii) by the prior allocation to the Subordinated Certificates of all or
a portion of losses realized on the related Mortgage Loans.
Losses realized on liquidated Mortgage Loans (other than Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses as described
below) will be allocated to the holders of Subordinated Certificates through a
reduction of the amount of principal payments on the Mortgage Loans to which
such holders are entitled before any corresponding reduction is made in respect
of the Senior Certificate.
A "Special Hazard Loss" is a loss on a liquidated Mortgage Loan occurring as
a result of a hazard not insured against under a standard hazard insurance
policy of the type described herein under "The Trust Estates--Mortgage Loans--
Insurance Policies." A "Fraud Loss" is a loss on a liquidated Mortgage Loan as
to which there was fraud in the origination of such Mortgage Loan. A
"Bankruptcy Loss" is a loss on a liquidated Mortgage Loan attributable to
certain actions which may be taken by a bankruptcy court in connection with a
Mortgage Loan, including a reduction by a bankruptcy court of the principal
balance of or the interest rate on a Mortgage Loan or an extension of its
maturity. Special 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.
33
<PAGE>
Limited Guarantee
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
Financial Guaranty Insurance Policy or Surety Bond
If so specified in the Prospectus Supplement with respect to a Series of
Certificates credit enhancement may be provided in the form of a financial
guaranty insurance policy or a surety bond issued by an insurer named therein.
Letter of Credit
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of
credit issued with respect to a Series of Certificates will be set forth in the
Prospectus Supplement relating to such Series.
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.
34
<PAGE>
Cross Support
If specified in the applicable Prospectus Supplement, the beneficial
ownership of separate groups of Mortgage Loans included in a Trust Estate may
be evidenced by separate Classes of Certificates. In such case, credit support
may be provided by a cross support feature which requires that distributions be
made with respect to certain Classes from mortgage loan payments that would
otherwise be distributed to Subordinated Certificates evidencing a beneficial
ownership interest in other loan groups within the same Trust Estate. The
applicable Prospectus Supplement for a Series that includes a cross support
feature will describe the specific operation of any such cross support feature.
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, the Master Servicer will be obligated, on or
before each Distribution Date, to pay an amount equal to the lesser of (i) the
aggregate interest shortfall with respect to such Distribution Date resulting
from principal prepayments in full by mortgagors and (ii) the portion of the
Master Servicer's master servicing compensation for such Distribution Date
specified in the applicable Prospectus Supplement. No comparable interest
shortfall coverage will be provided by the Master Servicer with respect to
liquidations of any Mortgage Loans or partial principal payments. Any interest
shortfall arising from prepayments not so covered
35
<PAGE>
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, 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
36
<PAGE>
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, 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 Seller or another person identified therein will have the
option to purchase all, but not less than all, of the Mortgage Loans in any
Trust Estate under the limited conditions specified in such Prospectus
Supplement. For any Series of Certificates for which an election has been made
to treat the Trust Estate (or one or more segregated pools of assets therein)
as a REMIC, any such purchase or repurchase may be effected only pursuant to a
"qualified liquidation," as defined in Code Section 860F(a)(4)(A). See "The
Pooling and Servicing Agreement--Termination; Optional Purchase of Mortgage
Loans."
SERVICING OF THE MORTGAGE LOANS
The following is a summary of certain provisions of the forms of the
Underlying Servicing Agreement and the Pooling and Servicing Agreement that
have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement and Underlying Servicing
Agreements for each Series of Certificates and the applicable Prospectus
Supplement.
THE MASTER SERVICER
The Master Servicer with respect to each Series of Certificates will be
Norwest Bank. See "Norwest Bank" above. The Master Servicer generally will (a)
be responsible under each Pooling and Servicing Agreement for providing general
administrative services for the Trust Estate for any such Series, including,
among other things, (i) for administering and supervising the performance by
the Servicers of their duties and responsibilities under the Underlying
Servicing Agreements, (ii) oversight of payments received on Mortgage Loans,
(iii) monitoring the amounts on deposit in various trust accounts, (iv)
calculation of the amounts payable to Certificateholders on each Distribution
Date, (v) preparation of periodic reports to the Trustee or the
Certificateholders with respect to the foregoing matters, (vi) preparation of
federal and applicable state and local tax and information returns; (vii)
preparation of reports, if any, required under the Securities and Exchange Act
of 1934, as 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
37
<PAGE>
enhancement for such Series, the fees and disbursements of the Trustee and any
custodian, fees due to the independent accountants and expenses incurred in
connection with distributions and reports to Certificateholders. Certain of
these expenses may be reimbursable to the Master Servicer pursuant to the terms
of the applicable Pooling and Servicing Agreement.
Each Prospectus Supplement relating to such a Series of Certificates will
contain information concerning recent delinquency, foreclosure and loan loss
experience on the mortgage loans included in Norwest Mortgage's servicing
portfolio which were originated or acquired by Norwest Mortgage for its own
account or for the account of its affiliates ("Program Loans"), and, if
available, on those Program Loans having payment terms generally similar to
those of the Mortgage Loans in the related Trust Estate. If the related Trust
Estate contains PHMC Mortgage Loans, the related Prospectus Supplement may
contain information concerning PHMC's delinquency, foreclosure and loans loss
experience prior to the PHMC Acquisition. Norwest Mortgage's total servicing
portfolio of Program Loans as of any date may include (and PHMC's servicing
portfolio included) loans having a variety of payment characteristics,
including adjustable rate mortgage loans and loans subject to subsidy
agreements, and the overall delinquency, foreclosure and loan loss experience
of the Program Loans (or PHMC--serviced mortgage loans) taken as a whole may
differ from that of the Mortgage Loans contained in any given Trust Estate and
from that of mortgage servicers generally.
THE SERVICERS
For each Series, Norwest Mortgage and, if specified in the applicable
Prospectus Supplement, one or more other Servicers will provide certain
customary servicing functions with respect to Mortgage Loans pursuant to
separate servicing agreements ("Underlying Servicing Agreements") with the
Seller or an affiliate thereof. The rights of the Seller or such affiliate
under the applicable Underlying Servicing Agreements in respect of the Mortgage
Loans included in the Trust Estate for any such Series will be assigned
(directly or indirectly) to the Trustee for such Series. The Servicers may be
entitled to withhold their Servicing Fees and certain other fees and charges
from remittances of payments received on Mortgage Loans serviced by them.
Each Servicer generally will be approved by FNMA or FHLMC as a servicer of
mortgage loans and must be approved by the Master Servicer. In determining
whether to approve a Servicer, the Master Servicer will review the credit of
the Servicer, including capitalization ratios, liquidity, profitability and
other similar items that indicate financial ability to perform its obligations.
In addition, the 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.
38
<PAGE>
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, as to each Series of Certificates, establish and
maintain a separate trust account in the name of the Trustee (the "Certificate
Account"). Such account may be established at Norwest Bank or an affiliate
thereof. Each such account must be maintained with a depository institution
("Depository") either (i) whose long-term debt obligations (or, in the case of
a depository institution which is part of a holding company structure, the
long-term debt obligations of such parent holding company) are, at the time of
any deposit therein rated in at least one of the two highest rating categories
by each nationally recognized statistical rating organization that rated the
related Series of Certificates, or (ii) that is otherwise acceptable to the
Rating Agency or Rating Agencies rating the Certificates of such Series and, if
a REMIC election has been made, that would not cause the related Trust Estate
(or one or more segregated pools of assets therein) to fail to qualify as a
REMIC. To the extent that the portion of funds deposited in the Certificate
Account at any time exceeds the limit of insurance coverage established by the
Federal Deposit Insurance Corporation (the "FDIC"), such excess will be subject
to loss in the event of the failure of the Depository. Such insurance coverage
will be based on the number of holders of Certificates, rather than the number
of underlying mortgagors. Holders of the Subordinated Certificates of a Series
will bear any such loss up to the amount of principal payments on the related
Mortgage Loans to which such holders are entitled.
Pursuant to the applicable Underlying Servicing Agreements with respect to a
Series, each Servicer will be required to establish and maintain one or more
accounts (collectively, the "Servicer Custodial Account") into which the
Servicer will be required to deposit on a daily basis amounts received with
respect to Mortgage Loans serviced by such Servicer included in the Trust
Estate for such Series, as more fully described below. Each Servicer Custodial
Account must be a separate custodial account insured to the available limits by
the FDIC and limited to funds held with respect to a particular Series, unless
the Underlying Servicing Agreement specifies that a Servicer may establish 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
39
<PAGE>
(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;
(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);
40
<PAGE>
(vii) to pay to itself, the Servicer and the Trustee from net Liquidation
Proceeds allocable to interest, the amount of any unpaid Master Servicing
Fee, Servicing Fees or Trustee Fees and any unpaid assumption fees, late
payment charges or other mortgagor charges on the related Mortgage Loan;
(viii) to withdraw from the Certificate Account any amount deposited in
such account that was not required to be deposited therein; and
(ix) to clear and terminate the Certificate Account.
The Master Servicer will be authorized to appoint a paying agent (the "Paying
Agent") to make distributions, as agent for the Master Servicer, to
Certificateholders of a Series. If the Paying Agent for a Series is the Trustee
of such Series, such Paying Agent will be authorized to make withdrawals from
the Certificate Account in order to make distributions to Certificateholders.
If the Paying Agent for a Series is not the Trustee for such Series, the Master
Servicer will, on each Distribution Date, deposit in immediately available
funds in an account designated by any such Paying Agent the amount required to
be distributed to the Certificateholders on such Distribution Date.
The Master Servicer will cause any Paying Agent that is not the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
agrees with the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Master Servicer for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to Certificateholders
or otherwise disposed of as provided in the applicable Pooling and
Servicing Agreement;
(2) give the Trustee notice of any default by the Master Servicer in the
making of such deposit; and
(3) at any time during the continuance of any such default, upon written
request to the Trustee, forthwith pay to the Trustee all amounts held in
trust by such Paying Agent.
PERIODIC ADVANCES AND LIMITATIONS THEREON
Generally each Servicer will be required to make (i) Periodic Advances to
cover delinquent payments of principal and interest on such Mortgage Loan and
(ii) other advances of cash ("Other Advances" and, collectively with Periodic
Advances, "Advances") to cover (x) delinquent payments of taxes, insurance
premiums, and other escrowed items and (y) rehabilitation expenses and
foreclosure costs, including reasonable attorneys' fees, in either case unless
such Servicer has determined that any subsequent payments on that Mortgage Loan
or from the borrower will ultimately not be available to reimburse such
Servicer for such amounts. The failure of the Servicer to make any required
Periodic Advances or Other Advances under an Underlying Servicing Agreement
constitutes a default under such agreement for which the Servicer will be
terminated. Upon default by a Servicer, other than Norwest Mortgage, the Master
Servicer may, and upon default by Norwest Mortgage the Trustee may, in each
case if so provided in the Pooling and Servicing Agreement, be required to make
Periodic Advances to the extent necessary to make required distributions on
certain Certificates or certain Other Advances, provided that the Master
Servicer or Trustee, as applicable, determines that funds will ultimately be
available to reimburse it. In the case of Certificates of any Series for which
credit enhancement is provided in the form of a mortgage pool insurance policy,
the Seller may obtain an endorsement to the mortgage pool insurance policy
which obligates the Pool Insurer to advance delinquent payments of principal
and interest. The Pool Insurer would only be obligated under such endorsement
to the extent the mortgagor fails to make such payment and the Master Servicer
or Trustee fails to make a required advance.
