<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-3574
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 24, 1998)
$347,077,774 (APPROXIMATE)
FIRST UNION RESIDENTIAL SECURITIZATION TRANSACTIONS, INC.,
Depositor
FIRST UNION NATIONAL BANK,
Seller
FIRST UNION MORTGAGE CORPORATION,
Servicer
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-A
PRINCIPAL AND INTEREST PAYABLE ON THE 25TH DAY OF EACH MONTH, BEGINNING IN MAY
1998
The Series 1998-A Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following twenty-two classes: (i) Class SA-1, Class SA-2,
Class SA-3, Class SA-4, Class SA-5 and Class SA-X (the "Class SA Certificates"),
(ii) Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7
and Class A-X (the "Class A Certificates"), (iii) Class M, Class B-1 and Class
B-2 (the "Senior Subordinate Certificates"), (iv) Class B-3, Class B-4 and Class
B-5 (the "Junior Subordinate Certificates" and, together with the Senior
Subordinate Certificates, the "Subordinate Certificates") and (v) Class R-I and
Class R-II (the "Residual Certificates" and, together with the Class SA
Certificates and the Class A Certificates, the "Senior Certificates").
(continued on next page)
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<TABLE>
<C> <C> <S>
$ 51,614,813 7.00% Class SA-1 Certificates
$ 79,081,309 6.90% Class SA-2 Certificates
$ 9,700,000 7.00% Class SA-3 Certificates
$ 15,253,691 7.00% Class SA-4 Certificates
(1) 7.00% Class SA-5 Certificates
(2) Variable Class SA-X Certificates
$ 126,652,919 6.87% Class A-1 Certificates
$ 19,168,000 7.00% Class A-2 Certificates
$ 18,130,000 7.00% Class A-3 Certificates
$ 9,500,000 7.00% Class A-4 Certificates
$ 2,700,000 7.00% Class A-5 Certificates
(3) 7.00% Class A-6 Certificates
$ 2,500,000 (4) Class A-7 Certificates
(5) Variable Class A-X Certificates
$ 7,701,171 7.00% Class M Certificates
$ 2,975,452 7.00% Class B-1 Certificates
$ 2,100,319 7.00% Class B-2 Certificates
$ 50 7.00% Class R-I Certificates(6)
$ 50 7.00% Class R-II Certificates(7)
</TABLE>
- --------------------------------------------------------------------------------
(1) The Class SA-5 Certificates will accrue interest on the Class SA-5 Notional
Amount. The "Class SA-5 Notional Amount" for any Distribution Date will
equal the Class Principal Balance of the Class SA-2 Certificates immediately
prior to such Distribution Date multiplied by approximately 1.42857%. The
Class SA-5 Notional Amount as of the Closing Date will be approximately
$1,129,732. The Class SA-5 Certificates will not be entitled to any
distributions of principal.
(2) The Class SA-X Certificates will accrue interest on the Class SA-X Notional
Amount. The "Class SA-X Notional Amount" for any Distribution Date will
equal the Group SA Aggregate Loan Balance as of the preceding Determination
Date. The Class SA-X Notional Amount as of the Closing Date will be
approximately $162,984,201. The Class SA-X Certificates will not be entitled
to any distributions of principal. The Certificate Rate on the Class SA-X
Certificates for any Distribution Date will equal the weighted average (by
principal balance) of the Net Loan Rate (as defined herein) on the Group SA
Loans (as defined herein) as of the preceding Determination Date (as defined
herein), or with respect to the initial Distribution Date, as of the Initial
Cut-Off Date (the "Group SA Weighted Average Rate") minus 7.00% per annum.
The Group SA Weighted Average Rate as of the Initial Cut-Off Date will equal
7.58% per annum. The "Net Loan Rate" for each Mortgage Loan is equal to the
Loan Rate thereon less the sum of the rates at which the applicable
Servicing Fee and Trustee Fee (each as defined herein) are calculated.
(3) The Class A-6 Certificates will accrue interest on the Class A-6 Notional
Amount. The "Class A-6 Notional Amount" for any Distribution Date will equal
the Class Principal Balance of the Class A-1 Certificates immediately prior
to such Distribution Date multiplied by approximately 1.85714%. The Class
A-6 Notional Amount as of the Closing Date will be approximately $2,352,122.
The Class A-6 Certificates will not be entitled to any distributions of
principal.
(4) The Class A-7 Certificates will accrue interest for the first twelve
Distribution Dates at a rate of 7.5% per annum. Thereafter, the Class A-7
Certificates will accrue interest at a rate of 7.0% per annum.
(5) The Class A-X Certificates will accrue interest on the Class A-X Notional
Amount. The "Class A-X Notional Amount" for any Distribution Date will equal
the sum of the Group A Aggregate Loan Balance and the balance of the
Pre-Funding Account (as defined herein) as of the preceding Determination
Date. The Class A-X Notional Amount as of the Closing Date will be
approximately $187,069,027. The Class A-X Certificates will not be entitled
to any distributions of principal. The Certificate Rate on the Class A-X
Certificates for any Distribution Date will equal the weighted average (by
principal balance) of the Net Loan Rate on the Group A Loans (as defined
herein) as of the preceding Determination Date, or with respect to the
initial Distribution Date, as of the Initial Cut-Off Date (the "Group A
Weighted Average Rate") minus 7.00% per annum. The Group A Weighted Average
Rate as of the Initial Cut-Off Date will equal 7.51% per annum.
(6) The Class R-I Certificate is the sole residual interest in REMIC I (as
defined herein).
(7) The Class R-II Certificate is the sole residual interest in REMIC II (as
defined herein).
FOR A DISCUSSION OF CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE
OFFERED CERTIFICATES, SEE "RISK FACTORS" ON PAGE S-19 HEREIN AND ON PAGE 10 IN
THE ACCOMPANYING PROSPECTUS.
THESE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN FIRST
UNION RESIDENTIAL SECURITIZATION TRANSACTIONS, INC. OR ANY OF ITS AFFILIATES.
NEITHER THESE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY
ANY AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE RELATED
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Offered Certificates are being offered by First Union Capital Markets, a
division of Wheat First Securities, Inc. ("First Union Capital Markets"), an
affiliate of the Depositor, the Seller and the Servicer, and Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ" and, together with First Union Capital
Markets, the "Underwriters") from time to time in negotiated transactions or
otherwise at varying prices to be determined, in each case, at the time of sale.
See "Underwriting" herein. The aggregate proceeds to the Depositor from the sale
of the Offered Certificates will be approximately $352,322,463, plus accrued
interest, before deducting expenses payable by the Depositor, estimated to be
approximately $570,000 in the aggregate.
First Union Capital Markets and DLJ expect to enter into market making
transactions in the Offered Certificates and may act as principal or agent in
any such transactions. Any such purchases or sales will be made at prices
related to prevailing market prices at the time of sale. This Prospectus
Supplement and the Prospectus may be used by First Union Capital Markets in
connection with such transactions.
The Offered Certificates offered hereby are offered subject to prior sale,
when, as and if issued by the Trust Fund and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Offered Certificates (other than the Class R Certificates) will
be made in book-entry form only through the facilities of The Depository Trust
Company on or about April 29, 1998 (the "Closing Date").
FIRST UNION CAPITAL MARKETS DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
The date of this Prospectus Supplement is April 24, 1998.
<PAGE> 2
(cover continued from previous page)
The Subordinate Certificates other than the Class M Certificates are referred to
herein as the "Class B Certificates." Only the Senior Certificates and the
Senior Subordinate Certificates (collectively, the "Offered Certificates") are
offered hereby. The Junior Subordinate Certificates are not offered hereby. The
Certificates will represent undivided interests in FURST Mortgage Loan Trust
1998-A (the "Trust Fund") consisting of a pool of first-lien, fixed-rate
mortgage loans (the "Mortgage Loans") secured by mortgages, security deeds or
deeds of trust on one- to four-family residential properties, all monies
received thereunder on or after a specified cut-off date (each, a "Cut-Off
Date"), security interests in the properties which secure the Mortgage Loans,
and certain other property. The aggregate principal balance of the Mortgage
Loans that will be conveyed to be Trust Fund on the Closing Date (the "Initial
Mortgage Loans") as of April 1, 1998 (the "Initial Cut-Off Date") was
$292,308,382.37 (the "Initial Cut-Off Date Aggregate Loan Balance"). The
Mortgage Loans will be segregated into two groups ("Loan Group SA" and "Loan
Group A", and each a "Loan Group"). All of the Mortgage Loans in Loan Group SA
(the "Group SA Mortgage Loans") have original terms to stated maturity (based on
the date of origination or any later modification) of greater than 15 but no
more than 30 years and were originated more than 36 months prior to the Initial
Cut-Off Date. All of the Mortgage Loans in Loan Group A (the "Group A Mortgage
Loans") have original terms to stated maturity (based on the date of origination
or any later modification) of greater than 15 but no more than 30 years and were
originated within the last 36 months prior to the Initial Cut-Off Date. The
characteristics of the Mortgage Loans comprising each Loan Group are described
herein under "The Mortgage Loan Pool." The Class SA Certificates will correspond
to the Group SA Mortgage Loans, the Class A Certificates will correspond to the
Group A Mortgage Loans and the Subordinate Certificates will correspond to both
the Group SA Mortgage Loans and the Group A Mortgage Loans.
On the Closing Date, a portion of the proceeds of the sale of the
Certificates equal to $57,744,845 (the "Pre-Funded Amount") will be deposited in
a trust account in the name of the Trustee (as defined herein) (the "Pre-Funding
Account"). The Pooling and Servicing Agreement provides that additional
fixed-rate mortgage loans (the "Subsequent Mortgage Loans") may be purchased by
the Trust Fund from the Seller from time to time on or before July 24, 1998,
from the Pre-Funded Amount. The Initial Mortgage Loans and Subsequent Mortgage
Loans will be collectively referred to herein as the "Mortgage Loans."
The Initial Mortgage Loans conveyed to the Trust Fund by First Union
Residential Securitization Transactions, Inc. (the "Depositor") on the Closing
Date were originated or purchased by First Union National Bank (in such
capacity, the "Seller") or its affiliates and were acquired from the Seller by
the Depositor. First Union Mortgage Corporation will service the Mortgage Loans
(in such capacity, the "Servicer"). The Trust Fund will be created pursuant to a
Pooling and Servicing Agreement dated as of April 1, 1998 (the "Pooling and
Servicing Agreement") among the Depositor, the Seller, the Servicer and Norwest
Bank Minnesota, National Association, as Trustee (the "Trustee") and as document
custodian (the "Document Custodian"). Terms used and not otherwise defined
herein shall have the respective meanings ascribed to such terms in the
Prospectus dated April 24, 1998 attached hereto (the "Prospectus").
Holders (alternatively, the "Holders" or the "Certificateholders") of the
Offered Certificates will receive distributions of principal and interest on the
25th day of each month (or, if such day is not a business day, the next
following business day), beginning in May, 1998 (each such day, a "Distribution
Date"). Distributions of interest and principal on the Class SA Certificates and
Class A Certificates will be based on interest and principal received or
advanced with respect to the Group SA Mortgage Loans and Group A Mortgage Loans,
respectively. The rights of the Holders of the Subordinate Certificates to
receive distributions with respect to the Mortgage Loans will be based upon
interest and principal received or advanced with respect to both Loan Groups.
Such rights in the case of the Subordinate Certificates will be subordinate to
the rights of the Holders of the Senior Certificates. The rights of Holders of
each Class of Subordinate Certificates will be subordinate to the rights of the
Holders of any Class of Subordinate Certificates with a lower numerical
designation (with the Class M Certificates being the lowest designation).
The yield to maturity on (a) the Class SA Certificates and Class A
Certificates generally will depend on the rate and timing of principal payments
(including prepayments, liquidations, repurchases and defaults) on the Mortgage
Loans in the related Loan Group and (b) any Class of Subordinate Certificates
will depend on
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<PAGE> 3
the rate and timing of principal payments (including prepayments, liquidations,
repurchases and defaults) on all of the Mortgage Loans.
One or more elections will be made to treat certain segregated pools of
assets held by the Trust Fund as real estate mortgage investment conduits (each,
a "REMIC" referred to herein as "REMIC I" and "REMIC II") for federal income tax
purposes. The Certificates (other than the Class R Certificates) will represent
"Regular Interests" in a REMIC and the Class R Certificates will each represent
a "Residual Interest" in its respective REMIC. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
The yield to maturity on the Class SA-5 and Class SA-X Certificates will be
extremely sensitive to the rate and timing of principal payments (including
prepayments, liquidations, repurchases and defaults) on the Group SA Mortgage
Loans, which may fluctuate significantly from time to time. A rapid rate of
principal prepayments on the Group SA Mortgage Loans will have a material
adverse effect on the yield to maturity of the Class SA-5 and Class SA-X
Certificates. Investors should fully consider the associated risks, including
the risk that a rapid rate of principal prepayments on the Group SA Mortgage
Loans could result in the failure of investors in the Class SA-5 and Class SA-X
Certificates to fully recoup their initial investment. See "Prepayment and Yield
Considerations -- Yield Considerations With Respect to the Class SA-5, Class
SA-X, Class A-6 and Class A-X Certificates" herein.
The yield to maturity on the Class A-6 and Class A-X Certificates will be
extremely sensitive to the rate and timing of principal payments (including
prepayments, liquidations, repurchases and defaults) on the Group A Mortgage
Loans, which may fluctuate significantly from time to time. A rapid rate of
principal prepayments on the Group A Mortgage Loans will have a material adverse
effect on the yield to maturity of the Class A-6 and Class A-X Certificates.
Investors should fully consider the associated risks, including the risk that a
rapid rate of principal prepayments on the Group A Mortgage Loans could result
in the failure of investors in the Class A-6 and Class A-X Certificates to fully
recoup their initial investment. See "Prepayment and Yield
Considerations -- Yield Considerations With Respect to the Class SA-5, Class
SA-X Class A-6 and Class A-X Certificates" herein.
The rights of the Holders of the Senior Subordinate Certificates to receive
distributions of interest and principal are subordinated to the rights of the
Holders of the Senior Certificates to receive distributions of interest and
principal. In addition, the rights of the Holders of a Class of Class B
Certificates to receive distributions of interest and principal will be
subordinate to the rights of Holders of Class B Certificates with lower
numerical designations and Holders of Class M Certificates to receive
distributions of interest and principal, and the rights of Holders of the Class
B-1 Certificates to receive distributions of interest and principal are
subordinated to the rights of the Holders of the Class M Certificates to receive
distributions of interest and principal. Furthermore, following the reduction of
the aggregate Class Principal Balance of the Junior Subordinate Certificates to
zero, the yield to maturity on each Class of the Senior Subordinate Certificates
will be extremely sensitive to certain realized losses on the Mortgage Loans
because a disproportionate amount of such losses (rather than a pro rata portion
thereof) generally will be allocable to such Certificates first to Class B-2,
then to Class B-1 and then to Class M. Similarly, following the reduction of the
aggregate of the Class Principal Balances of the Subordinate Certificates to
zero, the yield to maturity on the Senior Certificates will be sensitive to all
realized losses on the Mortgage Loans. See "Description of the
Certificates -- Subordination and Allocation of Losses" herein.
Although the Class SA-4 Certificates are Senior Certificates, the Class
SA-4 Certificates generally will not be entitled to receive any distributions of
principal prepayments on the Group SA Mortgage Loans until the Distribution Date
in May 2003. Therefore, the Class SA-4 Certificates will not be entitled to
receive the disproportionate allocations of such principal prepayments that the
other Class SA Certificates are entitled to receive. See "Description of the
Certificates -- Distributions of Principal" and "Prepayment and Yield
Considerations" herein.
Although the Class A-3 Certificates are Senior Certificates, the Class A-3
Certificates generally will not be entitled to receive any distributions of
scheduled principal or principal prepayments on the Group A Mortgage Loans until
the Distribution Date in May 2003. Therefore, the Class A-3 Certificates will
not be
iii
<PAGE> 4
entitled to receive the disproportionate allocations of such principal
prepayments that the other Class A Certificates are entitled to receive. See
"Description of the Certificates -- Distributions of Principal" and "Yield and
Prepayments Considerations" herein.
The Offered Certificates, other than the Class A-2, Class A-4, Class A-5,
Class A-7 and Class R Certificates, are offered in minimum denominations
equivalent to not less than $25,000 initial Certificate Principal Balance or
Notional Principal Amount, as applicable, each and multiples of $1 in excess
thereof. The Class A-2, Class A-4, Class A-5 and Class A-7 Certificates are
offered in minimum denominations equivalent to not less than $1,000 initial
Certificate Principal Balance each and multiples of $1 in excess thereof. The
Class R-I and Class R-II Certificates, which will each have an initial Class
Principal Balance of $50, will be offered in registered, certificated form in a
single denomination of a 100% Percentage Interest each. "Percentage Interest"
means, as to any Class of Certificates, the percentage obtained by dividing the
principal denomination of such Certificate by the aggregate of the principal
denominations of all certificates of the same Class.
The Underwriters intend to make a secondary market in the Offered
Certificates, but have no obligation to do so. There can be no assurance that a
secondary market for the Offered Certificates will develop, or if it does
develop, that it will provide Holders of the Offered Certificates with liquidity
of investment at any particular time or for the life of the Offered
Certificates. The Offered Certificates will not be listed on any securities
exchange. In addition, the Class R-I and Class R-II Certificates are subject to
various transfer restrictions described herein.
The Offered Certificates constitute part of a separate series of Mortgage
Pass-Through Certificates being offered by the Depositor from time to time
pursuant to the Prospectus. This Prospectus Supplement does not contain complete
information about the offering of the Offered Certificates. Additional
information is contained in the Prospectus, and investors are urged to read both
this Prospectus Supplement and the Prospectus in full. Sales of the Offered
Certificates may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus.
To the extent that any statements in this Prospectus Supplement modify
statements contained in the Prospectus, the statements in this Prospectus
Supplement shall control.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from an Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or such
Underwriter will deliver or cause to be delivered, without charge, a paper copy
of the Prospectus Supplement and Prospectus.