The advance obligation of the Master Servicer and Trustee may be further
limited to an amount specified by the Rating Agency rating the Certificates.
Any such Periodic Advances by the Servicers or the Master Servicer or Trustee,
as the case may be, must be deposited into the applicable Servicer 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.
41
<PAGE>
Any Periodic Advances made by a Servicer, the Master Servicer or the Trustee
with respect to Mortgage Loans included in the Trust Estate for any Series are
intended to enable the Trustee to make timely payment of the scheduled
distributions of principal and interest on the Certificates of such Series.
However, neither the Master Servicer, the Trustee, any Servicer nor any other
person will, except as otherwise specified in the applicable Prospectus
Supplement, insure or guarantee the Certificates of any Series or the Mortgage
Loans included in the Trust Estate for any Certificates.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will be required by the related Underlying Servicing Agreement
to make reasonable efforts to collect all payments called for under the
Mortgage Loans and, consistent with the applicable Underlying Servicing
Agreement and any applicable agreement governing any form of credit
enhancement, to follow such collection procedures as it follows with respect to
mortgage loans serviced by it that are comparable to the Mortgage Loans.
Consistent with the above, the Servicer may, in its discretion, (i) waive any
prepayment charge, assumption fee, late payment charge or any other charge in
connection with the prepayment of a Mortgage Loan and (ii) arrange with a
mortgagor a schedule for the liquidation of deficiencies running for not more
than 180 days (or such longer period to which the Master Servicer and any
applicable Pool Insurer or primary mortgage insurer have consented) after the
applicable Due Date.
Under each Underlying Servicing Agreement, each Servicer, to the extent
permitted by law, will establish and maintain one or more escrow accounts (each
such account, a "Servicing Account") in which each such Servicer will be
required to deposit any payments made by mortgagors in advance for taxes,
assessments, primary mortgage (if applicable) and hazard insurance premiums and
other similar items. Withdrawals from the Servicing Account may be made to
effect timely payment of taxes, assessments, mortgage and hazard insurance, to
refund to mortgagors amounts determined to be overages, to pay interest to
mortgagors on balances in the Servicing Account, if required, and to clear and
terminate such account. Each Servicer will be responsible for the
administration of its Servicing Account. A Servicer will be obligated to
advance certain amounts which are not timely paid by the mortgagors, to the
extent that it determines, in good faith, that they will be recoverable out of
insurance proceeds, liquidation proceeds, or otherwise. Alternatively, in lieu
of establishing a Servicing Account, a Servicer may procure a performance bond
or other form of insurance coverage, in an amount acceptable to the Master
Servicer and each Rating Agency rating the related Series of Certificates,
covering loss occasioned by the failure to escrow such amounts.
ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to each Mortgage Loan having a fixed interest rate, the
applicable Underlying Servicing Agreement will generally provide that, when any
Mortgaged Property is about to be conveyed by the mortgagor, the Servicer will,
to the extent it has knowledge of such prospective conveyance, exercise its
rights to accelerate the maturity of such Mortgage Loan under the "due-on-sale"
clause applicable thereto, if any, unless it is not exercisable under
applicable law or if such exercise would result in loss of insurance coverage
with respect to such Mortgage Loan or would, in the Servicer's judgment, be
reasonably likely to result in litigation by the mortgagor and such Servicer
has not obtained the Master Servicer's consent to such exercise. In either
case, the Servicer is authorized to take or enter into an assumption and
modification agreement from or with the person to whom such 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.
42
<PAGE>
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. In addition, the Servicer is
authorized under the applicable Underlying Servicing Agreement to permit the
assumption of a defaulted Mortgage Loan rather than to foreclose or accept a
deed-in-lieu of foreclosure if, in the Servicer's judgment, the default is
unlikely to be cured and the assuming borrower meets Norwest Mortgage's
applicable underwriting guidelines. In connection with any such assumption, the
Mortgage Interest Rate and the payment terms of the related Mortgage Note will
not be changed. Each Servicer may also, with the consent of the Master
Servicer, modify the payment terms of Mortgage Loans that are in default, or as
to which default is reasonably foreseeable, that remain in the Trust Estate
rather than foreclose on such Mortgage Loans; provided that no such
modification shall forgive principal owing under such Mortgage Loan or
permanently reduce the interest rate on such Mortgage Loan. Any such
modification will be made only upon the determination by the Servicer and the
Master Servicer that such modification is likely to increase the proceeds of
such Mortgage Loan over the amount expected to be collected pursuant to
foreclosure. See also "The Pooling and Servicing Agreement--Optional
Purchases," above, with respect to the Seller's right to repurchase Mortgage
Loans that are in default, or as to which default is reasonably foreseeable.
Further, a Servicer may encourage the refinancing of such defaulted Mortgage
Loans, including Mortgage Loans that would permit creditworthy borrowers to
assume the outstanding indebtedness.
In the case of foreclosure or of damage to a Mortgaged Property from an
uninsured cause, the Servicer will not be required to expend its own funds to
foreclose or restore any damaged property, unless it reasonably determines (i)
that such foreclosure or restoration will increase the proceeds to
Certificateholders of such Series of liquidation of the Mortgage Loan after
reimbursement to the related Servicer for its expenses and (ii) that such
expenses will be recoverable to it through Liquidation Proceeds or any
applicable insurance policy in respect of such Mortgage Loan. In the event that
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to be reimbursed from the Certificate Account for
such Series an amount equal to all costs and expenses incurred by it.
Norwest Mortgage will not be obligated to, and any other Servicer will not
(except with the express written approval of the Master Servicer), foreclose on
any Mortgaged Property which it believes may be contaminated with or affected
by hazardous wastes or hazardous substances. See "Certain Legal Aspects of the
Mortgage Loans--Environmental Considerations." If a Servicer does not foreclose
on a Mortgaged Property, the Certificateholders of the related Series may
experience a loss on the related Mortgage Loan. A Servicer will not be liable
to the Certificateholders if it fails to foreclose on a Mortgaged Property
which it believes may be so contaminated or affected, even if such 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
43
<PAGE>
the meaning of Code Section 860G(a)(8) or result in the receipt by the Trust
Estate of any "net income from foreclosure property" within the meaning of Code
Section 860G(c)(2), respectively. In general, this would preclude the holding
of the Mortgaged Property by a party acting as a dealer in such property or the
receipt of rental income based on the profits of the lessee of such property.
See "Certain Federal Income Tax Consequences."
INSURANCE POLICIES
Each Underlying Servicing Agreement will require the related Servicer to
cause to be maintained for each Mortgage Loan a standard hazard insurance
policy issued by a generally acceptable insurer insuring the improvements on
the Mortgaged Property underlying such Mortgage Loan against loss by fire, with
extended coverage (a "Standard Hazard Insurance Policy"). The Underlying
Servicing Agreements will require that such Standard Hazard Insurance Policy be
in an amount at least equal to the lesser of 100% of the insurable value of the
improvements on the Mortgaged Property or the principal balance of such
Mortgage Loan; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Each Servicer will also maintain on property acquired
upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, a
Standard Hazard Insurance Policy in an amount that is at least equal to the
lesser of 100% of the insurable value of the improvements which are a part of
such property or the principal balance of such Mortgage Loan plus accrued
interest and liquidation expenses; provided, however, that such insurance may
not be less than the minimum amount required to fully compensate for any damage
or loss on a replacement cost basis. Any amounts collected under any such
policies (other than amounts to be applied to the restoration or repair of the
Mortgaged Property or released to the borrower in accordance with normal
servicing procedures) will be deposited in the Servicer Custodial Account for
remittance to the Certificate Account by a Servicer.
The Standard Hazard Insurance Policies covering the Mortgage Loans generally
will cover physical damage to, or destruction of, the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm,
hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Because the Standard Hazard Insurance
Policies 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.
44
<PAGE>
FIXED RETAINED YIELD, SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Fixed Retained Yield with respect to any Mortgage Loan is that portion, if
any, of interest at the Mortgage Interest Rate that is not included in the
related Trust Estate. The Prospectus Supplement for a Series will specify
whether there is any Fixed Retained Yield with respect to the Mortgage Loans of
such Series. If so, the Fixed Retained Yield will be established on a loan-by-
loan basis and will be specified in the schedule of Mortgage Loans attached as
an exhibit to the applicable Pooling and Servicing Agreement. Norwest Mortgage
as Servicer may deduct the Fixed Retained Yield from mortgagor payments as
received or deposit such payments in the Servicer Custodial Account or
Certificate Account for such Series and then either withdraw the Fixed Retained
Yield from the Servicer Custodial Account or Certificate Account or request the
Master Servicer to withdraw the Fixed Retained Yield from the Certificate
Account for remittance to Norwest Mortgage. In the case of any Fixed Retained
Yield with respect to Mortgage Loans serviced by a Servicer other than Norwest
Mortgage, the Master Servicer will make withdrawals from the Certificate
Account for the purpose of remittances to Norwest Mortgage as owner of the
Fixed Retained Yield. Notwithstanding the foregoing, with respect to any
payment of interest received by Norwest Mortgage as Servicer relating to a
Mortgage Loan (whether paid by the mortgagor or received as Liquidation
Proceeds, insurance proceeds or otherwise) which is less than the full amount
of interest then due with respect to such Mortgage Loan, the owner of the Fixed
Retained Yield with respect to such Mortgage Loan will bear a ratable share of
such interest shortfall.
For each Series of Certificates, each Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans serviced by such Servicer until
termination of the applicable Underlying Servicing Agreement. A Servicer, at
its election, will pay itself the Servicing Fee for a Series with respect to
each Mortgage Loan by (a) withholding the Servicing Fee from any scheduled
payment of interest prior to deposit of such payment in the Servicer Custodial
Account for such Series or (b) withdrawing the Servicing Fee from the Servicer
Custodial Account after the entire interest payment has been deposited in such
account. A Servicer may also pay itself out of the Liquidation Proceeds of a
Mortgage Loan or other recoveries with respect thereto, or withdraw from the
Servicer Custodial Account or request the Master Servicer to withdraw from the
Certificate Account for remittance to the Servicer such amounts after the
deposit thereof in such accounts, or if such Liquidation Proceeds or other
recoveries are insufficient, from Net Foreclosure Profits with respect to the
related Distribution Date the Servicing Fee in respect of such Mortgage Loan to
the extent provided in the applicable Pooling and Servicing Agreement. The
Servicing Fee or the range of Servicing Fees with respect to the Mortgage Loans
underlying the Certificates of a Series will be specified in the applicable
Prospectus Supplement. Additional servicing compensation in the form of
prepayment charges, assumption fees, late payment charges or otherwise will be
retained by the Servicers.
Each Servicer will pay all expenses incurred in connection with the servicing
of the Mortgage Loans serviced by such Servicer underlying a Series, including,
without limitation, payment of the hazard insurance policy premiums. The
Servicer will be entitled, in certain circumstances, to reimbursement from the
Certificate Account of Periodic Advances, of Other Advances made by it to pay
taxes, insurance premiums and similar items with respect to any Mortgaged
Property or for expenditures incurred by it in connection with the restoration,
foreclosure or liquidation of any Mortgaged Property (to the extent of
Liquidation Proceeds or insurance policy proceeds in respect of such Mortgaged
Property) and of certain losses against which it is indemnified by the Trust
Estate.
As set forth in the preceding paragraph, a Servicer may be entitled to
reimbursement for certain expenses incurred by it, and payment of additional
fees for certain extraordinary services rendered by it (provided that such fees
do not exceed those which would be charged by third parties for similar
services) in connection with the liquidation of defaulted Mortgage Loans and
related Mortgaged Properties. In the event that claims are either not made or
are not fully paid from any applicable form of credit enhancement, the related
Trust Estate will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicing Fee and the expenses of the Servicer, are less
than the principal balance of the related Mortgage Loan.
EVIDENCE AS TO COMPLIANCE
Each Servicer will deliver annually to the Trustee or Master Servicer, as
applicable, on or before the date specified in the applicable Underlying
Servicing Agreement, an Officer's Certificate stating that (i) a review of the
activities of such Servicer during the preceding calendar year and of
performance under the applicable Underlying Servicing Agreement has been made
under the supervision of such officer, and (ii) to the best of such officer's
knowledge, based on such review, such Servicer has fulfilled all its
obligations under the applicable Underlying Servicing Agreement throughout such
year, or, if there has been a default in the
45
<PAGE>
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof. Such Officer's Certificate shall be
accompanied by a statement of a firm of independent public accountants to the
effect that, on the basis of an examination of certain documents and records
relating to a random sample of the mortgage loans being serviced by such
Servicer pursuant to such Underlying Servicing Agreement and/or other similar
agreements, conducted substantially in compliance with the Uniform Single Audit
Program for Mortgage Bankers, the servicing of such mortgage loans was
conducted in compliance with the provisions of the applicable Underlying
Servicing Agreement and other similar agreements, except for (i) such
exceptions as such firm believes to be immaterial and (ii) such other
exceptions as are set forth in such statement.
The Master Servicer will deliver annually to the Trustee, on or before the
date specified in the applicable Pooling and Servicing Agreement, an Officer's
Certificate stating that such officer has received, with respect to each
Servicer, the Officer's Certificate and accountant's statement described in the
preceding paragraph, and, that on the basis of such officer's review of such
information, each Servicer has fulfilled all its obligations under the
applicable Underlying Servicing Agreement throughout such year, or, if there
has been a default in the fulfillment of any such obligation, specifying each
such default known to such officer and the nature and status thereof.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Master Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series without the consent of the
Trustee, except upon its determination that its duties thereunder are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature carried on by it.
No such resignation will become effective until the Trustee for such Series or
a successor master servicer has assumed the Master Servicer's obligations and
duties under the Pooling and Servicing Agreement. If the Master Servicer
resigns for any of the foregoing reasons and the Trustee is unable or unwilling
to assume responsibility for its duties under the Pooling and Servicing
Agreement, it may appoint another institution to so act as described under "The
Pooling and Servicing Agreement--Rights Upon Event of Default" below.
The Pooling and Servicing Agreement will also provide that neither the Master
Servicer nor any subcontractor, nor any partner, director, officer, employee or
agent of any of them, will be under any liability to the Trust Estate or the
Certificateholders, for the taking of any action or for refraining from the
taking of any action in good faith pursuant to the Pooling and Servicing
Agreement, or for errors in judgment; provided, however, that neither the
Master Servicer, any subcontractor, nor any such person will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of his or its
duties or by reason of reckless disregard of his or its obligations and duties
thereunder. The Pooling and Servicing Agreement will further provide that the
Master Servicer, any subcontractor, and any partner, director, officer,
employee or agent of either of them shall be entitled to indemnification by the
Trust Estate and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Pooling and
Servicing Agreement or the Certificates, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross
negligence in the performance of his or its duties thereunder or by reason of
reckless disregard of his or its obligations and duties thereunder. In
addition, the Pooling and Servicing Agreement will provide that the Master
Servicer will not be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its duties under the Pooling and
Servicing Agreement and that in its opinion may involve it in any expense or
liability. The Master Servicer may, however, in its discretion, undertake any
such action deemed by it necessary or desirable with respect to the Pooling and
Servicing Agreement and the rights and duties of the parties thereto and the
interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust Estate and the Master Servicer
will be entitled to be reimbursed therefor out of the Certificate Account, and
any loss to the Trust Estate arising from such right of reimbursement will be
allocated first to the Subordinated Certificate of a Series before being
allocated to the related Senior Certificates, or if such Series does not
contain Subordinated Certificates, pro rata among the various Classes of
Certificates unless otherwise specified in the applicable Pooling and Servicing
Agreement.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger, conversion or consolidation to which the
Master Servicer is a party, or any person succeeding to the business through
the transfer of substantially all of its assets or all assets relating to such
business, or otherwise, of the Master Servicer will be the successor of the
Master Servicer under the Pooling and Servicing Agreement for each Series
provided that such successor or resulting entity has a net worth of not less
than $15,000,000 and is qualified to service mortgage loans for FNMA or FHLMC.
46
<PAGE>
The Master Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each
Series; provided that, if the Master Servicer desires to be released from its
obligations under the Pooling and Servicing Agreement, (i) the purchaser or
transferee accepting such assignment or delegation is qualified to service
mortgage loans for FNMA or FHLMC, (ii) the purchaser is satisfactory to the
Trustee for such Series, in the reasonable exercise of its judgment, and
executes and delivers to the Trustee an agreement, in form and substance
reasonably satisfactory to the Trustee, which contains an assumption by such
purchaser or transferee of the due and punctual performance and observance of
each covenant and condition to be performed or observed by the Master Servicer
under the Pooling and Servicing Agreement from and after the date of such
agreement; and (iii) each applicable Rating Agency's rating of any Certificates
for such Series in effect immediately prior to such assignment, sale or
transfer would not be qualified, downgraded or withdrawn as a result of such
assignment, sale or transfer and the Certificates would not be placed on credit
review status by any such Rating Agency. The Master Servicer will be released
from its obligations under the Pooling and Servicing Agreement upon any such
assignment and delegation, except that the Master Servicer will remain liable
for all liabilities and obligations incurred by it prior to the time that the
conditions contained in clauses (i), (ii) and (iii) above are met.
THE POOLING AND SERVICING AGREEMENT
ASSIGNMENT OF MORTGAGE LOANS TO THE TRUSTEE
The Seller will have acquired the Mortgage Loans included in each Trust
Estate from Norwest Mortgage pursuant to an agreement (the "Norwest Mortgage
Sale Agreement"). In connection with the conveyance of the Mortgage Loans to
the Seller, Norwest Mortgage will (i) agree to deliver to the Seller all of the
documents which the Seller is required to deliver to the Trustee; (ii) make
certain representations and warranties to the Seller which will be the basis of
certain of the Seller's representations and warranties to the Trustee or assign
the representations and warranties made by a Correspondent to Norwest Mortgage;
and (iii) agree to repurchase or substitute (or assign rights to a comparable
agreement of a Correspondent) for any Mortgage Loan for which any document is
not delivered or is found to be defective in any material respect, or which
Mortgage Loan is discovered at any time not to be in conformance with any
representation and warranty Norwest Mortgage has made to the Seller and the
breach of such representation and warranty materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan, if Norwest
Mortgage cannot deliver such document or cure such defect or breach within 60
days after notice thereof. Such agreement will inure to the benefit of the
Trustee and is intended to help ensure the Seller's performance of its limited
obligation to repurchase or substitute for Mortgage Loans. See "The Mortgage
Loan Programs--Representations and Warranties" above.
At the time of issuance of each Series of Certificates, the Mortgage Loans in
the related Trust Estate will, pursuant to the applicable Pooling and Servicing
Agreement, be assigned to the Trustee, together with all principal and interest
received on or with respect to such Mortgage Loans after the applicable Cut-Off
Date other than principal and interest due and payable on or before such Cut-
Off Date and interest attributable to the Fixed Retained Yield on such Mortgage
Loans, if any. See "Servicing of the Mortgage Loans--Fixed Retained Yield,
Servicing Compensation and Payment of Expenses." The Trustee or its agent will,
concurrently with such assignment, authenticate and deliver the Certificates
evidencing such Series to the Seller in exchange for the Mortgage Loans. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
applicable Pooling and Servicing Agreement. Each such schedule will include,
among other things, the unpaid principal balance as of the close of business on
the applicable Cut-Off Date, the maturity date and the Mortgage Interest Rate
for each Mortgage Loan in the related Trust Estate.
In addition, with respect to each Mortgage Loan in a Trust Estate, the
mortgage or other promissory note or a lost note affidavit executed by the
applicable Servicer, 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.