UNTIL 90 DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates each be rated "AAA" (except for the Class SA-5, Class SA-X,
Class A-6 and Class A-X Certificates, which will be rated "AAAr") by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P")
and "AAA" by Duff & Phelps Credit Rating Co. ("DCR" and, together with S&P, the
"Rating Agencies"), that the Class M Certificates be rated not less than "AA" by
DCR, that the Class B-1 Certificates be rated not less than "A" by DCR, that the
Class B-2 Certificates be rated not less than "BBB" by DCR, that the Class B-3
Certificates be rated not less than "BB" by DCR, and that the Class B-4
Certificates be rated not less than "B" by DCR.
iv
<PAGE> 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by or on
behalf of the Trust Fund with the Commission pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
on or subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates made by this Prospectus
Supplement. The Depositor will provide without charge to each person to whom
this Prospectus Supplement and Prospectus are delivered, on request of such
person, a copy of any or all of the documents incorporated herein by reference
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be directed to the
Secretary of First Union Residential Securitization Transactions, Inc. in
writing at 301 South College Street, Charlotte, North Carolina 28288-0600, or by
telephone at (704) 383-3624.
v
<PAGE> 6
SUMMARY OF TERMS OF THE OFFERED CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise defined
shall have the respective meanings assigned them in the Prospectus or elsewhere
in this Prospectus Supplement.
Securities Offered......... Mortgage Pass-Through Certificates, Series 1998-A.
Trust Fund................. FURST Mortgage Loan Trust 1998-A (the "Trust Fund")
will be formed pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement")
dated as of April 1, 1998 among First Union
Residential Securitization Transactions, Inc., as
depositor (the "Depositor"), First Union National
Bank ("First Union"), as seller (the "Seller"),
First Union Mortgage Corporation, as servicer (the
"Servicer"), and Norwest Bank Minnesota, National
Association, as trustee (the "Trustee") and as
document custodian (the "Document Custodian"). The
property of the Trust Fund will include: a pool of
first-lien, fixed-rate mortgage loans (the
"Mortgage Loans"), secured by deeds of trust,
security deeds or mortgages on residential
properties that are primarily one- to four-family
residential properties (the "Mortgaged Properties")
(which pool, as of the Closing Date, will include
the Initial Mortgage Loans and subsequently, may
include both the Initial Mortgage Loans and any
Subsequent Mortgage Loans purchased by the Trust
Fund); payments in respect of the Mortgage Loans
received on and after the applicable Cut-Off Date;
property that secured a Mortgage Loan which has
been acquired by foreclosure or deed in lieu of
foreclosure; any funds on deposit in the
Pre-Funding Account; any funds on deposit in the
Capitalized Interest Account (as defined herein)
and certain other property, as described more fully
herein. With respect to any date, the "Aggregate
Loan Balance" will be equal to the aggregate of the
outstanding principal balances of all Mortgage
Loans as of such date. The "Cut-Off Date Loan
Balance" with respect to each Mortgage Loan is the
Scheduled Principal Balance (as defined herein)
thereof as of the applicable Cut-Off Date. The
"Loan Balance" of a Mortgage Loan (other than a
Liquidated Mortgage Loan) on any day is equal to
its Cut-Off Date Loan Balance, minus all
collections applied in reduction of the Cut-Off
Date Loan Balance of such Mortgage Loan. The Loan
Balance of a Liquidated Mortgage Loan (as defined
herein) after the Collection Period in which such
Mortgage Loan becomes a Liquidated Mortgage Loan
shall be zero. The "Collection Period" with respect
to any Distribution Date or Determination Date is
the calendar month immediately preceding the
calendar month in which such Distribution Date or
Determination Date, as the case may be, occurs.
Interest on each Mortgage Loan is payable monthly
at a rate per annum (the "Loan Rate") specified in
the related Mortgage Note on the outstanding Loan
Balance thereof.
Depositor.................. First Union Residential Securitization
Transactions, Inc. ("FURST"), a North Carolina
corporation, a wholly owned, limited purpose
subsidiary of the Seller and an affiliate of First
Union Capital Markets, will sell the Mortgage Loans
to the Trust Fund in exchange for the Certificates.
The Mortgage Loans will be acquired by the
Depositor from the Seller.
S-1
<PAGE> 7
Seller..................... First Union National Bank, a national banking
association, a wholly owned subsidiary of First
Union Corporation and an affiliate of First Union
Capital Markets, will originate or acquire the
Mortgage Loans and sell them to the Depositor.
Servicer................... First Union Mortgage Corporation, a North Carolina
corporation, a wholly owned subsidiary of First
Union Corporation and an affiliate of First Union
Capital Markets, will service the Mortgage Loans.
Trustee and Document
Custodian.................. Norwest Bank Minnesota, National Association, a
national banking association, will act as trustee
and document custodian of the Trust Fund.
Initial Principal Amount
of the Offered
Certificates............. $347,077,774 (approximate, subject to an upward or
downward variance of no more than 5%).
Description of the
Certificates............... The Certificates will consist of the Class SA
Certificates, Class A Certificates, Class M
Certificates, Class B Certificates and Class R
Certificates (each, a "Class"). The Certificates,
other than Class B-3, Class B-4 and Class B-5
Certificates, are sometimes collectively referred
to herein as the "Offered Certificates". Only the
Offered Certificates are offered hereby.
The "Class SA Certificates" will consist of the
Class SA-1, Class SA-2, Class SA-3, Class SA-4,
Class SA-5 and Class SA-X Certificates.
The Class SA-5 Certificates are interest only
Certificates. The Class SA-5 Certificates will not
receive distributions of principal but will accrue
interest on the Class SA-5 Notional Amount (defined
herein).
The Class SA-X Certificates are interest only
Certificates. The Class SA-X Certificates will not
receive distributions of principal but will accrue
interest on the Class SA-X Notional Amount (defined
herein).
The "Class A Certificates" will consist of the
Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7 and Class A-X
Certificates.
The Class A-6 Certificates are interest only
Certificates. The Class A-6 Certificates will not
receive distributions of principal but will accrue
interest on the Class A-6 Notional Amount (defined
herein).
The Class A-X Certificates are interest only
Certificates. The Class A-X Certificates will not
receive distributions of principal but will accrue
interest on the Class A-X Notional Amount (defined
herein).
The "Class R Certificates" or "Residual
Certificates" will consist of the Class R-I and
Class R-II Certificates.
The "Class B Certificates" will consist of the
Class B-1, Class B-2, Class B-3, Class B-4 and
Class B-5 Certificates.
The Class M and Class B Certificates are sometimes
collectively referred to herein as the "Subordinate
Certificates."
The Class M, Class B-1 and Class B-2 Certificates
are sometimes collectively referred to herein as
the "Senior Subordinate Certificates."
S-2
<PAGE> 8
The Class B-3, Class B-4 and Class B-5 Certificates
are sometimes collectively referred to herein as
the "Junior Subordinate Certificates."
The Class R-I, Class R-II, Class SA and Class A
Certificates are sometimes collectively referred to
herein as the "Senior Certificates."
The Class B-3, Class B-4 and Class B-5 Certificates
are not offered hereby. Any information contained
herein relating to the Class B-3, Class B-4 or
Class B-5 Certificates is presented solely to
provide a better understanding of the Offered
Certificates.
The approximate initial Class Principal Balances or
Notional Principal Amount, if applicable, and the
interest rate applicable to each Class of the
Offered Certificates (each, a "Certificate Rate")
will be as set forth on the cover hereof.
Prepayment and Yield
Considerations........... The actual rate of prepayment of principal on the
Mortgage Loans cannot be predicted. The investment
performance of the Offered Certificates may vary
materially and adversely from the investment
expectations of investors due to prepayments on the
Mortgage Loans being higher or lower than
anticipated by investors. The actual yield to the
Holder of an Offered Certificate may not be equal
to the yield anticipated at the time of purchase of
the Certificate or, notwithstanding that the actual
yield is equal to the yield anticipated at that
time, the total return on investment expected by
the investor or the weighted average life of the
Certificate may not be realized.
The yield to maturity on the Class M, Class B-1 and
Class B-2 Certificates, respectively, will be
extremely sensitive to losses (other than Special
Hazard Losses, Fraud Losses and Bankruptcy Losses
in excess of the applicable coverage therefor) on
the Mortgage Loans (and the timing thereof), to the
extent such losses are not covered by the
applicable Classes of Certificates subordinate
thereto, because the entire amount of any such
losses will be allocable to each such Class of
Certificates until their principal balance is
reduced to zero.
Weighted Average
Life Volatility.......... One indication of the impact of varying prepayment
rates on a security is the change in its weighted
average life. The "weighted average life" of an
Offered Certificate is the average amount of time
that will elapse between the date of issuance of
the Certificate and the date on which each dollar
in reduction of the principal balance of the
Certificate is distributed to the investor. Low
rates of prepayment may result in the extension of
the weighted average life of a Certificate; high
rates may result in the shortening of such weighted
average life. In general, if the weighted average
life of a Certificate purchased at par is extended
beyond that initially anticipated, such
Certificate's market value may be adversely
affected. The weighted average lives of the Offered
Certificates, under various prepayment scenarios,
are displayed in the tables appearing under the
heading "Prepayment and Yield Considerations" in
this Prospectus Supplement.
Denominations.............. The Offered Certificates, other than the Class A-2,
Class A-4, Class A-5, Class A-7 and Class R
Certificates, are offered in minimum denominations
equivalent to not less than $25,000 initial
Certificate
S-3
<PAGE> 9
Principal Balance or Notional Principal Amount, as
applicable, each and multiples of $1 in excess
thereof. The Class A-2, Class A-4, Class A-5 and
Class A-7 Certificates are offered in minimum
denominations equivalent to not less than $1,000
initial Certificate Principal Balance each and
multiples of $1 in excess thereof. The Class R-I
and Class R-II Certificates, each of which will
have an initial Class Principal Balance of $50,
will be offered in registered, certificated form in
a single denomination of a 100% Percentage Interest
each.
Initial Cut-Off Date....... April 1, 1998.
Pooling and Servicing
Agreement................ The Pooling and Servicing Agreement dated as of
April 1, 1998 among the Depositor, the Seller, the
Servicer, the Document Custodian and the Trustee
relating to the Certificates.
The Initial Mortgage
Loans...................... The Initial Mortgage Loans to be conveyed to the
Trust Fund consist of Mortgages and the related
Mortgage Notes on single-family properties (which
may be condominiums, manufactured/modular homes,
townhouses, rowhouses or homes in one- to
four-family residences), including investment
properties, located in 23 states and the District
of Columbia. No Loan-to-Value Ratio (as defined
herein) (based upon appraisals made at the time of
origination of the related Mortgage Loan) relating
to any Initial Mortgage Loan exceeded 100% as of
the Initial Cut-Off Date. The majority of the
Mortgage Loans are not insured by primary mortgage
insurance policies, nor does any pool insurance
insure the Mortgage Loans. Neither the Offered
Certificates nor the underlying Mortgage Loans are
guaranteed by the Depositor, the Seller or the
Servicer or any affiliate of the Depositor, the
Seller or the Servicer. Neither the Offered
Certificates nor the underlying Mortgage Loans are
guaranteed or insured by any governmental agency or
instrumentality. As of the Initial Cut-Off Date,
the average Loan Balance was $321,218 the Loan
Rates of the Initial Mortgage Loans ranged from
7.500% to 10.750% per annum, the weighted average
Loan-to-Value Ratio of the Initial Mortgage Loans
was 72.72% (based upon appraisals made at the time
of the origination of the loans), approximately
4.61% of the Initial Mortgage Loans have
Loan-to-Value Ratios greater than 80% and have no
primary mortgage insurance, the weighted average
Loan Rate of the Initial Mortgage Loans was 7.961%
per annum, and the weighted average remaining term
to amortization maturity of the Initial Mortgage
Loans was 302 months. The remaining terms to
amortization maturity of the Initial Mortgage Loans
as of the Initial Cut-Off Date ranged from 25
months to 360 months. The maximum Loan Balance of
any Mortgage Loan as of the Initial Cut-Off Date
was $1,297,229.63. No Initial Mortgage Loan matures
after April 1, 2028. Each of the Initial Mortgage
Loans provides for a schedule of substantially
level and equal monthly payments sufficient to
amortize fully its principal balance over the
amortization period for such Initial Mortgage Loan.
As of the Cut-Off Date, none of the Initial
Mortgage Loans were more than 30 days past due, and
none of the Initial Mortgage Loans has been more
than 30 days past due more than once in the 12
months preceding the Cut-Off Date. The Mortgage
Loans consist of 910 loans as of the Initial
Cut-Off Date. The Mortgage Loans are divided into
two groups ("Loan Group SA" and "Loan Group A", and
each a "Loan Group"). All of the Mortgage Loans in
Loan Group SA (the "Group SA Mortgage Loans") have
original terms to stated maturity (based on the
date of origination or any
S-4
<PAGE> 10
later modification) of greater than 15 but no more
than 30 years and were originated more than 36
months prior to the Initial Cut-Off Date. All of
the Initial Mortgage Loans in Loan Group A
(together with any Subsequent Mortgage Loans, the
"Group A Mortgage Loans") have original terms to
stated maturity (based on the date of origination
or any later modification) of greater than 15 but
no more than 30 years and were originated within
the last 36 months prior to the Initial Cut-Off
Date.
The Seller expects the Group SA and Initial Group A
Mortgage Loans to have the characteristics
described below.
S-5
<PAGE> 11
SELECTED INITIAL MORTGAGE LOAN DATA
APPROXIMATE AS OF THE INITIAL CUT-OFF DATE
Group SA Mortgage Loans
<TABLE>
<S> <C>
Number of Mortgage Loans..................... 568
Aggregate Unpaid Principal Balance........... $162,984,200.88
Range of Unpaid Principal Balances........... $21,990.50 to $903,623.29
Average Unpaid Principal Balance............. $286,944.02
Range of Loan Rates.......................... 7.500% to 10.750%
Weighted Average Loan Rate................... 7.969%
Range of Remaining Terms to Amortization
Maturity................................... 25 to 323 months
Weighted Average Remaining Term to
Amortization Maturity...................... 270 months
Weighted Average Loan Age(1)................. 68 months
Range of Original Loan-to-Value Ratios....... 8.00% to 100.00%
Weighted Average Original Loan-to-Value
Ratio...................................... 72.26%
Geographic Concentration of Mortgaged
Properties Securing Mortgage Loans in
Excess of 5% of Aggregate Unpaid Principal
Balance(2)................................. Florida-30.00%, New Jersey-26.01%, Virginia-
10.34%, New York-6.66%, Maryland-6.17%, North
Carolina-5.28%
</TABLE>
- ---------------
(1) Based on the number of months from and including the first Monthly Payment
to and including the Initial Cut-Off Date.
(2) Approximate.
Initial Group A Mortgage Loans
<TABLE>
<S> <C>
Number of Initial Mortgage Loans............. 342
Aggregate Unpaid Principal Balance........... $129,324,181.49
Range of Unpaid Principal Balances........... $138,359.61 to $1,297,229.63
Average Unpaid Principal Balance............. $378,140.88
Range of Loan Rates.......................... 7.500% to 9.375%
Weighted Average Loan Rate................... 7.950%
Range of Remaining Terms to Amortization
Maturity................................... 116 to 360 months
Weighted Average Remaining Term to
Amortization Maturity...................... 343 months
Weighted Average Loan Age(1)................. 11 months
Range of Original Loan-to-Value Ratios....... 23.00% to 96.00%
Weighted Average Original Loan-to-Value
Ratio...................................... 73.29%
Geographic Concentration of Mortgaged
Properties Securing Initial Mortgage Loans
in Excess of 5% of Aggregate Unpaid
Principal Balance(2)....................... New Jersey-21.34%, Florida-19.25%, North
Carolina-9.88%, Connecticut-7.23%,
Georgia-6.66%, South Carolina-6.63%, New
York-6.50%, Virginia-5.01%
</TABLE>
- ---------------
(1) Based on the number of months from and including the first Monthly Payment
to and including the Initial Cut-Off Date.
(2) Approximate.
S-6
<PAGE> 12
For a further description of the Mortgage Loans,
see "Description of the Mortgage Pool" herein.
Pre-Funding Account........ On the Closing Date, $57,744,845 (the "Pre-Funded
Amount") will be deposited in a trust account in
the name of the Trustee (the "Pre-Funding Account")
and may be used to acquire Subsequent Mortgage
Loans for inclusion in Loan Group A. The "Funding
Period" is the period from the Closing Date until
the earlier of (i) the date on which the remaining
balance of the Pre-Funded Amount is less than
$100,000, and (ii) July 24, 1998. The Pre-Funded
Amount will be reduced during the Funding Period by
the amount thereof, if any, used to purchase
Subsequent Mortgage Loans in accordance with the
Pooling and Servicing Agreement. Subsequent
Mortgage Loans purchased by and transferred to the
Trust Fund on any date (each, a "Subsequent
Transfer Date" and, together with the Closing Date,
each a "Transfer Date") must satisfy the criteria
set forth in the Pooling and Servicing Agreement
and will be purchased at a price equal to the
Scheduled Principal Balance of each such Subsequent
Mortgage Loan as of the close of business on the
first day of the month of the Subsequent Transfer
Date (the "Subsequent Cut-Off Date"). Any portion
of the Pre-Funded Amount remaining at the end of
the Funding Period will be applied as a
distribution of principal to the Holders of the
Class or Classes of Class A Certificates entitled
to receive principal distributions on the
Distribution Date which immediately follows the end
of the Funding Period as described herein. The
Pre-Funding Account will be an asset of the Trust
Fund but will not be an asset of any of the REMICs.
See "Prepayment and Yield Considerations--Mandatory
Prepayment" herein.
Capitalized Interest
Account.................... On the Closing Date, cash will be deposited in the
Capitalized Interest Account in the name of the
Trustee on behalf of the Trust Fund. The amount on
deposit in the Capitalized Interest Account,
including reinvestment income thereon, will be used
by the Trustee to fund certain interest and fee
shortfalls with respect to the Class A Certificates
and a portion of the Subordinate Certificates on
any Distribution Date during the Funding Period and
on the first Distribution Date following the end of
the Funding Period as described herein under
"Description of the Certificates--Capitalized
Interest Account." The Pooling and Servicing
Agreement provides that certain amounts on deposit
in the Capitalized Interest Account that are
determined not to be required to fund such payments
will be periodically distributed to the Seller. In
addition, amounts remaining in the Capitalized
Interest Account at the end of the Funding Period
and not used for such purposes are required to be
paid to the Seller. The Capitalized Interest
Account will be an asset of the Trust Fund but will
not be an asset of either of the REMICs.
Priority of
Distributions.............. Commencing in May 1998, on the 25th day of each
month, or if such 25th day is not a Business Day,
then on the immediately succeeding Business Day
(each, a "Distribution Date"), prior to the Credit
Support Depletion Date (as defined below),
distributions will generally be made from the Group
SA Available Distribution Amount (as defined
herein) for such Distribution Date in the order and
priority as follows: (1) first, interest to the
Class SA Certificates then entitled to receive
accrued and unpaid interest, and to the Class R-I
and Class R-II Certificates at their respective
Certificate Rates as described in "Description of
the Certifi
S-7
<PAGE> 13
cates -- Distributions of Interest" herein; (2)
second, principal to the Class SA Certificates then
entitled to principal and the Class R-I and Class
R-II Certificates in the order described in
"Description of the Certificates -- Distributions
of Principal -- Class SA Certificate Principal
Distributions" herein; (3) third, to the
Subordinate Certificates, interest and then
principal, as described in "Description of the
Certificates -- Distributions of Interest" and
"-- Distributions of Principal -- Subordinate
Certificate Principal Distributions" herein; and
(4) fourth, the remainder of the Group SA Available
Distribution Amount for such Distribution Date will
be distributed to the Holders of the Class R-II
Certificates, as described in "Description of the
Certificates -- Distributions of Principal -- Class
SA Certificate Principal Distributions" herein.
On each Distribution Date, prior to the Credit
Support Depletion Date, distributions will
generally be made from the Group A Available
Distribution Amount for such Distribution Date in
the order of priority as follows: (1) first,
interest to the Class A Certificates at their
respective Certificate Rates as described in
"Descriptions of the Certificates -- Distributions
of Interest" herein; (2) second, principal to the
Class A Certificates then entitled to principal in
the order described in "Description of the
Certificates -- Distributions of Principal -- Class
A Certificate Principal Distributions" herein; (3)
third, to the Subordinate Certificates, interest
and then principal, as described in "Description of
the Certificates -- Distributions of Interest" and
"-- Distributions of Principal -- Subordinate
Certificate Principal Distributions" herein; and
(4) fourth, the remainder of the Group A Available
Distribution Amount for such Distribution Date will
be distributed to the Holders of the Class R-II
Certificates, as described in "Description of the
Certificates -- Distributions of Principal -- Class
A Certificate Principal Distributions" herein.
Distributions of interest and principal to the
Group SA and Group A Certificates will be based
solely on payments received with respect to the
Group SA and Group A Loans, respectively, except
under the limited circumstances described in
"Description of the Certificates -- Priority of
Distributions -- Cross-Collateralization
Provisions" herein.
The "Credit Support Depletion Date" is the first
Distribution Date on which the aggregate of the
Certificate Principal Balances of the Subordinate
Certificates has been or will be reduced to zero.
On each Distribution Date on or after the Credit
Support Depletion Date, distributions will
generally be made from the Group SA Available
Distribution Amount in the order and priority as
follows: (1) first, the Class SA and the Class R
Certificates then entitled to interest receive
accrued and unpaid interest, as described in
"Description of the Certificates -- Distributions
of Interest"; (2) second, the Class SA Certificates
and the Class R Certificates receive principal pro
rata according to their respective Class Principal
Balances; (3) third, the Class A Certificates then
entitled to receive interest receive accrued and
unpaid interest, as described in "Description of
the Certificates -- Distributions of Interest", to
the extent the Group A Available Distribution
Amount for such Distribution Date was insufficient
for such purpose; (4) fourth, the Class A
Certificates receive principal pro rata according
to their respective Class Principal Balances to the
extent the Group A Available
S-8
<PAGE> 14
Distribution Amount for such Distribution Date was
insufficient for such purpose; and (5) fifth, the
remaining Group SA Available Distribution Amount
for such Distribution Date will be distributed to
the Class R-II Certificates.
On each Distribution Date on or after the Credit
Support Depletion Date, distributions will
generally be made from the Group A Available
Distribution Amount in the order and priority as
follows: (1) first, interest to the Class A
Certificates, as described in "Description of the
Certificates -- Distribution of Interest" herein;
(2) second, principal to the Class A Certificates
pro rata according to the respective Class
Principal Balances; (3) third, the Class SA
Certificates then entitled to receive interest
receive accrued and unpaid interest, as described
in "Description of the
Certificates -- Distributions of Interest", to the
extent the Group SA Available Distribution Amount
for such Distribution Date was insufficient for
such purpose; (4) fourth, the Class SA Certificates
receive principal pro rata according to their
respective Class Principal Balances to the extent
the Group SA Available Distribution Amount for such
Distribution Date was insufficient for such
purpose; and (5) fifth, the remaining Group A
Available Distribution Amount for such Distribution
Date will be distributed to the Class R-II
Certificates.
For a description of the order and priority of
distributions, see "Description of
Certificates -- Priority of Distributions" herein.
Interest................... With respect to each Class of Certificates,
interest will be passed through monthly on each
Distribution Date, commencing in May 1998. With
respect to each Distribution Date, an amount of
interest will accrue on each Class of the Offered
Certificates at a rate generally equal to 1/12th of
the applicable Certificate Rate for such Class
multiplied by the related Class Principal Balance
or Class Notional Amount. The Certificate Rates for
the Offered Certificates are as set forth on the
cover page hereof. The initial Certificate Rate for
each Class of Senior Subordinate Certificates will
be 7% per annum. Interest to be distributed on the
Certificates on any Distribution Date will consist
of accrued and unpaid interest as of previous
Distribution Dates and interest accrued during the
preceding calendar month. No interest will accrue
on accrued but unpaid interest. All distributions
of interest for each Class of Certificates will
generally be made only to the extent of the
applicable Available Distribution Amount as
described herein under "Description of the
Certificates -- Priority of Distributions".
See "Description of the
Certificates -- Distributions of Interest" herein.
Compensating Interest...... Subject to the limitations described in this
Prospectus Supplement under "Prepayment and Yield
Considerations", on each Distribution Date, the
Servicer is obligated to remit to the Distribution
Account an amount equal to the lesser of (a) any
shortfall for the related month in interest
collections resulting from the timing of (i)
Payoffs (as defined herein) made other than on the
first of the month or (ii) Curtailments (as defined
herein) and (b) the monthly Servicing Fee. The
amount so passed through will hereinafter be
referred to as "Compensating Interest".
Compensating Interest will be allocated to each
Class of Certificates pro rata according to the
amount of interest accrued thereon, and any
remaining shortfall in interest collections
resulting from the timing of
S-9
<PAGE> 15
prepayments in full on a Mortgage Loan ("Payoffs")
or partial principal prepayments on a Mortgage Loan
("Curtailments") will be applied pro rata according
to the amount of interest to which each Class of
Certificates would otherwise be entitled in
reduction thereof. See "Description of the
Certificates -- Distributions of Interest" herein.
Principal (including
Prepayments)............. General. On each Distribution Date, the Class SA
Certificates will be entitled to receive principal
distributions from the Group SA Available
Distribution Amount to the extent described herein;
the Class A Certificates will be entitled to
receive principal distributions from the Group A
Available Distribution Amount to the extent
described herein; and the Subordinate Certificates
will be entitled to receive distributions from the
Group SA Available Distribution Amount and Group A
Available Distribution Amount. All distributions of
principal will be made only to the extent of the
applicable Available Distribution Amount as
described herein under "Description of the
Certificates -- Priority of Distributions".
The Class SA-5, Class SA-X, Class A-6 and Class A-X
Certificates will not be entitled to receive any
distributions of principal.
Distributions to Class SA Certificates.
On each Distribution Date, prior to the Credit
Support Depletion Date, an amount, up to the amount
of the Group SA Senior Principal Distribution
Amount (as defined in "Description of the
Certificates -- Distributions of Principal -- Class
SA Certificates Principal Distributions" herein)
for such Distribution Date, will be distributed as
principal to the following Classes of the Class SA
Certificates and the Class R Certificates in the
following order of priority:
(i) first, to the Class SA-4 Certificates, an
amount, up to the amount of the Class SA-4
Lockout Principal Distribution Amount (as
defined herein) for such Distribution Date,
until the Class SA-4 Principal Balance has
been reduced to zero;
(ii) second, to the Class R-I and Class R-II
Certificates pro rata, the portion of the
Group SA Senior Principal Distribution Amount
remaining after the distribution described
above, until the Class R-I Principal Balance
and the Class R-II Principal Balance have
been reduced to zero;
(iii) third, the portion of the Group SA Senior
Principal Distribution Amount remaining after
the distributions described above,
sequentially as follows:
(A) first, to the Class SA-1 and Class SA-2
Certificates, pro rata, until the Class
SA-1 Principal Balance and Class SA-2
Principal Balance have been reduced to
zero;
(B) second, to the Class SA-3 Certificates,
until the Class SA-3 Principal Balance
has been reduced to zero; and
(C) third, to the Class SA-4 Certificates,
until the Class SA-4 Principal Balance
has been reduced to zero.
S-10
<PAGE> 16
On each Distribution Date on and after the Credit
Support Depletion Date, principal will not be
distributed in the order and priority described
above. Instead, an amount up to the Group SA Senior
Principal Distribution Amount for such Distribution
Date will be distributed as provided herein under
"Description of the Certificates -- Priority of
Distributions."
Distributions to the Class A Certificates.
On each Distribution Date, prior to the Credit
Support Depletion Date, an amount, up to the amount
of the Group A Senior Principal Distribution Amount
(as defined in "Description of the
Certificates -- Distributions of Principal -- Class
A Certificates Principal Distributions" herein) for
such Distribution Date, will be distributed as
principal to the following Classes of the Class A
Certificates in the following order of priority:
(i) first, to the Class A-3 Certificates, an
amount, up to the amount of the Class A-3
Lockout Principal Distribution Amount (as
defined herein) for such Distribution Date,
until the Class A-3 Principal Balance has been
reduced to zero;
(ii) second, the portion of the Group A Senior
Principal Distribution Amount remaining after
the distributions described above,
sequentially as follows:
(A) first, to the Class A-1 Certificates,
until the Class A-1 Principal Balance
has been reduced to zero;
(B) second, to the Class A-2 Certificates,
until the Class A-2 Principal Balance
has been reduced to zero;
(C) third, to the Class A-4 and Class A-7
Certificates, pro rata, until the Class
A-4 Principal Balance and Class A-7
Principal Balance have been reduced to
zero;
(D) fourth, to the Class A-5 Certificates,
until the Class A-5 Principal Balance
has been reduced to zero; and
(E) fifth, to the Class A-3 Certificates,
until the Class A-3 Principal Balance
has been reduced to zero.
On each Distribution Date on and after the Credit
Support Depletion Date, principal will not be
distributed in the order and priority described
above. Instead, the Group A Senior Principal
Distribution Amount for such Distribution Date will
be distributed as provided herein under
"Description of Certificates -- Priority of
Distributions."
Distributions to the Subordinate Certificates. On
each Distribution Date, an amount, up to the
aggregate amount of the Subordinate Distribution
Amount (as defined herein) for such Distribution
Date, will be distributed as principal to the
Subordinate Certificates. On each Distribution
Date, each Class of Subordinate Certificates will
be entitled to receive its pro rata share (by Class
Principal Balance) of the Subordinate Principal
Distribution Amount remaining after distributions
of interest and principal to all Classes of
Subordinate Certificates senior to such Class and
distributions of interest to such Class.
Notwithstanding the foregoing, on any Distribution
Date on which the Subordination
S-11
<PAGE> 17
Level (as defined herein) for any Class of
Subordinate Certificates is less than the
Subordination Level as of the Closing Date, the
portion of the Subordinate Principal Prepayments
Distribution Amount (as defined herein) otherwise
allocable to the Class or Classes of the
Subordinate Certificates junior to such Class will
be allocated to the most senior Class of
Subordinate Certificates for which the
Subordination Level is less than such percentage as
of the Closing Date and to the Class or Classes of
Subordinate Certificates senior thereto, pro rata
according to the Class Principal Balances of such
Classes. See "Description of the
Certificates -- Priority of Distributions" herein.
The relative seniority, from highest to lowest, of
the Subordinate Certificates shall be as follows:
Class M, Class B-1, Class B-2, Class B-3, Class B-4
and Class B-5.
The rights of the Holders of the Subordinate
Certificates to receive distributions of principal
are subordinated to the rights of the Holders of
the Senior Certificates to receive distributions of
principal. See "Description of the
Certificates -- Subordination and Allocation of
Losses" herein.
For a more detailed description of how
distributions of principal will be allocated among
the various Classes of Certificates, see
"Description of the Certificates -- Distributions
of Principal" herein.
Subordination and
Allocation of Losses....... The Subordinate Certificates will be subordinate in
right of payment to and provide credit support for
the Senior Certificates; the Junior Subordinate
Certificates will be subordinate in right of
payment to and provide credit support for the
Senior Subordinate Certificates; the Class B-2
Certificates will be subordinate in right of
payment to and provide credit support for the Class
M and Class B-1 Certificates; and the Class B-1
Certificates will be subordinate in right of
payment to and provide credit support for the Class
M Certificates, in each case, to the extent
described herein. The support provided by the
Subordinate Certificates to the Senior Certificates
is intended to afford such Holders protection
against certain losses. The support provided by the
Junior Subordinate Certificates to the Senior
Subordinate Certificates is intended to enhance the
likelihood of regular receipt by the Holders of the
Senior Subordinate Certificates of the full amount
of monthly distributions of interest and principal
to which they are entitled and to afford such
Holders protection against certain losses. The
protection afforded the Senior Subordinate
Certificates by the Junior Subordinate Certificates
will be accomplished by the preferential right, on
each Distribution Date, of the Senior Subordinate
Certificates to receive distributions of interest
and principal prior to the distributions of
interest or principal to the Junior Subordinate
Certificates. The protection afforded the Class M
Certificates by the Class B-1 and Class B-2
Certificates, and the protection afforded the Class
B-1 Certificates by the Class B-2 Certificates will
be similarly accomplished by the preferential right
of the Class M Certificates to receive
distributions of interest and principal prior to
such distributions of interest and principal to the
Class B-1 and Class B-2 Certificates and the
preferential right of the Class B-1 Certificates to
receive such distributions prior to such
distributions of interest and principal to the
Class B-2 Certificates.
S-12
<PAGE> 18
Except for Special Hazard Losses, Fraud Losses and
Bankruptcy Losses in excess of the designated
amount of Special Hazard Coverage, Fraud Coverage
and Bankruptcy Coverage, any loss realized with
respect to a Mortgage Loan in a Loan Group will be
allocated among the related Certificates (i) for
losses allocable to principal (a) first, to the
Junior Subordinate Certificates, until the
aggregate of the Class Principal Balances thereof
have been reduced to zero, (b) second, to the Class
B-2 Certificates, until the Class B-2 Principal
Balance has been reduced to zero, (c) third, to the
Class B-1 Certificates, until the Class B-1
Principal Balance has been reduced to zero, (d)
fourth, to the Class M Certificates, until the
Class M Principal Balance has been reduced to zero
and (e) fifth, to the related Senior Certificates
(other than the Class SA-5, Class SA-X, Class A-6
and Class A-X Certificates), pro rata, according to
their Class Principal Balances in reduction of
their respective Class Principal Balances; and (ii)
for losses allocable to interest (a) first, to the
Junior Subordinate Certificates, in reduction of
accrued but unpaid interest thereon and then in
reduction of the Class Principal Balances of the
Junior Subordinate Certificates, (b) second, to the
Class B-2 Certificates, in reduction of accrued but
unpaid interest thereon and then in reduction of
the Class B-2 Principal Balance, (c) third, to the
Class B-1 Certificates, in reduction of accrued but
unpaid interest thereon and then in reduction of
the Class B-1 Principal Balance, (d) fourth, to the
Class M Certificates, in reduction of accrued but
unpaid interest thereon and then in reduction of
the Class M Principal Balance, (e) fifth, to the
applicable Senior Certificates, pro rata according
to accrued but unpaid interest thereon and then pro
rata according to their Class Principal Balances in
reduction of their respective Class Principal
Balances, as applicable.
The allocation of the principal portion of losses
relating to a Mortgage Loan in a given Loan Group
to all Classes of the related Senior Certificates
and to the Subordinate Certificates pro rata
according to their respective Class Principal
Balances and the allocation of the interest portion
of losses pro rata according to the amount of
interest accrued on each such Class in reduction
thereof and then, pro rata, in reduction of their
related Class Principal Balance is hereinafter
referred to as "Pro Rata Allocation." For purposes
of any Pro Rata Allocation in part to the
Subordinate Certificates, each Class of Subordinate
Certificates will be deemed to have a Class
Principal Balance (and to accrue interest thereon)
equal to the actual Class Principal Balance thereof
multiplied by a fraction, the numerator of which is
the Group SA Subordinate Amount (for a loss on a
Group SA Mortgage Loan) or the Group A Subordinate
Amount (for a loss on a Group A Mortgage Loan), and
the denominator of which is the aggregate of the
Group SA Subordinate Amount and the Group A
Subordinate Amount (each as defined herein).
Since the Subordinate Certificates will absorb
losses on Mortgage Loans in both Mortgage Loan
Groups, a disproportionate amount of losses with
respect to Mortgage Loans in one Loan Group will
adversely impact the subordination available to the
Senior Certificates related to the other Loan
Group.