47
<PAGE>
The Trustee or custodian will hold such documents in trust for the benefit of
Certificateholders of the related Series and will review such documents within
180 days of the date of the applicable Pooling and Servicing Agreement. If any
document is not delivered or is found to be defective in any material respect,
or if the Seller is in breach of any of its representations and warranties, and
such breach materially and adversely affects the interests of the
Certificateholders in a Mortgage Loan, and the Seller cannot deliver such
document or cure such defect or breach within 60 days after written notice
thereof, the Seller will, within 60 days of such notice, either repurchase the
related Mortgage Loan from the Trustee at a price equal to the then unpaid
principal balance thereof, plus accrued and unpaid interest at the applicable
Mortgage Interest Rate (minus any Fixed Retained Yield) through the last day of
the month in which such repurchase takes place, or (in the case of a Series for
which one or more REMIC elections have been or will be made, unless the maximum
period as may be provided by the Code or applicable regulations of the
Department of the Treasury ("Treasury Regulations") shall have elapsed since
the execution of the applicable Pooling and Servicing Agreement) substitute for
such Mortgage Loan a new mortgage loan having characteristics such that the
representations and warranties of the Seller made pursuant to the applicable
Pooling and Servicing Agreement (except for representations and warranties as
to the correctness of the applicable schedule of mortgage loans) would not have
been incorrect had such substitute Mortgage Loan originally been a Mortgage
Loan. In the case of a repurchased Mortgage Loan, the purchase price will be
deposited by the Seller in the related Certificate Account. In the case of a
substitute Mortgage Loan, the mortgage file relating thereto will be delivered
to the Trustee or the custodian and the Seller will deposit in the Certificate
Account, an amount equal to the excess of (i) the unpaid principal balance of
the Mortgage Loan which is substituted for, over (ii) the unpaid principal
balance of the substitute Mortgage Loan, together with interest on such excess
at the Mortgage Interest Rate (minus any Fixed Retained Yield) to the next
scheduled Due Date of the Mortgage Loan which is being substituted for. In no
event will any substitute Mortgage Loan have an unpaid principal balance
greater than the scheduled principal balance calculated in accordance with the
amortization schedule (the "Scheduled Principal Balance") of the Mortgage Loan
for which it is substituted (after giving effect to the scheduled principal
payment due in the month of substitution on the Mortgage Loan substituted for),
or a term greater than, a Mortgage Interest Rate less than, a Mortgage Interest
Rate more than one percent per annum greater than or a Loan-to-Value Ratio
greater than, the Mortgage Loan for which it is substituted. If substitution is
to be made for an adjustable rate Mortgage Loan, the substitute Mortgage Loan
will have an unpaid principal balance no greater than the Scheduled Principal
Balance of the Mortgage Loan for which it is substituted (after giving effect
to the scheduled principal payment due in the month of substitution on the
Mortgage Loan substituted for), a Loan-to-Value Ratio less than or equal to,
and a Mortgage Interest Rate at least equal to, that of the Mortgage Loan for
which it is substituted, and will bear interest based on the same index, margin
and frequency of adjustment as the substituted Mortgage Loan. The repurchase
obligation and the mortgage substitution referred to above will constitute the
sole remedies available to the Certificateholders or the Trustee with respect
to missing or defective documents or breach of the Seller's representations and
warranties.
If no custodian is named in the Pooling and Servicing Agreement, the Trustee
will be authorized to appoint a custodian to maintain possession of the
documents relating to the Mortgage Loans and to conduct the review of such
documents described above. Any custodian so appointed will keep and review such
documents as the Trustee's agent under a custodial agreement.
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
48
<PAGE>
related Mortgage Loans and the aggregate unpaid principal balance of the
Mortgage Loans evidenced by each Class after giving effect to the principal
distributions on such Distribution Date;
(ii) the amount of servicing compensation with respect to the related
Trust Estate and such other customary information as is required to enable
Certificateholders to prepare their tax returns;
(iii) the amount by which the Servicing Fee for the related Distribution
Date has been reduced by interest shortfalls due to prepayments;
(iv) the aggregate amount of any Periodic Advances by the Servicer, the
Master Servicer or the Trustee included in the amounts actually distributed
to the Certificateholders;
(v) to each holder of a Certificate entitled to the benefits of payments
under any form of credit enhancement or from any Reserve Fund:
(a) the amounts so distributed under any such form of credit
enhancement or from any such Reserve Fund on the applicable Distribution
Date; and
(b) the amount of coverage remaining under any such form of credit
enhancement and the balance in any such Reserve Fund, after giving
effect to any payments thereunder and other amounts charged thereto on
the Distribution Date;
(vi) in the case of a Series of Certificates with a variable Pass-Through
Rate, such Pass-Through Rate;
(vii) the book value of any collateral acquired by the Trust Estate
through foreclosure or otherwise;
(viii) the unpaid principal balance of any Mortgage Loan as to which the
Servicer has notified the Master Servicer that such Servicer has determined
not to foreclose because it believes the related Mortgaged Property may be
contaminated with or affected by hazardous wastes or hazardous substances;
and
(ix) the number and aggregate principal amount of Mortgage Loans one
month, two months and three or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer will furnish either directly, or through the
Trustee, a report to each Certificateholder of record at any time during such
calendar year such information as required by the Code and applicable
regulations thereunder to enable Certificateholders to prepare their tax
returns. In the event that an election has been made to treat the Trust Estate
(or one or more segregated pools of assets therein) as 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
49
<PAGE>
Servicer indicating its insolvency, reorganization or inability to pay its
obligations and (iv) it and any subservicer appointed by it becoming ineligible
to service for both FNMA and FHLMC (unless remedied within 90 days). (Section
7.01).
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series or holders of
Certificates of such Series evidencing not less than 66 2/3% of the Voting
Interests in the Trust Estate for such Series may terminate all of the rights
and obligations of the Master Servicer under the Pooling and Servicing
Agreement and in and to the Mortgage Loans (other than the Master Servicer's
right to recovery of the aggregate Master Servicing Fees due prior to the date
of termination, and other expenses and amounts advanced pursuant to the terms
of the Pooling and Servicing Agreement, which rights the Master Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under the
Pooling and Servicing Agreement and will be entitled to monthly compensation
not to exceed the aggregate Master Servicing Fees together with the other
compensation to which the Master Servicer is entitled under the Pooling and
Servicing Agreement. In the event that the Trustee is unwilling or unable so to
act, it may select, pursuant to the public bid procedure described in the
applicable Pooling and Servicing Agreement, or petition a court of competent
jurisdiction to appoint, a housing and home finance institution, bank or
mortgage servicing institution with a net worth of at least $10,000,000 to act
as successor to the Master Servicer under the provisions of the Pooling and
Servicing Agreement; provided however, that until such a successor Master
Servicer is appointed and has assumed the responsibilities, duties and
liabilities of the Master Servicer under the Pooling and Servicing Agreement,
the Trustee shall continue as the successor to the Master Servicer as described
above. In the event such public bid procedure is utilized, the successor would
be entitled to compensation in an amount equal to the aggregate Master
Servicing Fees, together with the other compensation to which the Master
Servicer is entitled under the Pooling and Servicing Agreement, and the Master
Servicer would be entitled to receive the net profits, if any, realized from
the sale of its rights and obligations under the Pooling and Servicing
Agreement. (Sections 7.01 and 7.05).
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Certificateholders of such Series, and
holders of Certificates evidencing not less than 25% of the Voting Interests
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon the Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or
powers unless such Certificateholders have offered the Trustee reasonable
security or indemnity against the cost, expenses and liabilities which may be
incurred by the Trustee thereby. Also, the Trustee may decline to follow any
such direction if the Trustee determines that the action or proceeding so
directed may not lawfully be taken or would involve it in personal liability or
be unjustly prejudicial to the non-assenting Certificateholders. (Sections 7.02
and 7.03).
No Certificateholder of a Series, solely by virtue of such holder's status as
a Certificateholder, will have any right under the Pooling and Servicing
Agreement for such Series to institute any proceeding with respect to the
Pooling and Servicing Agreement, unless such holder previously has given to the
Trustee for such Series written notice of default and unless the holders of
Certificates evidencing not less than 25% of the Voting Interests for such
Series have made written request upon the Trustee to institute such proceeding
in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity and the Trustee for 60 days has neglected or refused to
institute any such proceeding. (Section 10.03).
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Seller, the Master
Servicer and the Trustee without the consent of the Certificateholders, (i) to
cure any ambiguity or mistake, (ii) to correct or supplement any provision
therein that may be inconsistent with any other provision therein, (iii) to
modify, eliminate or add to any of its provisions to such extent as shall be
necessary to maintain the qualification of the Trust Estate (or one or more
segregated pools of assets therein) as a REMIC at all times that any
Certificates are outstanding or to avoid or minimize the risk of the imposition
of any tax on the Trust Estate pursuant to the Code that would be a claim
against the Trust Estate, provided that the Trustee has received an opinion of
counsel to the effect that such action is necessary or desirable to maintain
such qualification or to avoid or minimize the risk of the imposition of any
such tax and such action will not, as evidenced by such opinion of counsel,
adversely affect in any material respect the interests of any
Certificateholder, (iv) to change the timing and/or nature of deposits into the
Certificate Account, provided that such change
50
<PAGE>
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 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.
51
<PAGE>
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 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
52
<PAGE>
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.
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
53
<PAGE>
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the tenant-
stockholder is generally responsible for the deficiency. See "--Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust and/or foreclosure of
a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to delay the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
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.
54
<PAGE>
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11
U.S.C. Sections 101 et seq., (the "Bankruptcy Code") may interfere with or
affect the ability of the Seller to obtain payment of a Mortgage Loan, to
realize upon collateral and/or enforce a deficiency judgment. For example,
under federal bankruptcy law, virtually all actions (including foreclosure
actions and deficiency judgment proceedings) are automatically stayed upon the
filing of a bankruptcy petition, and often no interest or principal payments
are made during the course of the bankruptcy proceeding. In a case under the
Bankruptcy Code, the secured party is precluded from foreclosing without
authorization from the bankruptcy court. In addition, a court with federal
bankruptcy jurisdiction may permit a debtor through his or her Chapter 11 or
Chapter 13 plan to cure a monetary default in respect of a Mortgage Loan by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court
(provided no foreclosure sale had yet occurred) prior to the filing of the
debtor's petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
If a Mortgage Loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits such Mortgage
Loan to be modified. Such modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment
schedule, and reducing the lender's security interest to the value of the
property, thus leaving the lender in the position of a general unsecured
creditor for the difference between the value of the property and the
outstanding balance of the Mortgage Loan. Some courts have permitted such
modifications when the Mortgage Loan is secured both by the debtor's principal
residence and by personal property.
If a court relieves a borrower's obligation to repay amounts otherwise due on
a Mortgage Loan, the Servicer will not be required to advance such amounts, and
any loss in respect thereof will be borne by the Certificateholders.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage or deed of trust. The laws of some
states provide priority to certain tax liens over the lien of the mortgage or
deed of trust. Numerous federal and some state consumer protection laws impose
substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. These laws include
the federal Truth in Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes and regulations. These federal laws and state laws impose
specific statutory liabilities upon lenders who originate or service mortgage
loans and who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the mortgage loans.
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.
55
<PAGE>
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain
states, environmental contamination on a property may give rise to a lien on
the property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("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.
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, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the 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.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to contamination on
the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may
held strictly, jointly and severally liable for environmental remediation
and/or damages at those off-site locations. Many states also have laws that are
similar to CERCLA. Liability under CERCLA or under similar state law could
exceed the value of the property itself as well as the aggregate assets of the
property owner.