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<PAGE> 19
Special Hazard Losses, Fraud Losses and Bankruptcy
Losses in excess of the applicable coverage will be
allocated to all outstanding Classes of related
Certificates by Pro Rata Allocation. Each of the
applicable coverages may be reduced periodically,
as described herein. See "Description of the
Certificate -- Subordination and Allocation of
Losses" and "-- Distributions of Principal" herein.
Credit Enhancements........ Subordination. The subordination of the
Subordinate Certificates and the further
subordination within the Class of Subordinate
Certificates described above and in "Description of
the Certificates -- Subordination and Allocation of
Losses" will provide credit enhancement to the
Senior Certificates and each Class of Subordinate
Certificates with lower Class designations.
Class A-7 Reserve Fund. A reserve fund of
approximately $12,500 (the "Class A-7 Reserve
Fund") for the benefit of the Holders of the Class
A-7 Certificates, which will be an asset of REMIC
II, will be established at the time the
Certificates are issued. No additional amounts will
be deposited into the Class A-7 Reserve Fund after
the initial deposit. The Funds on deposit in the
Class A-7 Reserve Fund will not be invested.
A withdrawal from the Class A-7 Reserve Fund will
be made on each of the first twelve Distribution
Dates equal to the product of (i) the Class
Principal Balance of the Class A-7 Certificates on
the day immediately preceding each such
Distribution and (ii) approximately 0.04167%. The
Holders of the Class A-7 Certificates will receive
such amount as a distribution of interest on each
of the first twelve Distribution Dates.
Any amounts remaining in the Class A-7 Reserve Fund
at the end of such twelve month period will be
distributed to the Holders of the Class R-II
Certificates.
Shifting of Interests. The Class SA Certificates
entitled to principal will receive 100% of
Prepayments received with respect to the Group SA
Mortgage Loans until the earliest to occur of (i)
the fifth anniversary of the first Distribution
Date, (ii) the Credit Support Depletion Date or
(iii) the Distribution Date on which Class SA
Certificates are retired. During the next four
years, unless previously retired, the Class SA
Certificates entitled to principal will receive a
disproportionately large, but decreasing, share of
such Prepayments. This will result in an
acceleration of the amortization of such Class SA
Certificates, subject to the priorities described
in "Description of the
Certificates -- Distributions of Principal" herein,
enhancing the likelihood that Holders of such
Classes of Certificates will be paid the full
amount of principal to which they are entitled.
The Class A Certificates entitled to principal will
receive 100% of the Prepayments received with
respect to the Group A Mortgage Loans until the
earliest to occur of (i) the fifth anniversary of
the first Distribution Date, (ii) the Credit
Support Depletion Date or (iii) the Distribution
Date on which the Class A Certificates are retired.
During the next four years, unless previously
retired, the Class A Certificates entitled to
principal will receive a disproportionately large,
but decreasing, share of such Prepayments. This
will result in an acceleration of the amortization
of such Class A Certificates, subject to the
priorities described in
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<PAGE> 20
"Description of the Certificates -- Distributions
of Principal" herein, enhancing the likelihood that
Holders of such Classes of Certificates will be
paid the full amount of principal to which they are
entitled.
For a more detailed description of how Prepayments
are allocated among the Senior Certificates and the
Subordinate Certificates, see "Description of the
Certificates -- Distributions of Principal" herein.
Advances................... The Servicer will be obligated to make advances of
cash in an amount equal to all amounts of scheduled
principal and interest, if any, at the time known
by the Servicer to be delinquent on each Mortgage
Loan and not previously advanced, but only to the
extent that such amounts are deemed recoverable by
the Servicer. Any advance made by the Servicer with
respect to a Mortgage Loan will be reimbursable to
it. The Servicer will be entitled to reimburse
itself in respect of otherwise non-recoverable
advances from funds otherwise distributable to
Certificateholders. See "Description of the
Certificates -- Advances" herein. The Servicer may
distribute Payaheads paid to the Servicer not yet
due in lieu of a required advance of scheduled
principal and interest, but must increase its
advances in subsequent months for which such
Payaheads are due to cover scheduled payments
represented thereby.
Servicing Fee.............. The Servicer will receive a fee (the "Servicing
Fee") with respect to each Collection Period
computed at an annual rate equal to not more than
0.44% on the Loan Balance of each Mortgage Loan as
of the first day of each such Collection Period
and, for any Distribution Date, the Servicing Fee
will be deducted from collections allocable to
payments of interest received during the related
Collection Period. See "Description of the
Certificates -- Servicing and Other Compensation
and Payment of Expenses" herein.
Trustee Fee................ The Trustee will receive a fee (the "Trustee Fee")
with respect to each Collection Period computed at
an annual rate equal to 0.01% on the Loan Balance
of each Mortgage Loan as of the first day of each
such Collection Period and, for any Distribution
Date, the Trustee Fee will be deducted from
collections allocable to payments of interest
received during the related Collection Period.
Optional Termination by the
Servicer................. The Servicer may, at its option, terminate the
Pooling and Servicing Agreement on any date on
which the Aggregate Loan Balance is less than 5% of
the sum of (i) the aggregate principal balance of
the Mortgage Loans as of the Initial Cut-Off Date
(the "Initial Cut-Off Date Aggregate Loan Balance")
and (ii) the original Pre-Funded Amount, at the
price described herein under "Description of the
Certificates -- Termination; Purchase of Mortgage
Loans."
Certain Federal Income Tax
Consequences............. For federal income tax purposes, the Trust Fund
will make one or more elections to treat certain
assets of the Trust Fund as one or more REMICs. The
Certificates (other than the Class R Certificates)
will constitute "Regular Interests" in REMIC II and
generally will be treated for federal income tax
purposes as debt instruments of REMIC II with
payment terms equivalent to the terms of such
certificates. The Class R-I Certificates and the
Class R-II Certificates will constitute the single
class of "Residual Interests" in REMIC I and REMIC
II,
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<PAGE> 21
respectively. Continued qualification of each REMIC
of the Trust Fund as a REMIC will be subject to
compliance with the applicable provisions of the
Internal Revenue Code of 1986, as amended (the
"Code"), and the related requirements set forth in
the Pooling and Servicing Agreement.
Interest on the Offered Certificates will be
required to be included in the income of the
Holders thereof in accordance with the accrual
method of accounting. The Class SA-5, Class SA-X,
Class A-6 and Class A-X Certificates will be (and
other Classes of Offered Certificates may be)
issued with original issue discount for federal
income tax purposes. Original issue discount must
be included in income as it accrues on a constant
yield method, regardless of whether a Holder
receives concurrently the cash attributable to such
original issue discount.
A Holder of a Residual Certificate generally will
be required to include in income the REMIC's net
income or net loss, without regard to the timing or
amount of cash distributions. It is anticipated
that all or a substantial part of the taxable
income of REMIC II and REMIC I includible by the
Class R-II and Class R-I Certificateholders will be
treated as "excess inclusion" income subject to
special rules and requirements under the Code.
Accordingly, the tax liability of a Holder of a
Residual Certificate attributable to the ownership
of a residual interest may substantially exceed the
amount of cash distributed thereon, and thus the
after-tax return of the Class R-II and Class R-I
Certificates may be significantly lower than would
be the case were those Certificates treated as debt
instruments for federal income tax purposes.
Further significant restrictions apply to the
transfer of the Class R Certificates.
For further information regarding the federal
income tax consequences of investing in the Offered
certificates, see "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Transfer Restrictions on
Residual Certificates...... A Residual Certificate may not be transferred, sold
or otherwise assigned unless generally, prior to
such transfer, the proposed transferee delivers to
the Trustee an affidavit to the effect that, among
other things, such transferee is not a
"disqualified organization" within the meaning of
the Code. If, notwithstanding such restrictions, a
Residual Certificate is transferred to a
"disqualified organization", a substantial tax may
be imposed on the transferor. In the case of a
purported transfer of a Residual Certificate to a
non-U.S. person, certain additional significant
conditions must be satisfied prior to transfer of
the Residual Certificate. In addition to the
foregoing, Treasury regulations prescribe that
certain transfers of a Residual Certificate be
disregarded with the result that the transferor
will continue to be treated as the owner of the
Residual Certificate for federal income tax
purposes. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations....... A fiduciary of a pension or other employee benefit
plan (an "ERISA Plan") subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), contemplating the purchase of the
Offered Certificates should consult with its
counsel before making a purchase and the fiduciary
and such legal advisors should consider the
possible application of the prohibited transaction
rules under ERISA and
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<PAGE> 22
the Code and the possible availability of the
prohibited transaction exemption and certain other
exemptions described herein. See "ERISA
Considerations" herein and in the Prospectus.
Subject to the considerations and conditions
described under "ERISA Considerations" herein, it
is expected that the Senior Certificates (other
than the Class R Certificates) may be purchased by
an ERISA Plan. The Class R Certificates and the
Senior Subordinate Certificates may not be
transfered except upon satisfaction of certain
conditions. See "ERISA Considerations" herein.
Legal Investment
Considerations........... As of the date of their issuance, the Offered
Certificates, other than the Class B-1 and Class
B-2 Certificates, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"). SMMEA
provides that states may override its provisions on
legal investment and restrict or condition
investment in mortgage related securities by taking
statutory action prior to October 4, 1991. Certain
states have enacted legislation which has
overridden the provisions of SMMEA. See "Legal
Investment Considerations" herein. It is
anticipated that the Class B-1 and Class B-2
Certificates will not be rated in one of the
highest rating categories by a nationally
recognized statistical rating organization and,
therefore, will not constitute "mortgage related
securities" for purposes of SMMEA.
Institutions whose investment activities are
subject to review by certain regulatory authorities
may be or may become subject to restrictions on
investment in the Offered Certificates, and such
restrictions may be retroactively imposed. The
Federal Financial Institutions Examination Council,
the Federal Deposit Insurance Corporation, the
Office of the Comptroller of the Currency, the
Board of Governors of the Federal Reserve System,
the Office of Thrift Supervision and the National
Credit Union Administration have adopted
guidelines, and have proposed policies, regarding
the suitability of investments in various types of
derivative mortgage-backed securities, including
securities such as the Offered Certificates. In
addition, several states have adopted or are
considering regulations that would prohibit
regulated institutions subject to their
jurisdiction from holding mortgage-backed
securities such as the Offered Certificates,
including such securities previously purchased.
Investors should consult their own legal advisors
in determining whether and to what extent the
Offered Certificates constitute legal investments
for such investors.
Use of Proceeds............ Substantially all of the net proceeds from the sale
of the Offered Certificates will be applied by the
Depositor to the purchase price of the Mortgage
Loans and to pay expenses connected with pooling
the Mortgage Loans and issuing the Certificates,
including funding the Pre-Funding Account and the
Capitalized Interest Account.
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<PAGE> 23
Certificate Rating......... It is a condition to the issuance of the Offered
Certificates that the Senior Certificates each be
rated "AAA" (except for the Class SA-5, Class SA-X,
Class A-6 and Class A-X Certificates, which will be
rated "AAAr") by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies,
Inc. ("S&P") and "AAA" by Duff & Phelps Credit
Rating Co. ("DCR"), that the Class M Certificates
be rated not less than "AA" by DCR, that the Class
B-1 Certificates be rated not less than "A" by DCR,
and that the Class B-2 Certificates be rated not
less than "BBB" by DCR, that the Class B-3
Certificates be rated not less than "BB" by DCR,
and that the Class B-4 Certificates be rated not
less than "B" by DCR.
Registration of Offered
Certificates............. Except in certain limited circumstances as
described herein, the Offered Certificates (except
for the Class R Certificates) generally will be
available only in book-entry form through the
facilities of The Depository Trust Company ("DTC").
See "Risk Factors -- Book-Entry
System", "Description of the
Certificates -- Book-Entry Registration" and
"-- Definitive Certificates" herein.
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<PAGE> 24
RISK FACTORS
LIMITED LIQUIDITY
There is currently no market for the Offered Certificates. While the
Underwriters currently intend to make a market in the Offered Certificates, they
are under no obligation to do so. There can be no assurance that a secondary
market will develop or, if a secondary market does develop, that it will provide
Holders of the Offered Certificates with liquidity of investment or that it will
continue for the lives of the Offered Certificates. The Offered Certificates
will not be listed on any securities exchange.
Issuance of the Offered Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Offered Certificates for which they cannot obtain
physical certificates. See "Description of the Certificates -- Book-Entry
Registration" herein.
RISKS ASSOCIATED WITH MORTGAGE LOANS
In addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of payments of
principal and interest when due on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to the
Mortgage Loans. Further, application of federal and state bankruptcy and debtor
relief laws would affect the interests of the Certificateholders in the Mortgage
Loans if such laws result in certain Mortgage Loans being uncollectible. See
"Certain Legal Aspects of the Mortgage Loans -- Anti-Deficiency Legislation;
Bankruptcy and Consumer Protection Legislation" herein.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, delay could be encountered in connection with the
liquidation of defaulted Mortgage Loans, with corresponding delays in the
receipt of related proceeds by the Certificateholders. Further, the Servicer
will be entitled to deduct from Liquidation Proceeds all expenses reasonably
incurred in attempting to recover amounts due on Liquidated Mortgage Loans and
not yet repaid, including legal fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses, thereby reducing collections
available to the Certificateholders. In the event that any Mortgaged Properties
fail to provide adequate security for the related Mortgage Loans and the
protection provided by the subordination feature is insufficient,
Certificateholders could experience a loss on their investment. See "Certain
Legal Aspects of the Mortgage Loans -- Foreclosure" and "-- Rights of
Redemption" herein.
Under federal and state environmental legislation and applicable case law,
it is unclear whether liability for costs of eliminating environmental hazards
in respect of real property may be imposed on a secured lender (such as the
Trust Fund) acquiring title to such real property. Such costs could be
substantial. See "Certain Legal Aspects of the Mortgage Loans -- Environmental
Legislation" herein.
LOCAL REAL ESTATE MARKETS
An overall decline in the residential real estate markets in the states in
which the Mortgaged Properties are located could adversely affect the values of
the Mortgaged Properties such that the outstanding Loan Balances equal or exceed
the value of the Mortgaged Properties. Such declines could reduce the interest
of the holder of a mortgage on the Mortgaged Property. Residential real estate
markets in many states have softened in recent years. There is no reliable
information available to the Seller with respect to the rate at which real
estate values have declined in such states. The Seller can neither quantify the
impact of such declines in property values nor predict how long such declines
may continue or when such declines will end. During a period of such declines,
the rates of delinquencies, foreclosures and losses on the Mortgage Loans would
be expected to be higher than those experienced in the mortgage lending industry
in general.
A rise in interest rates over a period of time and the general condition of
the Mortgaged Property as well as other factors may have the effect of reducing
the value of the Mortgaged Property from the appraised value at the time the
Mortgage Loan was originated. If there is a reduction in value of the Mortgaged
Property, the ratio of the amount of the Mortgage Loan to the value of the
Mortgaged Property may increase over what it
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<PAGE> 25
was at the time the Mortgage Loan was originated. Such an increase may reduce
the likelihood of liquidation or other proceeds being sufficient to satisfy the
Mortgage Loan after satisfaction of any senior liens.
PREPAYMENTS; DUE-ON-SALE PROVISIONS
The Mortgage Loans may be prepaid in whole or in part at any time without
penalty. In addition, a substantial portion of the Mortgage Loans contain
due-on-sale provisions which, to the extent enforced by the Servicer, will
result in prepayment of such Mortgage Loans. See "Prepayment and Yield
Considerations" and "Certain Legal Aspects of the Mortgage
Loans -- Enforceability of Certain Provisions" herein. The rate of prepayments
on fixed-rate mortgage loans, such as the Mortgage Loans, is sensitive to
prevailing interest rates. Generally, if prevailing interest rates fall
significantly below the interest rates on the Mortgage Loans, the Mortgage Loans
are likely to be subject to higher prepayment rates than if prevailing rates
remain at or above the interest rates on the Mortgage Loans. Conversely, if
prevailing interest rates rise significantly above the interest rates on the
Mortgage Loans, the rate of prepayments is likely to decrease. The average life
of the Offered Certificates, and, if purchased at other than par, the yields
realized by Holders of the Offered Certificates, will be sensitive to levels of
payment (including prepayments relating to the Mortgage Loans, the
"Prepayments") on the Mortgage Loans. In general, the yield on an Offered
Certificate that is purchased at a premium from the outstanding principal amount
thereof will be adversely affected by a higher than anticipated level of
Prepayments of the Mortgage Loans and enhanced by a lower than anticipated
level. Conversely, the yield on an Offered Certificate that is purchased at a
discount from the outstanding principal amount thereof will be enhanced by a
higher than anticipated level of Prepayments and adversely affected by a lower
than anticipated level.
The yield to maturity on the Class SA-5 and Class SA-X Certificates will be
extremely sensitive to the level of Prepayments of the Group SA Mortgage Loans.
Therefore, the yield to maturity on the Class SA-5 and Class SA-X Certificates
will decrease as a result of faster than expected Prepayments on the Group SA
Mortgage Loans. Prospective investors should fully consider the risks associated
with an investment in the Class SA-5 and Class SA-X Certificates, including the
possibility that if the rate of Prepayments on the Group SA Mortgage Loans is
rapid, such investors may not fully recoup their initial investments.
The yield to maturity on the Class A-6 and Class A-X Certificates will be
extremely sensitive to the level of Prepayments of the Group A Mortgage Loans.
Therefore, the yield to maturity on the Class A-6 and Class A-X Certificates
will decrease as a result of faster than expected Prepayments on the Group A
Mortgage Loans. Prospective investors should fully consider the risks associated
with an investment in the Class A-6 and Class A-X Certificates, including the
possibility that if the rate of Prepayments on the Group A Mortgage Loans is
rapid, such investors may not fully recoup their initial investments.
The yield to maturity on each Class of Senior Subordinate Certificates will
be extremely sensitive to realized losses on the Mortgage Loans (other than
Special Hazard Losses, Fraud Losses and Bankruptcy Losses in excess of the
applicable coverage therefor provided by the Subordinate Certificates), because
a disproportionately large amount of such losses (rather than a pro rata portion
thereof) generally will be allocable to such Classes of Certificates following
the reduction of the aggregate Class Principal Balances of the Junior
Subordinate Certificates to zero, as described under "Description of the
Certificates -- Subordination and Allocation of Losses" herein.