The law is unclear as to whether and under what precise 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," 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 to the extent that a
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 suggested 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 were 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.
56
<PAGE>
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. However, 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 was, until recently, very
unclear.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law the Asset Conservation Lender Liability and Deposit
Insurance Protection Act of 1996 (the "Asset Conservation Act"). The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute "participation in management" and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not trigger liability, provided, however, that
such activities did not otherwise rise to the level of "participation in
management." The Asset Conservation Act specifically reverses the Fleet Factors
"capacity to influence" standard. The Asset Conservation Act also provides
additional protection against liability in the event of foreclosure. However,
since the courts have not yet had the opportunity to interpret the new
statutory provisions, the scope of the additional protections offered by the
Asset Conservation Act is not fully defined. It also is important to note that
the Asset Conservation Act does not offer complete protection to lenders and
that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an action
for contribution against the owner or operator who created the environmental
contamination or against some other liable party, but that person or entity may
be bankrupt or otherwise judgment-proof. It is therefore possible that cleanup
or other environmental liability costs could become a liability of the Trust
Estate and occasion a loss to the Trust Estate and to Certificateholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to
any mortgaged property prior to the origination of the mortgage loan or prior
to foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, neither
the Seller, Norwest Mortgage nor Norwest Funding has made such evaluations
prior to the origination of the Mortgage Loans, nor does Norwest Mortgage or
Norwest Funding require that such evaluations be made by originators who have
sold the Mortgage Loans to Norwest Mortgage. Neither the Seller nor Norwest
Mortgage is required to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Neither the Seller nor the Master
Servicer makes any representations or warranties or assumes any liability with
respect to: the environmental condition of such Mortgaged Property; the
absence, presence or effect of hazardous wastes or hazardous substances on any
Mortgaged Property; any casualty resulting from the presence or effect of
hazardous wastes or hazardous substances on, near or emanating from such
Mortgaged Property; the impact on Certificateholders of any environmental
condition or presence of any substance on or near such Mortgaged Property; or
the compliance of any Mortgaged Property with any environmental laws, nor is
any agent, person or entity otherwise affiliated with the Seller authorized or
able to make any such representation, warranty or assumption of liability
relative to any such Mortgaged Property. 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
57
<PAGE>
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 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.
58
<PAGE>
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary,
such as the borrower failing to adequately maintain the property or the
borrower executing a second mortgage or deed of trust affecting the property.
In other cases, some courts have been faced with the issue of whether federal
or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under the deeds of trust receive
notices in addition to the statutorily-prescribed minimum requirements. For
the most part, these cases have upheld the notice provisions as being
reasonable or have found that the sale by a trustee under a deed of trust or
under a mortgage having a power of sale does not involve sufficient state
action to afford constitutional protections to the borrower.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion represents the opinion of Cadwalader,
Wickersham & Taft as to the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
discussion below does not purport to address all federal income tax
consequences that may be applicable to particular categories of investors,
some of which may be subject to special rules. The authorities on which this
discussion is based are subject to change or differing interpretations, and
any such change or interpretation could apply retroactively. This discussion
reflects the applicable provisions of the Code, as well as regulations (the
"REMIC Regulations") promulgated by the U.S. Department of the Treasury on
December 23, 1992. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them
of the purchase, ownership and disposition of Certificates.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a Fixed Retained Yield with respect to the Mortgage Loans of a
Series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Estate that does
not include the Fixed Retained Yield. References to a "Holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of
a Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may be made
to treat the Trust Estate or one or more segregated pools of assets therein as
one or more REMICs within the meaning of Code Section 860D. A Trust Estate or
a portion or portions thereof as to which one or more REMIC elections will be
made will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. With respect to each Series of REMIC Certificates,
Cadwalader, Wickersham & Taft, counsel to the Seller, has advised the Seller
that in the firm's opinion, assuming (i) the making of an appropriate
election, (ii) compliance with the Pooling and Servicing Agreement, and (iii)
compliance with any changes in the law, including any amendments to the Code
or applicable Treasury regulations thereunder, each REMIC Pool will qualify as
a REMIC. In such case, the Regular Certificates will be considered to be
"regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt instruments,
and the Residual Certificates will be considered to be "residual interests" in
the REMIC Pool. The Prospectus Supplement for each Series of Certificates will
indicate whether one or more REMIC elections with respect to the related Trust
Estate will be made, in which event references to "REMIC" or "REMIC Pool"
herein shall be deemed to refer to each such REMIC Pool.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would
59
<PAGE>
be treated as "loans......secured by an interest in real property which is . . .
residential real property'' within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C).
REMIC Certificates held by a real estate investment trust will constitute
""real estate assets'' within the meaning of Code Section 856(c)(5)(A), and
interest on the Regular Certificates and income with respect to Residual
Certificates will be considered ""interest on obligations secured by mortgages
on real property or on interests in real property'' within the meaning of Code
Section 856(c)(3)(B) in the same proportion that, for both purposes, the assets
of the REMIC Pool would be so treated. If at all times 95% or more of the
assets of the REMIC Pool qualify for each of the foregoing treatments, the
REMIC Certificates will qualify for the corresponding status in their entirety.
For purposes of Code Section 856(c)(5)(A), payments of principal and interest
on the Mortgage Loans that are reinvested pending distribution to holders of
REMIC Certificates qualify for such treatment. Where two REMIC Pools are a part
of a tiered structure they will be treated as one REMIC for purposes of the
tests described above respecting asset ownership of more or less than 95%. In
addition, if the assets of the REMIC include Buy-Down Loans, it is possible
that the percentage of such assets constituting ""loans . . . secured by an
interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related Buy-Down Funds. REMIC Certificates held by a regulated
investment company will not constitute "Government securities" within the
meaning of Code Section 851(b)(4)(A)(i). REMIC Certificates held by certain
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Code Section 582(c)(1). The Small Business Job Protection Act of
1996 (the "SBJPA of 1996") repealed the reserve method for bad debts of
domestic building and loan associations and mutual savings banks, and thus has
eliminated the asset category of "qualifying real property loans" in former
Code Section 593(d) for taxable years beginning after December 31, 1995. The
requirement in the SBJPA of 1996 that such institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a certain portion
of their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if such loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the Mortgage Loans
of any Series meeting this requirement, and no representation is made in this
regard.
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at
all times thereafter, may consist of assets other than "qualified mortgages"
and "permitted investments." The REMIC Regulations provide a safe harbor
pursuant to which the de minimis requirement will be met if at all times the
aggregate adjusted basis of the nonqualified assets is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets. An entity that fails
to meet the safe harbor may nevertheless demonstrate that it holds no more than
a de minimis amount of nonqualified assets. A REMIC Pool also must provide
"reasonable arrangements" to prevent its residual interests from being held by
"disqualified 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
60
<PAGE>
not sold or, if within two years of the Startup Day, exchanged, within 90 days
of discovery, ceases to be a qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC
Pool. A qualified reserve asset is any intangible property held for investment
that is part of any reasonably required reserve maintained by the REMIC Pool to
provide for payments of expenses of the REMIC Pool or amounts due on the
regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from the
assets in such fund for the year is derived from the sale or other disposition
of property held for less than three months, unless required to prevent a
default on the regular interests caused by a default on one or more qualified
mortgages. A reserve fund must be reduced "promptly and appropriately" as
payments on the Mortgage Loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally held for not more than two years,
with extensions granted by the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests
or (ii) a single class of residual interests on which distributions, if any,
are made pro rata. A regular interest is an interest in a REMIC Pool that is
issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified mortgages. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of the total interest, or a qualified variable rate, inverse
variable rate or difference between two fixed or qualified variable rates on
some or all of the qualified mortgages. The specified principal amount of a
regular interest that provides for interest payments consisting of a specified,
nonvarying portion of interest payments on qualified mortgages may be zero. A
residual interest is an interest in a REMIC Pool other than a regular interest
that is issued on the Startup Day and that is designated as a residual
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.
61
<PAGE>
Original Issue Discount
Compound Interest Certificates will be, and other classes of Regular
Certificates may be, issued with "original issue discount" within the meaning
of Code Section 1273(a). Holders of any Class or Subclass of Regular
Certificates having original issue discount generally must include original
issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, in advance of receipt of the cash attributable to
such income. The following discussion is based in part on temporary and final
Treasury regulations issued on February 2, 1994, as amended on June 14, 1996,
(the "OID Regulations") under Code Sections 1271 through 1273 and 1275 and in
part on the provisions of the 1986 Act. Regular Certificateholders should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Regular Certificates. To
the extent such issues are not addressed in such regulations, the Seller
intends to apply the methodology described in the Conference Committee Report
to the 1986 Act. No assurance can be provided that the Internal Revenue Service
will not take a different position as to those matters not currently addressed
by the OID Regulations. Moreover, the OID Regulations include an anti-abuse
rule allowing the Internal Revenue Service to apply or depart from the OID
Regulations where necessary or appropriate to ensure a reasonable tax result in
light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Investors are advised to consult their own tax advisors as to the discussion
herein and the appropriate method for reporting interest and original issue
discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Certificateholder or by random lot (a "Non-Pro Rata Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over
its "issue price." The issue price of a Class of Regular Certificates offered
pursuant to this Prospectus generally is the first price at which a substantial
amount of such Class is sold to the public (excluding bond houses, brokers and
underwriters). Although unclear under the OID Regulations, the Seller intends
to treat the issue price of a Class as to which there is no substantial sale as
of the issue date or that is retained by the Seller as the fair market value of
that Class as of the issue date. The issue price of a Regular Certificate also
includes any amount paid by an initial Regular Certificateholder for accrued
interest that relates to a period prior to the issue date of the Regular
Certificate, unless the Regular Certificateholder elects on its federal income
tax return to exclude such amount from the issue price and to recover it on the
first Distribution Date. The stated redemption price at maturity of a Regular
Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest." Under the OID
Regulations, qualified stated interest generally means interest payable at a
single fixed rate or a qualified variable rate (as described below) provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term of the Regular Certificate. Because there
is no penalty or default remedy in the case of nonpayment of interest with
respect to a Regular Certificate, it is possible that no interest on any Class
of Regular Certificates will be treated as qualified stated interest. However,
except as provided in the following three sentences or in the applicable
Prospectus Supplement, because the underlying Mortgage Loans provide for
remedies in the event of default, the Seller intends to treat interest with
respect to the Regular Certificates as qualified stated interest. Distributions
of interest on a Compound Interest Certificate, or on other Regular
Certificates with respect to which deferred interest will accrue, will not
constitute qualified stated interest, in which case the stated redemption price
at maturity of such Regular Certificates includes all distributions of interest
as well as principal thereon. Likewise, the Seller intends to treat an
interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Certificate is shorter than the
interval between subsequent Distribution Dates, the interest attributable to
the additional days will be included in the stated redemption price at
maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of full
years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Regular
Certificate and the denominator of which is the stated redemption price at
maturity of the Regular Certificate. The Conference Committee Report to
62
<PAGE>
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.
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.
63
<PAGE>
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under
the constant yield method, as described below under the heading "Election to
Treat All Interest Under the Constant Yield Method."
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance
by more than a specified amount and (ii) the interest compounds or is payable
at least annually at current values of (a) one or more "qualified floating
rates," (b) a single fixed rate and one or more qualified floating rates, (c) a
single "objective rate," or (d) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate." A floating rate is a qualified
floating rate if variations in the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds, where such rate
is subject to a fixed multiple that is greater than 0.65 but not more than
1.35. Such rate may also be increased or decreased by a fixed spread or subject
to a fixed cap or floor, or a cap or floor that is not reasonably expected as
of the issue date to affect the yield of the instrument significantly. An
objective rate is any rate (other than a qualified floating rate) that is
determined using a single fixed formula and that is based on objective
financial or economic information, provided that such information is not (i)
within the control of the issuer or a related party or (ii) unique to the
circumstances of the issuer or a related party. A qualified inverse floating
rate is a rate equal to a fixed rate minus a qualified floating rate that
inversely reflects contemporaneous variations in the cost of newly borrowed
funds; an inverse floating rate that is not a qualified inverse floating rate
may nevertheless be an objective rate. A Class of Regular Certificates may be
issued under this Prospectus that does not have a variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding such that it is considered
significantly "front-loaded" or "back-loaded" within the meaning of the OID
Regulations. It is possible that such a Class may be considered to bear
"contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Certificates. However, if final
regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion than would be the case under
the OID Regulations for non-contingent debt instruments. 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.
64
<PAGE>
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Seller intends to treat Regular Certificates
bearing an interest rate that is a weighted average of the net interest rates
on Mortgage Loans as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to create
more than de minimis original issue discount. The yield on such Regular
Certificates for purposes of accruing original issue discount will be a
hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on the Regular
Certificates.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either (i) on
the basis of a constant interest rate, or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period
plus the remaining interest as of the end of such period, or in the case of a
Regular Certificate issued with original issue discount, in the ratio of
original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income as partial distributions
in reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a
Regular Certificate over the interest distributable thereon. The deferred
portion of such interest expense in any taxable year generally will not exceed
the accrued market discount on the Regular Certificate for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later than
the year in which the related market discount income is recognized or the
Regular Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular Certificateholder
may elect 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
65
<PAGE>
the constant yield method. Such election will apply to all debt obligations
acquired by the Regular Certificateholder at a premium held in that taxable
year or thereafter, unless revoked with the permission of the Internal Revenue
Service. The Conference Committee Report to the 1986 Act indicates a
Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Certificates, although it is unclear whether the alternatives to the constant
interest method described above under "Market Discount" are available.
Amortizable bond premium will be treated as an offset to interest income on a
Regular Certificate, rather than as a separate deduction item. See "Election to
Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were
issued on the holder's acquisition date in the amount of the holder's adjusted
basis immediately after acquisition. It is unclear whether, for this purpose,
the initial Prepayment Assumption would continue to apply or if a new
prepayment assumption as of the date of the holder's acquisition would apply. A
holder generally may make such an election on an instrument by instrument basis
or for a class or group of debt instruments. However, if the holder makes such
an election with respect to a debt instrument with amortizable bond premium or
with market discount, the holder is deemed to have made elections to amortize
bond premium or to report market discount income currently as it accrues under
the constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own
tax advisors regarding the advisability of making such an election.
Treatment of Losses
Regular Certificateholders will be required to report income with respect to
Regular Certificates on the accrual method of accounting, without giving effect
to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such losses are uncollectible. Accordingly, the holder of a Regular
Certificate, particularly a Subordinated Certificate, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but
may not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectible, the Internal
Revenue Service may take the position that original issue discount must
continue to be accrued in spite of its uncollectibility until the debt
instrument is disposed of in a taxable transaction or becomes worthless in
accordance with the rules of Code Section 166. To the extent the rules of Code
Section 166 regarding bad debts are applicable, it appears that Regular
Certificateholders that are corporations or that otherwise hold the Regular
Certificates in connection with a trade or business should in general be
allowed to deduct as an ordinary loss such loss with respect to principal
sustained during the taxable year on account of any such Regular Certificates
becoming wholly or partially worthless, and that, in general, Regular
Certificateholders that are not corporations and do not hold the Regular
Certificates in connection with a trade or business should be allowed to deduct
as a short-term capital loss any loss sustained during the taxable year on
account of a portion of any such Regular Certificates becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Certificateholders should be allowed a bad debt deduction at such time
as the principal balance of such Regular Certificates is reduced to reflect
losses resulting from any liquidated Mortgage Loans. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect such losses only after all the Mortgage
Loans remaining in the Trust Estate have been liquidated or the applicable
Class of Regular Certificates has been otherwise retired. The Internal Revenue
Service could also assert that losses on the Regular Certificates are
deductible based on some other method that may defer such deductions for all
holders, such as reducing future cash flow for purposes of computing original
issue discount. This may have the effect of creating "negative" original issue
discount which would be deductible only against future positive original issue
discount or otherwise upon termination of the Class. Regular Certificateholders
are urged to consult their own tax advisors regarding the appropriate timing,
amount and character of any loss sustained with respect to such Regular
Certificates.
66
<PAGE>
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). Capital gains of certain non-corporate
taxpayers are subject to a lower maximum tax rate than ordinary income of such
taxpayers. The maximum tax rate for corporations is the same with respect to
both ordinary income and capital gains.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such
quarter and by allocating such daily portion among the Residual Holders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using the accrual method of
accounting, except that (i) the limitations on deductibility of investment
interest expense and expenses for the production of income do not apply, (ii)
all bad loans will be deductible as business bad debts, and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. The REMIC Pool's gross income includes interest, original
issue discount income, and market discount income, if any, on the Mortgage
Loans, reduced by amortization of any premium on the Mortgage Loans, plus
income from amortization of issue premium, if any, on the Regular Certificates,
plus income on reinvestment of cash flows and reserve assets, plus any
cancellation of indebtedness income upon allocation of realized losses to the
Regular Certificates. The REMIC Pool's deductions include interest and original
issue discount expense on the Regular Certificates, servicing fees on the
Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report
their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no Certificates of any class of the related Series
outstanding.
67
<PAGE>
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.
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.
68
<PAGE>
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although the Seller intends to compute REMIC income and expense in accordance
with the Code and applicable regulations, the authorities regarding the
determination of specific items of income and expense are subject to differing
interpretations. The Seller makes no representation as to the specific method
that it will use for reporting income with respect to the Mortgage Loans and
expenses with respect to the Regular Certificates and different methods could
result in different timing of reporting of taxable income or net loss to
Residual Holders or differences in capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Certificates as described above under "Taxation of Regular Certificates--
Original Issue Discount" and "--Variable Rate Regular Certificates," without
regard to the de minimis rule described therein, and "--Premium."
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of such
market discount would be recognized currently as an item of ordinary income in
a manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "Taxation of Regular
Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate of
the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "Taxation of Regular Certificates--Premium," a
person that holds a Mortgage Loan as a capital asset under Code Section 1221
may elect under Code Section 171 to amortize premium on Mortgage Loans
originated after September 27, 1985 under the constant yield method.
Amortizable bond premium will be treated as an offset to interest income on the
Mortgage Loans, rather than as a separate deduction item. Because substantially
all of the mortgagors on the Mortgage Loans are expected to be individuals,
Code Section 171 will not be available for premium on Mortgage Loans originated
on or prior to September 27, 1985. Premium with respect to such Mortgage Loans
may be deductible in accordance with a reasonable method regularly employed by
the holder thereof. The allocation of such premium pro rata among principal
payments should be considered a reasonable method; however, the Internal
Revenue Service may argue that such premium should be allocated in a different
manner, such as allocating such premium entirely to the final payment of
principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of
the long-term applicable Federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code
Section 1274(d), multiplied by (ii) the adjusted issue price of such Residual
Certificate at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Certificate at the beginning of a quarter is
the issue price of the Residual Certificate, plus the amount of such daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Certificate
prior to the beginning of such
69
<PAGE>
quarterly period. Accordingly, the portion of the REMIC Pool's taxable income
that will be treated as excess inclusions will be a larger portion of such
income as the adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on such Residual Holder's return. However,
net operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax
on unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who
are not U.S. Persons (as defined below under "Tax-Related Restrictions on
Transfer of Residual Certificates--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors--Residual Certificates" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by
the real estate investment trust or regulated investment company could not be
offset by net operating losses of its shareholders, would constitute unrelated
business taxable income for tax-exempt shareholders, and would be ineligible
for reduction of withholding to certain persons who are not U.S. Persons. The
SBJPA of 1996 has eliminated the special rule permitting Section 593
institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from Residual
Certificates that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except with respect to Residual Certificates continuously held by a thrift
institution since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual
Holder is determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a taxable year cannot be less
than the excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to any
excess inclusions. These rules are effective for taxable years beginning after
December 31, 1986, unless a Residual Holder elects to have such rules apply
only to taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a Residual
Certificate is transferred to a Disqualified Organization (as defined below), a
tax would be imposed in an amount equal to the product of (i) the present value
of the total anticipated excess inclusions with respect to such Residual
Certificate for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal
rate under Code Section 1274(d) as of the date of the transfer for a term
ending with the last calendar quarter in which excess inclusions are expected
to accrue. Such rate is applied to the anticipated excess inclusions from the
end of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and,
as of the time of the transfer, the transferor does not have actual knowledge
that such affidavit is false. The tax also may be waived by the Internal
Revenue Service if the Disqualified Organization promptly disposes of the
Residual Certificate and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Certificate
is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the Pass-
Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a
70
<PAGE>
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 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."
71
<PAGE>
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, an estate that is subject
to U.S. federal income tax regardless of the source of its income, or a trust
if (A) for taxable years beginning after December 31, 1996 (or for taxable
years ending after August 20, 1996, if the trustee has made an applicable
election), a court within the United States is able to exercise primary
supervision over the administration of such trust, and one or more United
States fiduciaries have the authority to control all substantial decisions of
such trust, or (B) for all other taxable years, such trust is subject to U.S.
federal income tax regardless of the source of its income.