RISKS OF HOLDING SUBORDINATE CERTIFICATES
The rights of the Holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Holders of the Senior Certificates and the rights of the Holders
of each Class of Subordinate Certificates to receive such distributions with
respect to the Mortgage Loans will be subordinated to such rights of the Class
or Classes of Subordinate Certificates subordinate thereto in each case only to
the extent described herein. Delinquencies that are not advanced by or on behalf
of the Servicer (because the amounts, if advanced, would be nonrecoverable),
will adversely affect the yield on the Subordinate Certificates. Because of the
priority of distributions, shortfalls resulting from delinquencies not so
advanced will be borne first by the Subordinate Certificates, in reverse order
of their Class
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<PAGE> 26
designations, and then by the related Senior Certificates. If, as a result of
such shortfalls, the aggregate of the Class Principal Balances of all Classes of
Certificates exceeds the Aggregate Loan Balance, the Class of Subordinate
Certificates then outstanding with the highest Class designation will be reduced
by the amount of such excess.
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in decreasing order of their priority of distributions, will be
progressively more sensitive to the rate and timing of Mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those assumed by a
Holder of a Subordinate Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such Holder based on such
assumption. The timing of losses on the Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Mortgage Loans are consistent with such investors
expectations. In general, the earlier a loss occurs the greater the effect on an
investor's yield to maturity. Losses on the Mortgage Loans will reduce the Class
Principal Balance of the Subordinate Certificates to the extent of any losses
allocated thereto without the receipt of cash attributable to such reduction.
See "Description of the Certificates -- Subordination and Allocation of Losses"
herein. As a result of such reductions, less interest will accrue on such
Classes of Subordinate Certificates than otherwise would be the case. The yield
to maturity of the Subordinate Certificates will also be affected by
disproportionate allocations of Prepayments to the Senior Certificates and other
cash shortfalls in Available Funds. See "Description of the
Certificates -- Subordination and Allocation of Losses" herein.
Since the Subordinate Certificates will absorb losses on Mortgage Loans in
both Loan Groups, a disproportionate amount of losses with respect to Mortgage
Loans in one Loan Group will adversely impact the availability of subordination
to the Senior Certificates related to the other Loan Group.
LIMITED SOURCE OF PAYMENTS -- NO RECOURSE TO DEPOSITOR, SELLER, SERVICER OR
TRUSTEE
The Mortgage Loans are to be the sole source of payments on the
Certificates. The Certificates do not represent an interest in or obligation of
the Depositor, the Seller, the Servicer, the Trustee or any of their affiliates,
except for the limited obligations of the Depositor and the Seller with respect
to certain breaches of their representations and warranties and of the Servicer
with respect to its servicing obligations. Neither the Certificates nor the
Mortgage Loans will be guaranteed by or insured by any governmental agency or
instrumentality, the Depositor, the Seller, the Servicer, the Trustee or any of
their affiliates. 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 the Depositor, the Seller, the
Servicer, the Trustee or any of their affiliates.
GEOGRAPHIC CONCENTRATION
Approximately 25.24% of all Initial Mortgage Loans, 30.00% of the Group SA
Mortgage Loans and approximately 19.25% of the Initial Group A Mortgage Loans
(by Initial Cut-Off Date Principal Balances) are secured by Mortgaged Properties
located in the State of Florida. In addition, approximately 26.01% and 10.34% of
the Group SA Mortgage Loans are located in New Jersey and Virginia,
respectively. Approximately 21.34%, 9.88%, 7.23%, 6.66%, and 6.63% of the
Initial Group A Mortgage Loans (by Initial Cut-Off Date Principal Balance) are
located in New Jersey, North Carolina, Connecticut, Georgia and South Carolina
respectively.
BOOK-ENTRY SYSTEM
Since transactions in the Class SA Certificates, the Class A Certificates
and the Senior Subordinate Certificates (the "Book-Entry Certificates")
generally can be effected only through The Depository Trust Company ("DTC"),
participating organizations, indirect participants and certain banks, the
ability of a Certificateholder to pledge a Book-Entry Certificate to persons or
entities that do not participate in the DTC system, or otherwise to take actions
with respect to such Certificates, may be limited due to a lack of a physical
certificate representing the Book-Entry Certificates. In addition, the
Certificateholders may experi-
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<PAGE> 27
ence some delay in their receipt of distribution of interest and principal on
the Book-Entry Certificates, since such distributions will be forwarded by the
Trustee (or its duly appointed paying agent, if any) to DTC, and DTC will credit
such distributions to the accounts of DTC Participants (as defined herein) which
will thereafter credit them to the accounts of Certificateholders either
directly or indirectly through indirect participants. Also, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity thereof in
any secondary trading market that may develop therefor because investors may be
unwilling to purchase securities for which they cannot obtain delivery of
physical certificates. See "Description of the Certificates -- Book-Entry
Registration" herein.
CERTIFICATE RATINGS
The rating of the Offered Certificates will depend primarily on an
assessment by the Rating Agencies of the underlying Mortgage Loans and the
amount of subordination. The rating by the Rating Agencies of the Offered
Certificates is not a recommendation to purchase, hold or sell the Offered
Certificates, in as much as such rating does not comment as to the market price
or suitability for a particular investor. There is no assurance that the ratings
will remain for any given period of time or that the ratings will not be
reduced, suspended or withdrawn by the Rating Agencies.
RISK OF YEAR 2000
The transition from the year 1999 to the year 2000 may disrupt the ability
of computerized systems to process information. The Servicer and the Trustee are
currently modifying their computer systems and applications such that they will
be year 2000 compliant by no later than August 31, 1999. If the Servicer or the
Trustee is unable to complete such modifications by the year 2000, the ability
of the Servicer or Trustee to service the Mortgage Loans and make distributions
to the Certificateholders, respectively, may be materially and adversely
affected.
OTHER LEGAL CONSIDERATIONS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust, security deed 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, security deed or mortgage. A
deficiency judgment would be a personal judgment against the former borrower
equal in most cases to the difference between the net amount received upon the
public sale of the real property and the amount due to the lender. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust, security deed or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of the Seller. In addition,
other state laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the Mortgage
Loans. The Seller will be required to repurchase any Mortgage Loans which, at
the time of origination did not comply with applicable federal and state laws
and regulations. Depending on the provisions of the applicable law and the
specific facts and circumstances involved, violations of these laws, policies
and principles may limit the ability of the Trust Fund to collect all or part of
the principal of or interest on the Mortgage Loans, may entitle the borrower to
a refund of amounts previously paid and, in addition, could subject the Trust
Fund to damages and administrative enforcement. See "Certain Legal Aspects of
Mortgage Loans" herein.
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<PAGE> 28
The Mortgage Loans are also subject to federal laws, including:
(i) the federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience;
(iv) the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full and equal
enjoyment of the goods, services, facilities, privileges, advantages or
accommodations of any place of public accommodation; and
(v) the Real Estate Settlement Procedures Act and the Fair Credit
Billing Act.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. The Seller will be required to repurchase any
Mortgage Loans which, at the time of origination did not comply with such
federal laws or regulations. See "Certain Legal Aspects of the Mortgage Loans"
herein.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect the
ability of the Servicer to collect full amounts of interest on certain Mortgage
Loans and could interfere with the ability of the Servicer to foreclose on
certain properties. See "Certain Legal Aspects of the Mortgage
Loans -- Soldiers' and Sailors' Civil Relief Act of 1940" herein.
RISK OF EARLY DEFAULTS
The majority of the Initial Group A Mortgage Loans were originated within
18 months prior to the Initial Cut-Off Date. The weighted average remaining term
to amortization maturity of the Initial Group A Mortgage Loans as of the Initial
Cut-Off Date is approximately 343 months. It is anticipated that any Subsequent
Mortgage Loans added to Loan Group A during the Funding Period will have been
originated within 12 months of the date of their addition. Although little data
is available, defaults on mortgage loans, including mortgage loans similar to
the Mortgage Loans, are generally expected to occur with greater frequency in
the early years of the terms of mortgage loans.
THE SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
To the extent that the Pre-Funded Amount has not been fully applied to the
purchase of Subsequent Mortgage Loans by the Trust Fund by the end of the
Funding Period, the Class or Classes of Class A Certificates then entitled to
receive distributions of principal as described herein, will receive a partial
prepayment of principal in an aggregate amount equal to the Pre-Funded Amount
remaining in the Pre-Funding Account on the Distribution Date following the end
of the Funding Period (is no event later than the July, 1998 Distribution Date).
As a result, the yield to Holders of the Class A Certificates, if purchased at a
premium, may be adversely affected. Although no assurances can be given, the
Seller intends that the principal amount of Subsequent Mortgage Loans sold to
the Trust Fund will require the application of substantially all of the
Pre-Funded Amount and that there will be no material principal prepayment from
the Pre-Funded Amount to the Holders of the Class A Certificates.
The Seller will not select Subsequent Mortgage Loans in a manner that it
believes is adverse to the interest of the Holders of the Class A Certificates.
Following the transfer of Subsequent Mortgage Loans to the Trust Fund, the
aggregate characteristics of the Mortgage Loans then held in the Trust Fund will
not vary significantly from those of the Initial Mortgage Loans. See "The
Mortgage Loan Pool -- Conveyance of Subsequent Mortgage Loans."
S-23
<PAGE> 29
The ability of the Trust Fund to purchase Subsequent Mortgage Loans will be
largely dependent upon the ability of the Seller to originate or acquire
additional loans meeting the required criteria. The ability of the Seller to
originate or acquire additional loans may be affected by a variety of social and
economic factors. Economic factors include interest rates, unemployment levels,
the rate of inflation and consumer perception of economic conditions generally.
However, the Seller is unable to determine and has no basis to predict whether
or to what extent economic or social factors will affect the Seller's ability to
originate or acquire additional loans and therefore the availability of
Subsequent Mortgage Loans.
THE MORTGAGE LOAN POOL
GENERAL
The Initial Mortgage Loans to be transferred by the Depositor to the Trust
Fund on April 30, 1998 (the "Startup Day") will consist of 910 first-lien,
fixed-rate conventional mortgage loans evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages and deeds of trust, security deeds or
mortgages (each, a "Mortgage"), which are located in 23 states and the District
of Columbia. The Mortgaged Properties securing the Mortgage Loans consist of
single-family residences (which may be detached, part of a two-to-four family
dwelling, a condominium unit, a manufactured or modular home, a townhouse or a
unit in a planned unit development). The Mortgaged Properties may be
owner-occupied (which includes second and vacation homes) and non-owner occupied
investment properties. All Initial Mortgage Loans were originated or purchased
after June 2, 1986.
The Loan-to-Value Ratios shown below were calculated based upon the
appraised values of the Mortgaged Properties at the time of origination (the
"Appraised Values").
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market in general or in
any particular area has experienced or should experience an overall decline in
property values such that the outstanding balances of the Mortgage Loans 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.
No Loan-to-Value Ratio (based upon appraisals made at the time of
origination of the related Mortgage Loan) relating to any Initial Mortgage Loan
exceeded 100% as of the Initial Cut-Off Date. No pool insurance insures the
Mortgage Loans. The Mortgage Loans are not guaranteed by the Depositor, the
Seller or any affiliate of the Depositor or the Seller.
As of the Initial Cut-Off Date, the average Loan Balance was $321,218.00,
the Loan Rates of the Initial Mortgage Loans ranged from 7.500% to 10.750% per
annum, the weighted average Loan-to-Value Ratio of the Initial Mortgage Loans
was 72.72% (based upon appraisals made at the time of the origination of such
loans), the weighted average Loan Rate of the Initial Mortgage Loans was 7.961%
per annum, and the weighted average remaining term to amortization maturity of
the Mortgage Loans was 302 months. Approximately 4.61% of the Initial Mortgage
Loans have a Loan-to-Value Ratio in excess of 80% and do not have primary
mortgage insurance. The remaining terms to amortization maturity of the Initial
Mortgage Loans as of the Initial Cut-Off Date ranged from 25 months to 360
months. The maximum Loan Balance, as of the Initial Cut-Off Date, was
$1,297,229.63. No Initial Mortgage Loan matures after April 1, 2028. The Initial
Mortgage Pool consist of 910 loans as of the Initial Cut-Off Date. As a
percentage of the Initial Cut-Off Date Aggregate Loan Balance, 93.13% were
secured by mortgages, deeds to secure debt or deeds of trust on single-family
dwellings, 0.08% were secured by mortgages or deeds of trust on two-to-four
family dwellings, 5.72% were secured by mortgages or deeds of trust on
condominium units and planned unit developments, 1.07% were secured by mortgages
or deeds of trust on other types of dwellings.
S-24
<PAGE> 30
LOAN GROUP SA
The latest original scheduled maturity of any Group SA Mortgage Loan will
be March 1, 2025. Each of the Group SA Mortgage Loans will have original terms
to maturity of not more than 30 years. At origination, based upon an appraisal
of the Mortgaged Property securing each Group SA Mortgage Loan, obtained at or
about the date of origination, approximately 15.76% of the Group SA Mortgage
Loans will have had Loan-to-Value Ratios greater than 80% but less than or equal
to 100%. No Group SA Mortgage Loan will have had a Loan-to-Value Ratio at
origination greater than 100%. Approximately 3.81% of the Group SA Mortgage
Loans have a Loan-to-Value Ratio in excess of 80% and do not have primary
mortgage insurance.
LOAN GROUP A
The latest original scheduled maturity of any Initial Group A Mortgage Loan
will be April 1, 2028. Each of the Group A Mortgage Loans will have original
terms to maturity of not more than 30 years. At origination, based upon an
appraisal of the Mortgaged Property securing each Initial Group A Mortgage Loan
obtained at or about the time of origination, approximately 13.28% of the
Initial Group A Mortgage Loans will have had Loan-to-Value Ratios greater than
80% but less than or equal to 100%. No Initial Group A Mortgage Loan will have
had a Loan-to-Value Ratio at origination greater than 96.00%. Approximately
5.61% of the Group A Mortgage Loans have a Loan-to-Value Ratio in excess of 80%
and do not have primary mortgage insurance.
The following information sets forth in tabular format certain information,
as of the Initial Cut-Off Date, with respect to the Mortgage Loans. Other than
with respect to rates of interest, percentages (approximate) are stated by
Aggregate Balance of the Mortgage Loans.
The percentages of the Initial Cut-Off Date Aggregate Loan Balance set
forth in the following tables may not sum to 100.00% due to rounding.
INITIAL MORTGAGE LOANS IN THE AGGREGATE
GEOGRAPHIC DISTRIBUTION OF ALL MORTGAGED PROPERTIES(1)
The geographic distribution of Mortgaged Properties by state, as of the
Initial Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
STATE LOANS BALANCES LOAN BALANCE
- ----- ---------------- --------------- ----------------------
<S> <C> <C> <C>
Arizona..................................... 2 $ 1,250,676.59 0.43%
California.................................. 15 4,763,829.09 1.63
Colorado.................................... 2 655,774.98 0.22
Connecticut................................. 30 12,581,544.87 4.30
Delaware.................................... 1 232,975.43 0.08
District of Columbia........................ 10 3,752,102.28 1.28
Florida..................................... 234 73,783,396.95 25.24
Georgia..................................... 26 9,222,060.73 3.15
Hawaii...................................... 1 396,171.12 0.14
Illinois.................................... 1 242,349.84 0.08
Maryland.................................... 58 16,492,921.57 5.64
Massachusetts............................... 2 534,854.48 0.18
Michigan.................................... 1 279,498.44 0.10
New Jersey.................................. 214 69,999,177.70 23.95
New York.................................... 62 19,257,962.28 6.59
North Carolina.............................. 66 21,385,508.32 7.32
Pennsylvania................................ 46 13,523,787.86 4.63
Rhode Island................................ 2 793,811.75 0.27
South Carolina.............................. 43 14,168,008.54 4.85
Tennessee................................... 13 4,399,428.23 1.51
</TABLE>
S-25
<PAGE> 31
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
STATE LOANS BALANCES LOAN BALANCE
- ----- ---------------- --------------- ----------------------
<S> <C> <C> <C>
Texas....................................... 2 618,203.26 0.21
Virginia.................................... 77 23,334,877.45 7.98
Vermont..................................... 1 301,939.27 0.10
Washington.................................. 1 337,521.34 0.12
--- --------------- ------
Totals............................ 910 $292,308,382.37 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) Determined by property address designated as such in the related Mortgage.
LOAN-TO-VALUE RATIOS(1) FOR ALL INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
RANGE OF INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
LOAN-TO-VALUE RATIO LOANS BALANCES LOAN BALANCE
- ------------------- ---------------- --------------- ----------------------
<S> <C> <C> <C>
5.001% -- 10.000%.......................... 1 $ 288,758.45 0.10%
20.001% -- 25.000%.......................... 1 374,159.87 0.13
30.001% -- 35.000%.......................... 4 1,285,116.85 0.44
35.001% -- 40.000%.......................... 12 5,254,559.47 1.80
40.001% -- 45.000%.......................... 17 6,021,188.06 2.06
45.001% -- 50.000%.......................... 20 7,121,273.95 2.44
50.001% -- 55.000%.......................... 29 8,913,562.07 3.05
55.001% -- 60.000%.......................... 56 19,811,331.58 6.78
60.001% -- 65.000%.......................... 50 16,320,578.43 5.58
65.001% -- 70.000%.......................... 94 34,247,159.79 11.72
70.001% -- 75.000%.......................... 160 51,646,528.83 17.67
75.001% -- 80.000%.......................... 322 98,157,269.21 33.58
80.001% -- 85.000%.......................... 28 10,346,740.25 3.54
85.001% -- 90.000%.......................... 78 21,820,106.96 7.46
90.001% -- 95.000%.......................... 28 7,675,210.31 2.63
95.001% -- 100.000%......................... 10 3,024,838.29 1.03
--- --------------- ------
Total............................. 910 $292,308,382.37 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) The loan-to-value ratios (the "Loan-to-Value Ratios") shown above are equal,
with respect to each Initial Mortgage Loan, to (i) the original principal
balance of such Mortgage Loan at the date of origination divided by (ii) the
lesser of (a) the value of the related Mortgaged Property, based upon the
appraisal made at the time of origination of such Mortgage Loan and (b) the
purchase price of such Mortgaged Property if the Mortgage Loan proceeds from
such Mortgage Loan are used to purchase such Mortgage Property.
LOAN RATES FOR ALL INITIAL MORTGAGE LOANS
The Loan Rates borne by the Mortgage Notes relating to the Initial Mortgage
Loans were distributed as follows as of the Initial Cut-Off Date:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
RANGE OF INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
LOAN RATES LOANS BALANCES LOAN BALANCE
- ---------- ---------------- --------------- ----------------------
<S> <C> <C> <C>
7.251% -- 7.500%........................... 162 $ 55,947,925.19 19.14%
7.501% -- 7.750%........................... 210 68,476,905.20 23.43
7.751% -- 8.000%........................... 214 67,529,329.56 23.10
8.001% -- 8.250%........................... 146 50,476,826.57 17.27
8.251% -- 8.500%........................... 105 29,086,693.53 9.95
8.501% -- 8.750%........................... 33 10,018,638.53 3.43
</TABLE>
S-26
<PAGE> 32
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
RANGE OF INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
LOAN RATES LOANS BALANCES LOAN BALANCE
- ---------- ---------------- --------------- ----------------------
<S> <C> <C> <C>
8.751% -- 9.000%........................... 22 6,201,080.18 2.12
9.001% -- 9.250%........................... 6 1,536,662.82 0.53
9.251% -- 9.500%........................... 1 287,108.48 0.10
9.501% -- 9.750%........................... 2 547,927.47 0.19
9.751% -- 10.000%.......................... 3 780,590.51 0.27
10.001% -- 10.250%.......................... 4 918,968.33 0.31
10.251% -- 10.500%.......................... 1 278,748.08 0.10
10.501% -- 10.750%.......................... 1 220,977.92 0.08
----- --------------- ------
Total............................. 910 $292,308,382.37 100.00%
===== =============== ======
</TABLE>
INITIAL CUT-OFF DATE PRINCIPAL BALANCES OF ALL INITIAL MORTGAGE LOANS
The distribution of the outstanding principal balances of the Initial
Mortgage Loans as of the Initial Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
RANGE OF INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
INITIAL CUT-OFF DATE LOAN BALANCE LOANS BALANCES LOAN BALANCE
- --------------------------------- ---------------- --------------- ----------------------
<S> <C> <C> <C>
$0.01 -- $100,000.00................. 8 $ 496,393.75 0.17%
$100,000.01 -- $200,000.00................. 37 6,343,641.42 2.17
$200,000.01 -- $300,000.00................. 522 130,860,706.02 44.77
$300,000.01 -- $400,000.00................. 178 61,240,725.86 20.95
$400,000.01 -- $500,000.00................. 82 37,244,815.23 12.74
$500,000.01 -- $600,000.00................. 41 22,461,164.82 7.68
$600,000.01 -- $700,000.00................. 14 9,194,414.03 3.15
$700,000.01 -- $800,000.00................. 12 9,250,858.39 3.16
$800,000.01 -- $900,000.00................. 8 6,936,309.27 2.37
$900,000.01 -- $1,000,000.00................ 5 4,842,018.54 1.66
Over $1,000,000.00.......................... 3 3,437,335.04 1.18
--- --------------- ------
Total............................. 910 $292,308,382.37 100.00%
=== =============== ======
</TABLE>
TYPES OF MORTGAGED PROPERTIES FOR ALL INITIAL MORTGAGE LOANS
The Mortgaged Properties securing the Initial Mortgage Loans were of the
property types as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
PROPERTY TYPE LOANS BALANCES LOAN BALANCE
- ------------- ---------------- --------------- ----------------------
<S> <C> <C> <C>
Single Family............................... 845 $272,224,174.16 93.13%
Condominium/Planned Unit Development........ 53 16,724,894.39 5.72
Other....................................... 12 3,359,313.82 1.15
--- --------------- ------
Total............................. 910 $292,308,382.37 100.00%
=== =============== ======
</TABLE>
S-27
<PAGE> 33
MONTHS SINCE ORIGINATION FOR ALL INITIAL MORTGAGE LOANS
The distribution of the number of months since the date of origination of
the Initial Mortgage Loans as of the Initial Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
RANGE OF INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
MONTHS SINCE ORIGINATION LOANS BALANCES LOAN BALANCE
- ------------------------ ----------------- ----------------- ----------------------
<S> <C> <C> <C>
-- 0................................ 7 $ 3,215,250.00 1.10%
1 -- 6................................ 111 45,912,497.73 15.71
7 -- 12................................ 122 47,730,262.21 16.33
13 -- 18................................ 34 11,727,786.92 4.01
19 -- 24................................ 12 4,169,159.43 1.43
25 -- 30................................ 10 3,788,142.91 1.30
31 -- 36................................ 46 12,781,082.29 4.37
37 -- 42................................ 21 5,609,187.47 1.92
43 -- 48................................ 55 15,321,528.09 5.24
49 -- 54................................ 53 15,892,871.85 5.44
55 -- 60................................ 103 31,299,005.72 10.71
61 -- 66................................ 90 26,220,058.74 8.97
67 -- 72................................ 70 21,991,140.11 7.52
73 -- 78................................ 32 8,484,864.58 2.90
79 -- 84................................ 28 7,362,623.07 2.52
85 -- 90................................ 19 4,489,341.37 1.54
91 -- 96................................ 24 6,966,067.36 2.38
97 -- 102................................ 23 6,758,530.65 2.31
103 -- 108................................ 23 6,178,921.16 2.11
109 -- 114................................ 10 2,576,638.81 0.88
115 -- 120................................ 15 3,407,008.74 1.17
121 -- 126................................ 2 426,413.16 0.15
--- --------------- ------
Total........................... 910 $292,308,382.37 100.00%
=== =============== ======
</TABLE>
REMAINING TERM TO AMORTIZATION MATURITY FOR ALL INITIAL MORTGAGE LOANS
The distribution of the number of months remaining to amortization maturity
of the Initial Mortgage Loans as of the Initial Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
RANGE OF INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
REMAINING MONTHS TO AMORTIZATION MATURITY LOANS BALANCES LOAN BALANCE
- ----------------------------------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C>
25 -- 48................................ 3 $ 233,148.50 0.08%
49 -- 72................................ 1 58,577.18 0.02
73 -- 96................................ 2 322,568.09 0.11
97 -- 120................................ 6 1,770,657.70 0.61
121 -- 144................................ 10 2,063,627.28 0.71
145 -- 168................................ 21 4,730,322.98 1.62
169 -- 192................................ 41 10,912,732.07 3.73
193 -- 216................................ 10 2,466,561.29 0.84
217 -- 240................................ 29 8,061,555.21 2.76
241 -- 264................................ 79 23,932,229.69 8.19
265 -- 288................................ 108 31,395,810.19 10.74
289 -- 312................................ 234 71,328,409.31 24.40
</TABLE>
S-28
<PAGE> 34
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
RANGE OF INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
REMAINING MONTHS TO AMORTIZATION MATURITY LOANS BALANCES LOAN BALANCE
- ----------------------------------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C>
313 -- 336................................ 99 29,564,854.05 10.11
337 -- 360................................ 267 105,467,328.83 36.08
--- --------------- ------
Total........................... 910 $292,308,382.37 100.00%
=== =============== ======
</TABLE>
OCCUPANCY TYPE OF MORTGAGED PROPERTY FOR ALL INITIAL MORTGAGE LOANS
The Mortgaged Properties securing the Initial Mortgage Loans were used as
follows as of the Initial Cut-Off Date:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
OCCUPANCY TYPE LOANS BALANCES LOAN BALANCE
- -------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C>
Primary................................... 877 $280,484,436.51 95.95%
Second.................................... 32 11,590,970.43 3.97
Investor.................................. 1 232,975.43 0.08
--- --------------- ------
Totals.......................... 910 $292,308,382.37 100.00%
=== =============== ======
</TABLE>
ORIGINAL TERM TO STATED MATURITY FOR ALL INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL
RANGE OF INITIAL MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
ORIGINAL TERM TO STATED MATURITY LOANS BALANCES LOAN BALANCE
- -------------------------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C>
181 -- 240................................ 63 $ 16,208,844.07 5.55%
241 -- 300................................ 4 970,117.12 0.33
301 -- 360................................ 843 275,129,421.18 94.12
--- --------------- ------
Total........................... 910 $292,308,382.37 100.00%
=== =============== ======
</TABLE>
GROUP SA MORTGAGE LOANS
GEOGRAPHIC DISTRIBUTION OF GROUP SA MORTGAGED PROPERTIES(1)
The geographic distribution of Mortgaged Properties by state, as of the
Initial Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
STATE LOANS BALANCES LOAN BALANCE
- ----- ----------------- ----------------- ----------------------
<S> <C> <C> <C>
California................................ 11 $ 3,190,635.93 1.96%
Connecticut............................... 13 3,226,636.80 1.98
District of Columbia...................... 8 2,908,679.64 1.78
Florida................................... 169 48,887,596.83 30.00
Georgia................................... 2 611,433.22 0.38
Massachusetts............................. 2 534,854.48 0.33
Maryland.................................. 38 10,062,932.54 6.17
New Jersey................................ 144 42,397,636.69 26.01
New York.................................. 40 10,852,947.20 6.66
North Carolina............................ 29 8,602,279.11 5.28
Pennsylvania.............................. 29 7,723,942.98 4.74
Rhode Island.............................. 1 282,431.63 0.17
South Carolina............................ 21 5,592,346.89 3.43
Tennessee................................. 3 949,523.78 0.58
</TABLE>
S-29
<PAGE> 35
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
STATE LOANS BALANCES LOAN BALANCE
- ----- ----------------- ----------------- ----------------------
<S> <C> <C> <C>
Virginia.................................. 57 16,858,383.89 10.34
Vermont................................... 1 301,939.27 0.19
--- --------------- ------
Totals.......................... 568 $162,984,200.88 100.00%
=== =============== ======
</TABLE>
LOAN-TO-VALUE RATIOS(1) FOR GROUP SA MORTGAGE LOAN
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
RANGE OF GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
LOAN-TO-VALUE RATIO LOANS BALANCES LOAN BALANCE
- ------------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
5.001% -- 10.000%....................... 1 $ 288,758.45 0.18%
30.001% -- 35.000%....................... 2 687,530.69 0.42
35.001% -- 40.000%....................... 7 2,606,060.12 1.60
40.001% -- 45.000%....................... 12 4,113,694.21 2.52
45.001% -- 50.000%....................... 11 3,697,098.42 2.27
50.001% -- 55.000%....................... 25 7,788,608.56 4.78
55.001% -- 60.000%....................... 38 11,396,343.67 6.99
60.001% -- 65.000%....................... 35 10,311,597.40 6.33
65.001% -- 70.000%....................... 61 19,870,359.91 12.19
70.001% -- 75.000%....................... 106 30,153,100.75 18.50
75.001% -- 80.000%....................... 175 46,384,265.30 28.46
80.001% -- 85.000%....................... 16 4,757,374.91 2.92
85.001% -- 90.000%....................... 48 12,726,273.72 7.81
90.001% -- 95.000%....................... 22 5,432,689.62 3.33
95.001% -- 100.000%....................... 9 2,770,445.15 1.70
--- --------------- ------
Total........................... 568 $162,984,200.88 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) The loan-to-value ratios shown above are equal, with respect to each
Mortgage Loan, to (i) the original principal balance of such Mortgage Loan
at the date of origination divided by (ii) the lesser of (a) the value of
the related Mortgaged Property, based upon the appraisal made at the time of
origination of such Mortgage Loan and (b) the purchase price of such
Mortgaged Property if the Mortgage Loan proceeds from such Mortgage Loan are
used to purchase such Mortgage Property.
LOAN RATES FOR GROUP SA MORTGAGE LOAN
The Loan Rates borne by the Mortgage Notes relating to the Group SA
Mortgage Loans were distributed as follows as of the Initial Cut-Off Date:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
RANGE OF GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
LOAN RATES LOANS BALANCES LOAN BALANCE
- ---------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
7.251% -- 7.500%........................ 117 $ 35,888,332.32 22.02%
7.501% -- 7.750%........................ 118 32,769,197.37 20.11
7.751% -- 8.000%........................ 136 39,594,417.72 24.29
8.001% -- 8.250%........................ 86 25,219,977.96 15.47
8.251% -- 8.500%........................ 69 17,893,305.88 10.98
8.501% -- 8.750%........................ 15 4,573,727.02 2.81
8.751% -- 9.000%........................ 11 3,015,760.62 1.85
9.001% -- 9.250%........................ 5 1,282,269.68 0.79
9.501% -- 9.750%........................ 2 547,927.47 0.34
9.751% -- 10.000%........................ 3 780,590.51 0.48
10.001% -- 10.250%........................ 4 918,968.33 0.56
</TABLE>
S-30
<PAGE> 36
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
RANGE OF GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
LOAN RATES LOANS BALANCES LOAN BALANCE
- ---------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
10.251% -- 10.500%........................ 1 278,748.08 0.17
10.501% -- 10.750%........................ 1 220,977.92 0.14
--- --------------- ------
Total........................... 568 $162,984,200.88 100.00%
=== =============== ======
</TABLE>
INITIAL CUT-OFF DATE PRINCIPAL BALANCES OF GROUP SA MORTGAGE LOANS
The distribution of the outstanding principal balances of the Group SA
Mortgage Loans as of the Initial Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
RANGE OF GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
INITIAL CUT-OFF DATE LOAN BALANCE LOANS BALANCES LOAN BALANCE
- --------------------------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
$0.01 -- $100,000.00.............. 8 $ 496,393.75 0.30%
$100,000.01 -- $200,000.00............... 35 6,017,865.23 3.69
$200,000.01 -- $300,000.00............... 368 90,413,887.30 55.47
$300,000.01 -- $400,000.00............... 93 31,679,298.21 19.44
$400,000.01 -- $500,000.00............... 33 14,717,291.12 9.03
$500,000.01 -- $600,000.00............... 15 8,130,786.21 4.99
$600,000.01 -- $700,000.00............... 8 5,218,488.11 3.20
$700,000.01 -- $800,000.00............... 6 4,573,061.50 2.81
$800,000.01 -- $900,000.00............... 1 833,506.16 0.51
$900,000.01 -- $1,000,000.00.............. 1 903,623.29 0.55
--- --------------- ------
Total........................... 568 $162,984,200.88 100.00%
=== =============== ======
</TABLE>
TYPES OF MORTGAGED PROPERTIES FOR GROUP SA MORTGAGE LOANS
The Mortgaged Properties securing the Group SA Mortgage Loans were of the
property types as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
PROPERTY TYPE LOANS BALANCES LOAN BALANCE
------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
Single Family............................. 527 $150,899,692.24 92.59%
Condominium/Planned Unit Development...... 35 10,294,443.83 6.32
Other..................................... 6 1,790,064.81 1.10
--- --------------- ------
Total........................... 568 $162,984,200.88 100.00%
=== =============== ======
</TABLE>
MONTHS SINCE ORIGINATION FOR GROUP SA MORTGAGE LOANS
The distribution of the number of months since the date of origination of
the Group SA Mortgage Loans as of the Initial Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
RANGE OF GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
MONTHS SINCE ORIGINATION LOANS BALANCES LOAN BALANCE
- ------------------------ ----------------- --------------- ----------------------
<S> <C> <C> <C>
37 -- 42................................ 21 $ 5,609,187.47 3.44%
43 -- 48................................ 55 15,321,528.09 9.40
49 -- 54................................ 53 15,892,871.85 9.75
55 -- 60................................ 103 31,299,005.72 19.20
61 -- 66................................ 90 26,220,058.74 16.09
67 -- 72................................ 70 21,991,140.11 13.49
73 -- 78................................ 32 8,484,864.58 5.21
79 -- 84................................ 28 7,362,623.07 4.52
</TABLE>
S-31
<PAGE> 37
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
RANGE OF GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
MONTHS SINCE ORIGINATION LOANS BALANCES LOAN BALANCE
- ------------------------ ----------------- --------------- ----------------------
<S> <C> <C> <C>
85 -- 90................................ 19 4,489,341.37 2.75
91 -- 96................................ 24 6,966,067.36 4.27
97 -- 102................................ 23 6,758,530.65 4.15
103 -- 108................................ 23 6,178,921.16 3.79
109 -- 114................................ 10 2,576,638.81 1.58
115 -- 120................................ 15 3,407,008.74 2.09
121 -- 126................................ 2 426,413.16 0.26
--- --------------- ------
Total........................... 568 $162,984,200.88 100.00%
=== =============== ======
</TABLE>
REMAINING TERM TO AMORTIZATION MATURITY FOR GROUP SA MORTGAGE LOANS
The distribution of the number of months remaining to amortization maturity
of the Group SA Mortgage Loans as of the Initial Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
RANGE OF GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
REMAINING MONTHS TO AMORTIZATION MATURITY LOANS BALANCES LOAN BALANCE
- ----------------------------------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
25 -- 48................................ 3 $ 233,148.50 0.14%
49 -- 72................................ 1 58,577.18 0.04
73 -- 96................................ 2 322,568.09 0.20
97 -- 120................................ 5 1,187,653.30 0.73
121 -- 144................................ 10 2,063,627.28 1.27
145 -- 168................................ 20 4,542,906.40 2.79
169 -- 192................................ 40 10,704,683.02 6.57
193 -- 216................................ 10 2,466,561.29 1.51
217 -- 240................................ 26 6,990,652.92 4.29
241 -- 264................................ 76 22,510,334.75 13.81
265 -- 288................................ 107 31,161,426.18 19.12
289 -- 312................................ 223 68,420,099.82 41.98
313 -- 336................................ 45 12,321,962.15 7.56
--- --------------- ------
Total........................... 568 $162,984,200.88 100.00%
=== =============== ======
</TABLE>
OCCUPANCY TYPE OF MORTGAGED PROPERTY FOR GROUP SA MORTGAGE LOANS
The Mortgaged Properties securing the Group SA Mortgage Loans were used as
follows as of the Initial Cut-Off Date:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
OCCUPANCY TYPE LOANS BALANCES LOAN BALANCE
- -------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
Primary................................... 556 $159,616,032.57 97.93%
Second.................................... 12 3,368,168.31 2.07
--- --------------- ------
Total........................... 568 $162,984,200.88 100.00%
=== =============== ======
</TABLE>
S-32
<PAGE> 38
ORIGINAL TERM TO STATED MATURITY FOR GROUP SA MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF GROUP SA
RANGE OF GROUP SA MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
ORIGINAL TERM TO STATED MATURITY LOANS BALANCES LOAN BALANCE
- -------------------------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
181 -- 240............................... 60 $ 15,137,941.78 9.29%
241 -- 300............................... 3 716,421.27 0.44
301 -- 360............................... 505 147,129,837.83 90.27
--- --------------- ------
Total........................... 568 $162,984,200.88 100.00%
=== =============== ======
</TABLE>
INITIAL GROUP A MORTGAGE LOANS
GEOGRAPHIC DISTRIBUTION OF INITIAL GROUP A MORTGAGED PROPERTIES(1)
The geographic distribution of Mortgaged Properties related to the Initial
Group A Mortgage Loans by state, as of the Initial Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL INITIAL CUT-OFF % OF INITIAL GROUP A
GROUP A MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
STATE LOANS BALANCES LOAN BALANCE
- ----- ----------------- --------------- ----------------------
<S> <C> <C> <C>
Arizona................................... 2 $ 1,250,676.59 0.97%
California................................ 4 1,573,193.16 1.22
Colorado.................................. 2 655,774.98 0.51
Connecticut............................... 17 9,354,908.07 7.23
Delaware.................................. 1 232,975.43 0.18
District of Columbia...................... 2 843,422.64 0.65
Florida................................... 65 24,895,800.12 19.25
Georgia................................... 24 8,610,627.51 6.66
Hawaii.................................... 1 396,171.12 0.31
Illinois.................................. 1 242,349.84 0.19
Maryland.................................. 20 6,429,989.03 4.97
Michigan.................................. 1 279,498.44 0.22
New Jersey................................ 70 27,601,541.01 21.34
New York.................................. 22 8,405,015.08 6.50
North Carolina............................ 37 12,783,229.21 9.88
Pennsylvania.............................. 17 5,799,844.88 4.48
Rhode Island.............................. 1 511,380.12 0.40
South Carolina............................ 22 8,575,661.65 6.63
Tennessee................................. 10 3,449,904.45 2.67
Texas..................................... 2 618,203.26 0.48
Virginia.................................. 20 6,476,493.56 5.01
Washington................................ 1 337,521.34 0.26
--- --------------- ------
Total........................... 342 $129,324,181.49 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) Determined by property address designated as such in the related Mortgage.