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "Taxation of Residual
Certificates--Basis and Losses") of such Residual Holder in such Residual
Certificate at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Certificate. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a
Residual Holder's Residual Certificate, in which case, if the Residual Holder
has an adjusted basis in its Residual Certificate remaining when its interest
in the REMIC Pool terminates, and if it holds such Residual Certificate as a
capital asset under Code Section 1221, then it will recognize a capital loss at
that time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii) in
the case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Internal Revenue Service has issued final regulations (the "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
72
<PAGE>
requirement applies to all securities of a dealer, except to the extent that
the dealer has specifically identified a security as held for investment. The
Mark to Market Regulations provide that, for purposes of this mark to market
requirement, a Residual Certificate is not treated as a security and thus may
not be marked to market. The 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.
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.
73
<PAGE>
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 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
74
<PAGE>
or unless the interest on the Regular Certificate is effectively connected with
the conduct of a trade or business within the United States by such Non-U.S.
Person. In the latter case, such Non-U.S. Person will be subject to United
States federal income tax at regular rates. Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences
to them of owning a Regular Certificate. The term "Non-U.S. Person" means any
person who is not a U.S. Person.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Certificates" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Estate or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Certificate relates, consists of obligations
issued in "registered form" within the meaning of Code Section 163(f)(1).
Generally, Mortgage Loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore, a
Residual Holder will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable
income that constitutes an "excess inclusion." See "Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income." If the
amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Certificate is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Certificates--Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale of
the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from distribution
on the Regular Certificates would be refunded by the Internal Revenue Service
or allowed as a credit against the Regular Certificateholder's federal income
tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and non-
charitable trusts, and partnerships who are either holders of record of Regular
Certificates or beneficial owners who own Regular Certificates through a broker
or middleman as nominee. All brokers, nominees and all other non-exempt holders
of record of Regular 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.
75
<PAGE>
Treasury regulations require that, in addition to the foregoing requirements,
information must be furnished quarterly to Residual Holders, furnished
annually, if applicable, to holders of Regular Certificates, and filed annually
with the Internal Revenue Service concerning Code Section 67 expenses (see
"Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates."
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
General
In the event that no election is made to treat a Trust Estate (or a
segregated pool of assets therein) with respect to a Series of Certificates as
a REMIC, the Trust Estate will be classified as a grantor trust under subpart
E, Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no Fixed Retained Yield with respect to the Mortgage
Loans underlying the Certificates of a Series, and where such Certificates are
not designated as "Stripped Certificates," the holder of each such Certificate
in such Series will be treated as the owner of a pro rata undivided interest in
the ordinary income and corpus portions of the Trust Estate represented by its
Certificate and will be considered the beneficial owner of a pro rata undivided
interest in each of the Mortgage Loans, subject to the discussion below under
"Recharacterization of Servicing Fees." Accordingly, the holder of a
Certificate of a particular Series will be required to report on its federal
income tax return its pro rata share of the entire income from the Mortgage
Loans represented by its Certificate, including interest at the coupon rate on
such Mortgage Loans, original issue discount (if any), prepayment fees,
assumption fees, and late payment charges received by the Servicer, in
accordance with such Certificateholder's method of accounting. A
Certificateholder generally will be able to deduct its share of the Servicing
Fee and all administrative and other expenses of the Trust Estate in accordance
with its method of accounting, provided that such amounts are reasonable
compensation for services rendered to that Trust Estate. However, investors who
are individuals, estates or trusts who own Certificates, either directly or
indirectly through certain pass-through entities, will be subject to limitation
with respect to certain itemized deductions described in Code Section 67,
including deductions under Code Section 212 for the Servicing Fee and all such
administrative and other expenses of the Trust Estate, to the extent that such
deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer
will be reduced by the lesser of (i) 3% of the excess, if any, of adjusted
gross income over $100,000 ($50,000 in the case of a married individual filing
a separate return) (in each case, as adjusted for inflation), or (ii) 80% of
the amount of itemized deductions otherwise allowable for such year. As a
result, such investors holding Certificates, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Certificates with respect to interest
at the pass-through rate or as discount income on such Certificates. In
addition, such expenses are not deductible at all for purposes of 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 which
is. . .residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Certificate is of the type described in such
section of the Code.
2. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust
Estate consist of qualified assets, and interest income on such assets will
be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
76
<PAGE>
3. A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Estate consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in clauses 1 and 2 of the immediately
preceding paragraph. There is indirect authority supporting treatment of an
investment in a Buy-Down Loan as entirely secured by real property if the fair
market value of the real property securing the loan exceeds the principal
amount of the loan at the time of issuance or acquisition, as the case may be.
There is no assurance that the treatment described above is proper.
Accordingly, Certificateholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Certificateholder's investment for federal income tax purposes.
Premium and Discount
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Certificate
will be determined generally as described above under "Federal Income Tax
Consequences for REMIC Certificates--Taxation of Residual Certificates--
Premium."
Original Issue Discount. The original issue discount rules of Code Sections
1271 through 1275 will be applicable to a Certificateholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
are applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984.
Under the OID Regulations, such original issue discount could arise by the
charging of points by the originator of the mortgages in an amount greater than
the statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions or, under
certain circumstances, by the presence of "teaser" rates on the Mortgage Loans.
See "--Stripped Certificates" below regarding original issue discount on
Stripped Certificates.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if such Mortgage Loans acquired
by a Certificateholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Market Discount," except that the ratable accrual methods
described therein will not apply. Rather, the holder will accrue market
discount pro rata over the life of the Mortgage Loans, unless the constant
yield method is elected. Unless indicated otherwise in the applicable
Prospectus Supplement, no prepayment assumption will be assumed for purposes of
such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither
income nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context
77
<PAGE>
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 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
78
<PAGE>
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 aggregated and treated as though they were made
on a single debt instrument. The Pooling and Servicing Agreement will require
that the Trustee make and report all computations described below using this
aggregate approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or, presumably, at a premium. This treatment
indicates that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations, assuming it is
not an interest-only or super-premium Stripped Certificate. Further, these
final regulations provide that the purchaser of such a Stripped Certificate
will be required to account for any discount as market discount rather than
original issue discount if either (i) the initial discount with respect to the
Stripped Certificate was treated as zero under the de minimis rule, or (ii) no
more than 100 basis points in excess of reasonable servicing is stripped off
the related Mortgage Loans. Any such market discount would be reportable as
described above under "Federal Income Tax Consequences for REMIC Certificates--
Taxation of Regular Certificates--Market Discount," without regard to the de
minimis rule therein, assuming that a prepayment assumption is employed in such
computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt, counsel
has advised the Seller that Stripped Certificates owned by applicable holders
should be considered to represent "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.
79
<PAGE>
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General," each
Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the
income of a holder of a Stripped Certificate (referred to in this discussion as
a "Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate qualfying as a market discount obligation as described
above under "General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to such Stripped Certificateholder, presumably under the
Prepayment Assumption, other than qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis
in such Stripped Certificate to recognize a loss (which may be a capital loss)
equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all of
the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as
the Stripped Certificates. However, if final regulations dealing with
contingent interest with respect to the Stripped Certificates apply the same
principles as the OID Regulations, such regulations may lead to different
timing of income inclusion than would be the case under the OID Regulations for
non-contingent debt instruments. 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
80
<PAGE>
holder of one or more Classes of Stripped Certificates may be treated as the
owner of a pro rata fractional undivided interest in each Mortgage Loan to the
extent that such Stripped Certificate, or Classes of Stripped Certificates in
the aggregate, represent the same pro rata portion of principal and interest on
each such Mortgage Loan, and a stripped bond or stripped coupon (as the case
may be), treated as an installment obligation or contingent payment obligation,
as to the remainder. Final regulations issued on December 28, 1992 regarding
original issue discount on stripped obligations make the foregoing
interpretations less likely to be applicable. The preamble to those regulations
states that they are premised on the assumption that an aggregation approach is
appropriate for determining whether original issue discount on a stripped bond
or stripped coupon is de minimis, and solicits comments on appropriate rules
for aggregating stripped bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, Stripped
Certificateholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Certificates for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Master Servicer will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as is necessary to enable such Certificateholders to prepare their
federal income tax returns. Such information will include the amount of
original issue discount accrued on Certificates held by persons other than
Certificateholders exempted from the reporting requirements. The amount
required to be reported by the Master Servicer may not be equal to the proper
amount of original issue discount required to be reported as taxable income by
a Certificateholder, other than an original Certificateholder that purchased at
the issue price. In particular, in the case of Stripped Certificates, unless
provided otherwise in the applicable Prospectus Supplement, such reporting will
be based upon a representative initial offering price of each Class of Stripped
Certificates. The Master Servicer will also file such original issue discount
information with the Internal Revenue Service. If a Certificateholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under "Federal Income Tax Consequences for REMIC Certificates--
Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other non-U.S. persons ("foreign
persons") generally will be subject to 30% United States withholding tax, or
such 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.
81
<PAGE>
Before purchasing any Certificates, a Plan fiduciary should consult with its
counsel and determine whether there exists any prohibition to such purchase
under the requirements of ERISA, whether prohibited transaction exemptions such
as PTE 83-1 or any individual administrative exemption (as described below)
applies, including whether the appropriate conditions set forth therein would
be met, or whether any statutory prohibited transaction exemption is
applicable, and further should consult the applicable Prospectus Supplement
relating to such Series of Certificates.
CERTAIN REQUIREMENTS UNDER ERISA
General. In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a Plan fiduciary should determine whether to do so
is permitted under the governing Plan instruments and is appropriate for the
Plan in view of its overall investment policy and the composition and
diversification of its portfolio. A Plan fiduciary should especially consider
the ERISA requirement of investment prudence and the sensitivity of the return
on the Certificates to the rate of principal repayments (including prepayments)
on the Mortgage Loans, as discussed in "Prepayment and Yield Considerations"
herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to
the Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Seller, the Master
Servicer or Master Servicer or the Trustee or certain affiliates thereof might
be considered or might become "parties in interest" or "disqualified persons"
with respect to a Plan. If so, the acquisition or holding of Certificates by or
on behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a Plan (including
assets that may be held in an insurance company's separate or general accounts
where assets in such accounts may be deemed Plan assets for purposes of ERISA)
are used to purchase a Certificate if, with respect to such assets, the Seller,
the Master Servicer or Master Servicer or the Trustee or an affiliate thereof
either: (a) has investment discretion with respect to the investment of such
assets of such Plan; or (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to such assets for a fee and
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such assets and that
such advice will be based on the particular investment needs of the Plan.
Delegation of Fiduciary Duty. Further, if the assets included in a Trust
Estate were deemed to constitute Plan assets, it is possible that a Plan's
investment in the Certificates might be deemed to constitute a delegation,
under ERISA, of the duty to manage Plan assets by the fiduciary deciding to
invest in the Certificates, and certain transactions involved in the operation
of the Trust Estate might be deemed to constitute prohibited transactions under
ERISA and the Code. Neither ERISA nor the Code define the term "plan assets."