S-33
<PAGE> 39
LOAN-TO-VALUE RATIOS FOR INITIAL GROUP A MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF INITIAL % OF
GROUP A INITIAL CUT-OFF INITIAL GROUP A
MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
RANGE OF LOAN-TO-VALUE RATIO LOANS BALANCES LOAN BALANCE
- ---------------------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
20.01% -- 25.00%........................... 1 $ 374,159.87 0.29%
30.01% -- 35.00%........................... 2 597,586.16 0.46
35.01% -- 40.00%........................... 5 2,648,499.35 2.05
40.01% -- 45.00%........................... 5 1,907,493.85 1.47
45.01% -- 50.00%........................... 9 3,424,175.53 2.65
50.01% -- 55.00%........................... 4 1,124,953.51 0.87
55.01% -- 60.00%........................... 18 8,414,987.91 6.51
60.01% -- 65.00%........................... 15 6,008,981.03 4.65
65.01% -- 70.00%........................... 33 14,376,799.88 11.12
70.01% -- 75.00%........................... 54 21,493,428.08 16.62
75.01% -- 80.00%........................... 147 51,773,003.91 40.03
80.01% -- 85.00%........................... 12 5,589,365.34 4.32
85.01% -- 90.00%........................... 30 9,093,833.24 7.03
90.01% -- 95.00%........................... 6 2,242,520.69 1.73
95.01% -- 100.00%........................... 1 254,393.14 0.20
--- --------------- ------
Total............................. 342 $129,324,181.49 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) The Loan-to-Value Ratios shown above are equal, with respect to each
Mortgage Loan, to (i) the original principal balance of such Mortgage Loan
at the date of origination divided by (ii) the lesser of (a) the value of
the related Mortgaged Property, based upon the appraisal made at the time of
origination of such Mortgage Loan and (b) the purchase price of such
Mortgaged Property if the Mortgage Loan proceeds from such Mortgage Loan are
used to purchase such Mortgage Property.
LOAN RATES FOR INITIAL GROUP A MORTGAGE LOANS
The Loan Rates borne by the Mortgage Notes relating to the Initial Group A
Mortgage Loans were distributed as follows as of the Initial Cut-Off Date:
<TABLE>
<CAPTION>
NUMBER OF INITIAL % OF
GROUP A INITIAL CUT-OFF INITIAL GROUP A
MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
RANGE OF LOAN RATES LOANS BALANCES LOAN BALANCE
- ------------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
7.251% -- 7.500%............................ 45 $ 20,059,592.87 15.51%
7.501% -- 7.750%............................ 92 35,707,707.83 27.61
7.751% -- 8.000%............................ 78 27,934,911.84 21.60
8.001% -- 8.250%............................ 60 25,256,848.61 19.53
8.251% -- 8.500%............................ 36 11,193,387.65 8.66
8.501% -- 8.750%............................ 18 5,444,911.51 4.21
8.751% -- 9.000%............................ 11 3,185,319.56 2.46
9.001% -- 9.250%............................ 1 254,393.14 0.20
9.251% -- 9.500%............................ 1 287,108.48 0.22
--- --------------- ------
Total............................. 342 $129,324,181.49 100.00%
=== =============== ======
</TABLE>
S-34
<PAGE> 40
INITIAL CUT-OFF DATE PRINCIPAL BALANCES OF INITIAL GROUP A MORTGAGE LOANS
The distribution of the outstanding principal balances of the Initial Group
A Mortgage Loans as of the Initial Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL INITIAL CUT-OFF % OF INITIAL GROUP A
GROUP A MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
RANGE OF CUT-OFF DATE LOAN BALANCE LOANS BALANCES LOAN BALANCE
- ---------------------------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
$100,000.01 -- $ 200,000.00................ 2 $ 325,776.19 0.25%
$200,000.01 -- $ 300,000.00................ 154 40,446,818.72 31.28
$300,000.01 -- $ 400,000.00................ 85 29,561,427.65 22.86
$400,000.01 -- $ 500,000.00................ 49 22,527,524.11 17.42
$500,000.01 -- $ 600,000.00................ 26 14,330,378.61 11.08
$600,000.01 -- $ 700,000.00................ 6 3,975,925.92 3.07
$700,000.01 -- $ 800,000.00................ 6 4,677,796.89 3.62
$800,000.01 -- $ 900,000.00................ 7 6,102,803.11 4.72
$900,000.01 -- $1,000,000.00............... 4 3,938,395.25 3.05
Over $1,000,000.00......................... 3 3,437,335.04 2.66
--- --------------- ------
Total............................ 342 $129,324,181.49 100.00%
=== =============== ======
</TABLE>
TYPES OF MORTGAGED PROPERTIES FOR INITIAL GROUP A MORTGAGE LOANS
The Mortgaged Properties securing the Initial Group A Mortgage Loans were
of the property types as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL INITIAL CUT-OFF % OF INITIAL GROUP A
GROUP A MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
PROPERTY TYPE LOANS BALANCES LOAN BALANCE
- ------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
Single Family............................. 318 $121,324,481.92 93.81%
Condominium/Planned Unit Development...... 18 6,430,450.56 4.97
Other..................................... 6 1,569,249.01 1.21
--- --------------- ------
Total........................... 342 $129,324,181.49 100.00%
=== =============== ======
</TABLE>
MONTHS SINCE ORIGINATION FOR INITIAL GROUP A MORTGAGE LOANS
The distribution of the number of months since the date of origination of
the Initial Group A Mortgage Loans as of the Initial Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL INITIAL CUT-OFF % OF INITIAL GROUP A
RANGE OF GROUP A MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
MONTHS SINCE ORIGINATION LOANS BALANCES LOAN BALANCE
- ------------------------ ----------------- --------------- ----------------------
<S> <C> <C> <C>
0........................................ 7 $ 3,215,250.00 2.49%
1 -- 6................................... 111 45,912,497.73 35.50
7 -- 12.................................. 122 47,730,262.21 36.91
13 -- 18.................................. 34 11,727,786.92 9.07
19 -- 24.................................. 12 4,169,159.43 3.22
25 -- 30.................................. 10 3,788,142.91 2.93
31 -- 36.................................. 46 12,781,082.29 9.88
--- --------------- ------
Total........................... 342 $129,324,181.49 100.00%
=== =============== ======
</TABLE>
S-35
<PAGE> 41
REMAINING TERM TO AMORTIZATION MATURITY FOR INITIAL GROUP A MORTGAGE LOANS
The distribution of the number of months remaining to amortization maturity
of the Initial Group A Mortgage Loans as of the Initial Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL INITIAL CUT-OFF % OF INITIAL GROUP A
RANGE OF GROUP A MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
REMAINING MONTHS TO AMORTIZATION MATURITY LOANS BALANCES LOAN BALANCE
- ----------------------------------------- ----------------- --------------- ----------------------
<S> <C> <C> <C>
97 -- 120................................ 1 $ 583,004.40 0.45%
145 -- 168................................ 1 187,416.58 0.14
169 -- 192................................ 1 208,049.05 0.16
217 -- 240................................ 3 1,070,902.29 0.83
241 -- 264................................ 3 1,421,894.94 1.10
265 -- 288................................ 1 234,384.01 0.18
289 -- 312................................ 11 2,906,309.49 2.25
313 -- 336................................ 54 17,242,891.90 13.33
337 -- 360................................ 267 105,467,328.83 81.55
--- --------------- ------
Total........................... 342 $129,324,181.49 100.00%
=== =============== ======
</TABLE>
OCCUPANCY TYPE OF MORTGAGED PROPERTY FOR INITIAL GROUP A MORTGAGE LOANS
The Mortgaged Properties securing the Initial Group A Mortgage Loans were
used as follows as of the Initial Cut-Off Date:
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL GROUP A
INITIAL GROUP A MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
OCCUPANCY TYPE LOANS BALANCES LOAN BALANCE
- -------------- ------------------------ --------------- ----------------------
<S> <C> <C> <C>
Primary............................... 321 $120,868,403.94 93.46%
Second................................ 20 8,222,802.12 6.36
Investor.............................. 1 232,975.43 0.18
--- --------------- ------
Total....................... 342 $129,324,181.49 100.00%
=== =============== ======
</TABLE>
ORIGINAL TERM TO STATED MATURITY FOR INITIAL GROUP A MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF INITIAL CUT-OFF % OF INITIAL GROUP A
RANGE OF INITIAL GROUP A MORTGAGE DATE LOAN CUT-OFF DATE AGGREGATE
ORIGINAL TERM TO STATED MATURITY LOANS BALANCES LOAN BALANCE
- -------------------------------- ------------------------ --------------- ----------------------
<S> <C> <C> <C>
181 -- 240............................ 3 $ 1,070,902.29 0.83%
241 -- 300............................ 1 253,695.85 0.20
301 -- 360............................ 338 127,999,583.35 98.98
--- --------------- ------
Total....................... 342 $129,324,181.49 100.00%
=== =============== ======
</TABLE>
PAYMENTS ON THE MORTGAGE LOANS
The Mortgage Loans provide that interest is charged to the Mortgagors
thereunder, and payments are due from such Mortgagors, as of a scheduled day of
each month which is fixed at the time of origination. Scheduled monthly payments
made by the Mortgagors on the Mortgage Loans either earlier or later than the
scheduled due dates thereof will not affect the amortization schedule or the
relative application of such payments to principal and interest. All of the
Mortgage Loans provide for monthly installments of principal and interest
sufficient to amortize fully their respective principal balances over their
respective amortization periods.
The Mortgage Loans provide for required monthly payments to be due on the
first day of each month (the "Due Date").
S-36
<PAGE> 42
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Pooling and Servicing Agreement permits the Trust Fund to acquire up to
$57,744,845 aggregate principal balance of Subsequent Mortgage Loans which will
be added to Loan Group A. No Subsequent Mortgage Loans will be added to Loan
Group SA. Accordingly, the statistical characteristics of the Mortgage Loans
will vary from those of the Initial Mortgage Loans as of any Subsequent Transfer
Date upon the acquisition of Subsequent Mortgage Loans.
The obligation of the Trust Fund to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the following requirements, any of which
requirements (except for the requirement stated in clause (ii) of this
paragraph) may be waived or modified in any respect by the Rating Agencies: (i)
such Subsequent Mortgage Loan may not be 30 or more days contractually
delinquent as of the related Subsequent Cut-Off Date; (ii) the original term to
stated maturity of such Subsequent Mortgage Loan must be 30 years and such
Subsequent Mortgage Loan must have a fixed rate of interest; (iii) such
Subsequent Mortgage Loan will be secured by a Mortgage in a first lien position
on a one- to four-family property (which may be attached, part of a two- to
four-family dwelling, a condominium unit, a townhouse or a unit in a planned
unit development); (iv) such Subsequent Mortgage Loan will not have a Loan Rate
less than 7.26% per annum; (v) such Subsequent Mortgage Loan will be otherwise
acceptable to the Rating Agencies; (vi) such Subsequent Mortgage Loan will have
an origination date of not more than 36 months prior to the related Subsequent
Cut-Off Date; (vii) and following the purchase of such Subsequent Mortgage Loan
by the Trust Fund on a Subsequent Transfer Date, the Mortgage Loans (including
such Subsequent Mortgage Loans) as of the first day of the month following such
Subsequent Transfer Date: (a) will have a weighted average Loan Rate by Loan
Balance of between 7.75% and 8.15% per annum; (b) will have a weighted average
remaining term to stated maturity of between 300 and 315 months; (c) will have a
weighted average Loan-to-Value Ratio by Loan Balance of between 70% and 75%,
inclusive; (d) will have a state concentration not in excess of 28% (by
Aggregate Loan Balance) for any one state; (e) will have no more than 10% (by
Aggregate Loan Balance) of Mortgage Loans relating to non-owner occupied
properties; (f) will have no more than 2.00% (by Aggregate Loan Balance) of
Mortgage Loans secured by three- to four-family properties; and (g) will not
have more than 25% (by Loan Balance) of Subsequent Mortgage Loans.
THE SELLER AND THE SERVICER
GENERAL
First Union National Bank is the Seller under the Pooling and Servicing
Agreement. First Union Mortgage Corporation, a North Carolina corporation, is
the Servicer under the Pooling and Servicing Agreement. First Union National
Bank is a national banking association and a banking subsidiary of First Union
Corporation, a North Carolina corporation and a multi-bank holding company
registered under the Bank Holding Company Act. First Union Mortgage Corporation
is a wholly-owned subsidiary of First Union Corporation. First Union Corporation
is the sixth largest bank holding company in the United States based on total
assets as of December 31, 1997.
The Offered Certificates will not represent an interest in or obligation
of, nor are the Mortgage Loans guaranteed by, the Seller, the Servicer or any of
their affiliates.
The Servicer may use a subservicer (the "Subservicer") in the performance
of the administrative and servicing obligations of the Servicer under the
Pooling and Servicing Agreement, but no such subservicing arrangements will
discharge the Servicer from its obligations under the Pooling and Servicing
Agreement.
The Trustee may remove the Servicer, and the Servicer may resign, only in
accordance with the terms of the Pooling and Servicing Agreement. No removal or
resignation shall become effective until the Trustee or a successor servicer
shall have assumed the Servicer's responsibilities and obligations in accordance
therewith.
Any collections received by the Servicer after removal or resignation shall
be endorsed by it to the Trustee and remitted directly to the Trustee.
S-37
<PAGE> 43
CREDIT AND UNDERWRITING GUIDELINES
The following is a description of the underwriting guidelines customarily
employed by the Seller with respect to mortgage loans which it purchases
(including by acquisitions or mergers) or originates. The Seller believes that
many of the Mortgage Loans were underwritten with exceptions to these
guidelines. Those that were made with exceptions to these underwriting
guidelines were approved when other compensating factors existed. The Seller
believes its standards are consistent with those utilized by mortgage lenders
generally. The underwriting process is intended to assess both the prospective
borrower's ability to repay and the adequacy of the real property security as
collateral for the loan granted. Loans may be made outside of those guidelines
with the prior approval of a senior official of the Seller.
The Seller generally originates or purchases fixed rate loans, which fully
amortize over a period not to exceed 360 months. The original loan amounts
generally range from a minimum of $203,200 to a maximum of $1,000,000.
The homes used for collateral to secure the loans may be either primary
residential (which includes second and vacation homes) or investor owned one- to
four-family homes, condominiums, planned unit developments or modular homes or
townhouses.
The Loan-to-Value Ratio generally may not exceed 95% for a primary
residence and 90% for a second home. Each property proposed as security for a
loan must be appraised.
Each mortgage applicant generally provides, and the Seller generally
verifies, personal financial information. The applicant's total monthly
obligations (which includes principal and interest on each mortgage, tax
assessments, other loans, charge accounts and all other scheduled indebtedness)
generally cannot exceed 38% of the applicant's gross monthly income. Applicants
who are salaried employees must provide current employment information in
addition to two recent years of employment history and the Seller verifies this
information. Verifications are based on written confirmation from employers or a
combination of a recent pay stub, the most recent W-2 tax form and telephone
confirmation from the employer. Self-employed applicants must be self-employed
in the same field for a minimum of two years. The self-employed applicant must
provide signed copies of complete federal income tax returns (including
schedules) filed for the most recent two years.