The U.S. Department of Labor (the "Department") has issued regulations (the
"Regulations") concerning whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an entity (such as a Trust
Estate) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an "equity interest"
(such as a Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the assets of a
Trust Estate. However, it cannot be predicted in advance nor can there be any
continuing assurance whether such exceptions may be met, because of the factual
nature of certain of the rules set forth in the Regulations. For example, one
of the exceptions in the Regulations states that the underlying assets of an
entity will not be considered "plan assets" if less than 25% of the value of
all classes of equity interests are held by "benefit plan investors," which are
defined as Plans, IRAs, and employee benefit plans not subject to ERISA (for
example, governmental plans), and any entity whose assets include "plan assets"
by reason of benefit plan investment in such entity, 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.
82
<PAGE>
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.
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.
83
<PAGE>
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 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--
84
<PAGE>
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, 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. (S) 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.(S)
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).
85
<PAGE>
The foregoing does not take into consideration the applicability of statutes,
rules, regulations, orders, guidelines or agreements generally governing
investments made by a particular investor, including, but not limited to,
"prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not "interest-
bearing" or "income-paying," and, with regard to any Certificates issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of certain Classes of Certificates as "mortgage
related securities," no representation is made as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
All investors should consult with their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
PLAN OF DISTRIBUTION
The Certificates are being offered hereby in Series through one or more of
the methods described below. The applicable Prospectus Supplement for each
Series will describe the method of offering being utilized for that Series and
will state the public offering or purchase price of each Class of Certificates
of such Series, or the method by which such price is to be determined, and the
net proceeds to the Seller from such sale.
The Certificates will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular Series of Certificates may be made
through a combination of two or more of these methods:
1. By negotiated firm commitment underwriting and public re-offering by
underwriters specified in the applicable Prospectus Supplement;
2. By placements by the Seller with investors through dealers; and
3. By direct placements by the Seller with investors.
If underwriters are used in a sale of any Certificates, such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, with respect to the
offer and sale of a particular Series of Certificates will be set forth on the
cover of the Prospectus Supplement applicable to such Series and the members of
the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Seller to the underwriters, any other
items constituting underwriting compensation and any discounts and commissions
to be allowed or paid to the dealers. The obligations of the underwriters will
be subject to certain conditions precedent. The underwriters with respect to a
sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. The Seller, and, if specified in the
applicable Prospectus Supplement, Norwest Mortgage, will indemnify the
applicable underwriters against certain civil liabilities, including
liabilities under the Securities Act.
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.
86
<PAGE>
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Seller or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the underwriter or
underwriters at a price specified or described in such Prospectus Supplement.
Such purchaser may thereafter from time to time offer and sell, pursuant to
this Prospectus, some or all of such Certificates so purchased directly,
through one or more underwriters to be designated at the time of the offering
of such Certificates or through dealers acting as agent and/or principal. Such
offering may be restricted in the matter specified in such Prospectus
Supplement. Such transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices. The underwriters and
dealers participating in such purchaser's offering of such Certificates may
receive compensation in the form of underwriting discounts or commissions from
such purchaser and such dealers may receive commissions from the investors
purchasing such Certificates for whom they may act as agent (which discounts or
commissions will not exceed those customary in those types of transactions
involved). Any dealer that participates in the distribution of such
Certificates may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any commissions and discounts received by such dealer and
any profit on the resale of such Certificates by such dealer might be deemed to
be underwriting discounts and commissions under the Securities Act.
USE OF PROCEEDS
The net proceeds from the sale of each Series of Certificates will be used by
the Seller for the purchase of the Mortgage Loans represented by the
Certificates of such Series from Norwest Mortgage. It is expected that Norwest
Mortgage will use the proceeds from the sale of the Mortgage Loans to the
Seller for its general business purposes, including, without limitation, the
origination or acquisition of new mortgage loans and the repayment of
borrowings incurred to finance the origination or acquisition of mortgage
loans, including the Mortgage Loans underlying the Certificates of such Series.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Certificateholders of an investment in the Certificates of a Series, will be
passed upon for the Seller by Cadwalader, Wickersham & Taft, New York.
RATING
It is a condition to the issuance of the Certificates of any Series offered
pursuant to this Prospectus and a Prospectus Supplement that they be rated in
one of the four highest categories by at least one Rating Agency.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. Each securities rating should be evaluated independently of any
other rating.
87
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
1986 Act.................................................................. 61
Accrual Certificates...................................................... 32
Additional Collateral..................................................... 17
Advances.................................................................. 41
ALTA...................................................................... 23
Asset Conservation Act.................................................... 57
Balloon Loan.............................................................. 17
Balloon Period............................................................ 17
Bankruptcy Code........................................................... 55
Bankruptcy Loss........................................................... 33
Bankruptcy Loss Amount.................................................... 33
Beneficial Owner.......................................................... 29
Book-Entry Certificates................................................... 10
Buy-Down Fund............................................................. 17
Buy-Down Loans............................................................ 17
Cede...................................................................... 29
CERCLA.................................................................... 56
Certificate Account....................................................... 38
Certificateholder......................................................... 29
Certificates.............................................................. Cover
Class..................................................................... Cover
Cleanup Costs............................................................. 56
Code...................................................................... 11
Commission................................................................ 2
Cooperatives.............................................................. 14
Correspondents............................................................ 19
Credit Score.............................................................. 20
DCR....................................................................... 83
Deferred Interest......................................................... 16
Definitive Certificates................................................... 10
Delegated Underwriting.................................................... 20
Department................................................................ 82
Depository................................................................ 39
Detailed Information...................................................... 2
Disqualified Organization................................................. 71
Distribution Date......................................................... 9
DTC....................................................................... 10
DTC Participants.......................................................... 29
Due Date.................................................................. 15
Due on Sale............................................................... 57
EDGAR..................................................................... 2
Eligible Custodial Account................................................ 39
Eligible Investments...................................................... 40
EPA....................................................................... 57
ERISA..................................................................... 11
Excess Bankruptcy Losses.................................................. 33
Excess Fraud Losses....................................................... 33
Excess Special Hazard Losses.............................................. 33
FDIC...................................................................... 39
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
FHLBB..................................................................... 57
FHLMC..................................................................... 23
FICO Score................................................................ 20
Fitch..................................................................... 83
Fixed Retained Yield...................................................... 32
FNMA...................................................................... 23
Fraud Loss................................................................ 33
Fraud Loss Amount......................................................... 33
Garn Act.................................................................. 57
GEMICO.................................................................... 23
Graduated Pay Mortgage Loans.............................................. 16
Growing Equity Mortgage Loans............................................. 16
Holder.................................................................... 29
Indirect DTC Participants................................................. 29
IRA....................................................................... 81
Joint Ventures............................................................ 19
Liquidation Proceeds...................................................... 39
Loan Stores............................................................... 19
Mark to Market Regulations................................................ 72
Master Servicer........................................................... Cover
Master Servicing Fee...................................................... 32
Moody's................................................................... 83
Mortgage Interest Rate.................................................... 32
Mortgage Loans............................................................ Cover
Mortgage Notes............................................................ 14
Mortgaged Properties...................................................... 14
Mortgages................................................................. 14
NASCOR.................................................................... Cover
NCUA...................................................................... 85
Net Foreclosure Profits................................................... 31
Net Mortgage Interest Rate................................................ 31
Non-Pro Rata Certificate.................................................. 62
Non-U.S. Person........................................................... 75
Norwest Bank.............................................................. Cover
Norwest Corporation....................................................... 8
Norwest Funding........................................................... 18
Norwest Mortgage.......................................................... Cover
Norwest Mortgage Loan..................................................... 18
Norwest Mortgage Sale Agreement........................................... 47
OID Regulations........................................................... 62
Other Advances............................................................ 41
OTS....................................................................... 57
Partial Liquidation Proceeds.............................................. 31
Pass-Through Rate......................................................... 9
Pass-Through Entity....................................................... 70
Paying Agent.............................................................. 41
PCBS...................................................................... 56
Percentage Interest....................................................... 30
Periodic Advances......................................................... 10
PHMC...................................................................... 18
PHMC Acquisition.......................................................... 18
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
PHMC Mortgage Loans....................................................... 18
PHMSC..................................................................... 18
Plans..................................................................... 81
Pledged Asset Mortgage Loans.............................................. 17
Policy Statement.......................................................... 85
Pool Distribution Amount.................................................. 30
Pool Insurers............................................................. 23
Pooling and Servicing Agreement........................................... 8
Prepayment Assumption..................................................... 63
Program Loans............................................................. 38
PTE 83-1.................................................................. 84
Qualified Mortgage........................................................ 27
Rating Agency............................................................. 11
Record Date............................................................... 9
Regular Certificateholder................................................. 61
Regular Certificates...................................................... 28
Regulations............................................................... 82
Relief Act................................................................ 55
REMIC..................................................................... Cover
REMIC Certificates........................................................ 59
REMIC Pool................................................................ 59
REMIC Regulations......................................................... 59
Remittance Date........................................................... 39
Reserve Fund.............................................................. 34
Residual Certificates..................................................... 28
Residual Holders.......................................................... 67
Restricted Group.......................................................... 84
Rules..................................................................... 29
S&P....................................................................... 83
SBJPA of 1996............................................................. 60
Scheduled Principal Balance............................................... 48
Securities Act............................................................ 2
Seller.................................................................... Cover
Senior Certificates....................................................... Cover
Series.................................................................... Cover
Servicer.................................................................. Cover
Servicer Custodial Account................................................ 39
Servicing Account......................................................... 42
Servicing Fee............................................................. 32
SMMEA..................................................................... 85
Special Hazard Loss....................................................... 33
Special Hazard Loss Amounts............................................... 33
Standard Hazard Insurance Policy.......................................... 44
Startup Day............................................................... 60
Stripped Certificateholder................................................ 80
Stripped Certificates..................................................... 76
Subclass.................................................................. Cover
Subordinated Certificates................................................. Cover
Subsidy Account........................................................... 16
Subsidy Loans............................................................. 16
Subsidy Payments.......................................................... 16
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Superliens................................................................ 56
Tiered Payment Mortgage Loans............................................. 16
Title V................................................................... 58
T.O.P. Loans.............................................................. 23
Treasury Regulations...................................................... 48
Trust Estate.............................................................. Cover
Trustee................................................................... 51
Trustee Fee............................................................... 32
U.S. Person............................................................... 72
UCC....................................................................... 53
UGRIC..................................................................... 23
Underlying Servicing Agreement............................................ 8
Underwriter's Exemption................................................... 83
Voting Interests.......................................................... 49
Window Period............................................................. 58
Window Period Loans....................................................... 58
Window Period States...................................................... 58
</TABLE>
91