A credit report by an independent credit reporting agency is generally
required reflecting the applicant's complete credit history. The credit report
should reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies, divorce actions and similar adverse
credit practices that can be discovered by a search of public records. If the
report is obtained more than 120 or 180 days (depending on type of property)
prior to the loan closing, the lender must determine that the reported
information has not changed. All taxes and assessments not included in the
payment must be verified as current.
The Seller is responsible for using sound judgment in underwriting the
loans consistent with prudent industry practices. Generally, the applicant
should have an acceptable credit history given the amount of equity available,
the strength of the applicant's employment history and the level of the
applicant's income to debt obligations. The rescission period must have expired
prior to funding a loan. The rescission period may not be waived by the
applicant except as permitted by law. An attorney's title opinion or an ALTA
title insurance policy is required for all loans.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan. The Seller must ensure that its name and
address is properly added to the mortgagee clause of the insurance policy.
DELINQUENCY, LOAN LOSS AND FORECLOSURE INFORMATION
The following table sets forth the Seller's delinquency experience, on a
servicing portfolio of mortgage loans similar to the Mortgage Loans, at the
dates indicated below. The Seller's portfolio of mortgage loans may differ
significantly from the Mortgage Loans included in the Trust Fund in terms of
interest rates, principal balances, geographic distribution, Loan-to-Value
Ratios and other relevant characteristics. There
S-38
<PAGE> 44
can be no assurance the delinquency and loss experienced on the Mortgage Loans
(most of which have been acquired by the Seller during the past twelve months)
will be consistent with the historical information provided below. Such losses
and delinquencies on the Mortgage Loans may be higher than the historical
information presented below.
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the Mortgage Loans for the
four quarters ended March 31, 1997, June 30, 1997, September 30, 1997 and
December 31, 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
DECEMBER 31, 1997 SEPTEMBER 30, 1997 JUNE 30, 1997
-------------------------- -------------------------- --------------------------
NUMBER OF DOLLAR NUMBER OF DOLLAR NUMBER OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio............ 3,816 $1,249,896,170 3,737 $1,222,191,914 3,645 $1,174,533,467
Delinquency
percentage(1)
30-59 days......... 1.23% 1.21% 1.58% 1.41% 1.43% 1.36%
60-89 days......... 0.18 0.15 0.27 0.24 0.38 0.36
90 days or more.... 0.58 0.76 0.51 0.54 0.60 0.69
------ -------------- ------ -------------- ------ --------------
Total....... 1.99% 2.12% 2.36% 2.19% 2.41% 2.41%
Foreclosures......... 0.45% 0.44% 0.35% 0.37% 0.36% 0.37%
Percentage of Net
Gains/(Losses) on
liquidated loans... 0.03% (0.00)% (0.03)% (0.02)% (0.03)% (0.00)%
<CAPTION>
QUARTER ENDED
--------------------------
MARCH 31, 1997
--------------------------
NUMBER OF DOLLAR
LOANS AMOUNT
--------- --------------
<S> <C> <C>
Portfolio............ 3,552 $1,144,951,857
Delinquency
percentage(1)
30-59 days......... 1.15% 1.02%
60-89 days......... 0.31 0.28
90 days or more.... 0.76 0.95
------ --------------
Total....... 2.22% 2.25%
Foreclosures......... 0.37% 0.32%
Percentage of Net
Gains/(Losses) on
liquidated loans... N/A N/A
</TABLE>
- ---------------
(1) The period of delinquency is based on the number of days the payment is
contractually past due.
The above delinquency experience percentages are calculated on the basis of
the total mortgage loan portfolio of similar loans serviced by the Seller at the
date indicated, all of which loans were acquired or originated by the Seller.
However, because the total amount of loans serviced by the Seller has increased
over these periods as a result of new originations, the total amount of loans
serviced as of the end of any indicated period will include many loans that will
not have been outstanding long enough to give rise to some or all of the
indicated periods of delinquency. Because the Trust Fund consists of a fixed
group of Mortgage Loans, the actual delinquency percentages with respect to the
Mortgage Loans may differ from the delinquency percentages indicated above.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yield to maturity of each Class of Certificates will depend upon, among
other things, the price at which such Certificates are purchased, the applicable
Certificate Rate, the actual characteristics of the Mortgage Loans in the
related Loan Group, the rate of principal payments (including Prepayments) on
the Mortgage Loans in the related Loan Group and the rate of liquidations on the
Mortgage Loans. The yield to maturity to Holders of the Certificates will be
lower than the yield to maturity otherwise produced by the applicable
Certificate Rate and purchase price of such Certificates because principal and
interest distributions will not be payable to such Certificateholders until the
25th day of the month following the month of accrual (without any additional
distribution of interest or earnings thereon with respect to such delay). Except
in the limited circumstances set forth herein, distributions to the Class SA
Certificates and the Class A Certificates relate to payments on the Group SA
Mortgage Loans and Group A Mortgage Loans, respectively. Distributions of the
Subordinate Certificates and the Residual Certificate, relate to payments on
both the Group SA Mortgage Loans and Group A Mortgage Loans.
S-39
<PAGE> 45
PRINCIPAL PREPAYMENTS AND COMPENSATING INTEREST
When a Mortgagor prepays a Mortgage Loan in full between Due Dates for such
Mortgage Loan, the Mortgagor pays interest on the amount prepaid only to the
date of prepayment instead of for the entire month. Also, when a Curtailment is
made on a Mortgage Loan together with the scheduled Monthly Payment for a month
on or after the related Due Date, the principal balance of the Mortgage Loan is
reduced by the amount of the Curtailment as of such Due Date, but such principal
is not distributed to related Certificateholders until the Distribution Date in
the next month; therefore, one month of interest shortfall accrues on the amount
of such Curtailment.
In order to reduce the adverse effect on Certificateholders from the
deficiency in interest payable as a result of a Payoff or Curtailment on a
Mortgage Loan between its Due Dates, the Servicer will pass through Compensating
Interest to the related Certificateholders to the limited extent and in the
manner set forth below. The Servicer is obligated to remit to the Distribution
Account on the day prior to each Distribution Date with respect to the Mortgage
Loans in each Loan Group an amount equal to the lesser of (a) any shortfall for
the related month in interest collections resulting from the timing of Payoffs
made other than on the first day of the month or Curtailments and (b) the
monthly Servicing Fee payable to the Servicer.
To the extent that the amount allocated to a Loan Group to pay Compensating
Interest is insufficient to cover the deficiency in interest payable as a result
of a Payoff and any deficiency as a result of a Curtailment on a Mortgage Loan,
such deficiency will be allocated to the Certificates of the related Certificate
Group pro rata according to the amount of interest to which each related Class
of Certificates would otherwise be entitled in reduction thereof.
MANDATORY PREPAYMENT
The original Pre-Funded Amount of $57,744,845 will be funded from the
proceeds of the sale of the Certificates and is intended to be used to acquire
Subsequent Mortgage Loans. In the event that, on July 24, 1998, not all of the
Pre-Funded Amount has been used to acquire Subsequent Mortgage Loans, then the
Class or Classes of Class A Certificates then entitled to receive payments of
principal will receive a partial prepayment on the July, 1998 Distribution Date
in an aggregate amount equal to the remainder of the Pre-Funded Amount.
Although no assurances can be given, the Seller intends that the principal
amount of Subsequent Mortgage Loans sold to the Trust Fund will require the
application of substantially all of the Pre-Funded Amount and that there should
be no material amount of principal prepaid from the Pre-Funded Amount to the
Holders of any of the Certificates.
THE SUBORDINATE CERTIFICATES
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in decreasing order of their priority of distributions, will be
progressively more sensitive to the rate and timing of Mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those assumed by a
Holder of a Subordinate Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such Holder based on such
assumption. The timing of losses on the Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Mortgage Loans are consistent with such
investor's expectations. In general, the earlier a loss occurs the greater the
effect on an investor's yield to maturity. Losses on the Mortgage Loans will
reduce the Class Principal Balance of the Subordinate Certificates to the extent
of any losses allocated thereto without the receipt of cash attributable to such
reduction. See "Description of the Certificates -- Subordination and Allocation
of Losses" herein. As a result of such reductions, less interest will accrue on
such Classes of Subordinate Certificates than otherwise would be the case. The
yield to maturity of the Subordinate Certificates will also be affected by
disproportionate allocations of principal prepayments to the Senior Certificates
and other cash shortfalls in Available Funds. See "Description of the
Certificates -- Subordination and Allocation of Losses" herein.
S-40
<PAGE> 46
RATE OF PAYMENTS
The rate of principal payments on the Certificates entitled to receive
principal generally is directly related to the rate of principal payments on the
Mortgage Loans in the related Loan Group, which may be in the form of scheduled
payments or Prepayments. See "Risk Factors" herein and "Yield and Prepayment
Considerations" in the Prospectus. Mortgagors may prepay the Mortgage Loans at
any time without penalty. A higher than anticipated rate of Prepayments would
reduce the aggregate principal balance of the Mortgage Loans more quickly than
expected. As a consequence, aggregate interest payments with respect to the
Mortgage Loans would be substantially less than expected, therefore, a higher
rate of Prepayments in a Loan Group could result in a lower than expected yield
to maturity on each related Class of Certificates purchased at a premium and in
certain circumstances such investors may not fully recoup their initial
investments. Conversely, a lower than anticipated rate of Prepayments in a Loan
Group would reduce the return to investors on any related Classes of
Certificates purchased at a discount, in that principal payments with respect to
the Mortgage Loans would occur later than anticipated. There can be no assurance
that Certificateholders will be able to reinvest amounts received with respect
to the Certificates at a rate which is comparable to the applicable Certificate
Rate. Investors should fully consider all of the associated risks.
SPECIAL SENSITIVITIES
The yield to maturity on the Class SA-5 and Class SA-X Certificates will be
extremely sensitive to the level of Prepayments of the Group SA Mortgage Loans.
Therefore, the yield to maturity on the Class SA-5 and Class SA-X Certificates
will decrease as a result of faster than expected Prepayments on the Group SA
Mortgage Loans. Prospective investors should fully consider the risks associated
with an investment in the Class SA-5 and Class SA-X Certificates, including the
possibility that if the rate of Prepayments on the Group SA Mortgage Loans is
rapid, such investors may not fully recoup their initial investments.
The yield to maturity on the Class A-6 and Class A-X Certificates will be
extremely sensitive to the level of Prepayments of the Group A Mortgage Loans.
Therefore, the yield to maturity on the Class A-6 and Class A-X Certificates
will decrease as a result of faster than expected Prepayments on the Group A
Mortgage Loans. Prospective investors should fully consider the risks associated
with an investment in the Class A-6 and Class A-X Certificates, including the
possibility that if the rate of Prepayments on the Group A Mortgage Loans is
rapid, such investors may not fully recoup their initial investments.
BASIC PREPAYMENT ASSUMPTION
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this Prospectus
Supplement (the "Basic Prepayment Assumption" or "BPA") represents an assumed
rate of prepayment each month relative to the then outstanding principal balance
of a pool of mortgage loans. For all mortgage loans, a 100% Basic Prepayment
Assumption assumes a per annum rate of prepayment of 0.2% of the then
outstanding principal balance of a pool of mortgage loans in the first month of
the life of such mortgage loan, following which, such annual prepayment rate
increases by 0.2% each month until the 30th month after origination of such
mortgage loans and remains constant at 6% per annum in the 30th month after
origination of such mortgage loans and in each month thereafter. As used in the
tables below, a 50% BPA assumes current rates equal to 50% of the BPA.
Correspondingly, a 300% BPA assumes prepayment rates equal to 300% of the BPA,
and so forth.
BPA does not purport to be either an historical description of the
prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans, and there is no assurance that the Mortgage Loans in any Loan
Group will prepay at any given percentage of the BPA. The actual rate of
Prepayments on the Mortgage Loans may be influenced by a variety of economic,
geographic, social and other factors. In general, if prevailing interest rates
fall significantly below the interest rates on the Mortgage Loans, the Mortgage
Loans are likely to be subject to higher prepayment rates than if prevailing
rates remain at or above the interest rates on the Mortgage Loans. Conversely,
if interest rates rise above the interest rates on the Mortgage Loans, the rate
of prepayment would
S-41
<PAGE> 47
be expected to decrease. A comparatively low interest-rate environment may
result in a higher than expected rate of Prepayments on the Mortgage Loans and
an earlier than expected retirement of the Certificates.
The Depositor makes no representation as to the specific factors that will
affect the prepayment of the Mortgage Loans or the relative importance of such
factors. Factors not identified by the Depositor or discussed herein may
significantly affect the prepayment rate of the Mortgage Loans. In particular,
the Depositor makes no representation as to the percentage of the principal
amount of the Mortgage Loans that will be paid as of any date or as to the
overall rate of prepayment.
For purposes of the tables set forth in Appendix A, it is assumed that the
Mortgage Loans included in the Mortgage Pool on the Closing Date have the
characteristics set forth below: (i) the scheduled payments on all Mortgage
Loans are received on the first day of each month beginning May 1, 1998, (ii)
any Prepayments on the Mortgage Loans are received on the last day of each month
beginning on April 30, 1998 and include 30 days of interest thereon, (iii) there
are no defaults or delinquencies on the Mortgage Loans, (iv) optional
termination of the Trust Fund does not occur, (v) there are no partial
prepayments on the Mortgage Loans and prepayments are computed after giving
effect to scheduled payments received on the following day, (vi) the Mortgage
Loans in each Loan Group prepay at the indicated constant percentages of the
BPA, (vii) the date of issuance for the Certificates is April 29, 1998, (viii)
cash distributions are received by the Certificateholders on the 25th day of
each month when due, (ix) the scheduled monthly payments for each Mortgage Loan
are computed based upon its unpaid principal balance, Loan Rate and amortized
remaining term such that the Mortgage Loan will fully amortize on its maturity
date, and (x) all of the Pre-Funded Amount is used to acquire Subsequent
Mortgage Loans on the Initial Cut-Off Date (collectively, the "Modeling
Assumptions"). The approximate Class Principal Balances of the Junior
Subordinate Certificates as of the Closing Date will be as follows: Class B-3,
$1,225,186, Class B-4, $700,106 and Class B-5 $1,050,161.64.
REPRESENTATIVE LOAN POOLS
<TABLE>
<CAPTION>
PRINCIPAL GROSS NET ORIGINAL
BALANCE WAC WAC WAM TERM TO MATURITY
--------- ------- ------- --- ----------------
<S> <C> <C> <C> <C> <C>
LOAN GROUP A
49,127,747.73 7.72868 7.34368 352 356
47,730,262.21 8.05367 7.66867 345 354
32,466,171.55 8.13271 7.74771 328 353
30,317,064.95 7.53603 7.27603 356 358
22,544,770.11 7.86156 7.60156 358 358
4,883,010.21 7.26000 7.00000 357 357
LOAN GROUP SA
30,802,921.25 8.12218 7.73718 239 339
15,847,487.65 8.10856 7.72356 254 332
48,211,198.85 8.00638 7.62138 269 335
47,191,877.57 7.74158 7.35658 280 336
20,930,715.56 8.06325 7.67825 305 349
</TABLE>
Any discrepancy between the actual characteristics of the Mortgage Loans
and the characteristics of the Mortgage Loans set forth above may affect the
percentages of the initial Class Principal Balances set forth in the tables and
the weighted average lives of the Offered Certificates. In addition, to the
extent that the characteristics of the Mortgage Loans differ and the initial
Class Principal Balances differ from those assumed in preparing the tables in
Appendix A, the outstanding Class Principal Balance of any Class of Offered
Certificates may be reduced to zero earlier or later than indicated by such
tables.
Variations in actual prepayment experience may increase or decrease the
percentages of the original outstanding Class Principal Balances and the
weighted average lives shown in the tables in Appendix A. Such variations may
occur even if the average prepayment experience of all the Mortgage Loans equals
the
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<PAGE> 48
indicated percentage of the applicable Basic Prepayment Assumption. There is no
assurance, however, that prepayment of the Mortgage Loans of any Loan Group will
conform to any given percentage of the Basic Prepayment Assumption. The
Depositor makes no representations that the actual rates of prepayments on the
Mortgage Loans will in any way correspond to any of the assumptions made herein.
Based on the foregoing assumptions, the tables in Appendix A indicate the
weighted average lives of the Offered Certificates and set forth the percentages
of the initial outstanding Class Principal Balances of each such Class of
Offered Certificates that would be outstanding after each of the dates shown at
various constant percentages of the Basic Prepayment Assumption.
There is no historical prepayment data available for the Mortgage Pool, and
comparable data is not available because the Mortgage Loans do not constitute a
representative sample of mortgage loans generally. In addition, historical data
available with respect to mortgage loans underlying mortgage pass through
certificates issued by GNMA, FNMA and FHLMC may not be comparable to prepayments
expected to be experienced by the Mortgage Pool because the Mortgage Loans may
have characteristics which differ from the mortgage loans underlying
certificates issued by GNMA, FNMA and FHLMC.
The Depositor makes no representation that the Mortgage Loans will prepay
in the manner or at any of the rates assumed above. Each investor must make its
own decision as to the appropriate prepayment assumptions to be used in deciding
whether or not to purchase any of the Certificates. Since the rate of principal
payments (including Prepayments) with respect to, and repurchases of, the
Mortgage Loans will significantly affect the yields to maturity on the Offered
Certificates, prospective investors are urged to consult their investment
advisors as to both the anticipated rate of future principal payments (including
Prepayments) on the Mortgage Loans and the suitability of the Certificates to
their investment objectives.
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS SA-5, CLASS SA-X, CLASS A-6 AND
CLASS A-X CERTIFICATES
The yields to maturity on the Class SA-5, Class SA-X, Class A-6 and Class
A-X Certificates will be extremely sensitive to the level of Prepayments of the
Mortgage Loans in the related Loan Group. The yield to maturity on such
Certificates will generally decrease as a result of faster than expected
Prepayments on the related Mortgage Loans. Prospective investors should fully
consider the risks associated with an investment in the Class SA-5, Class SA-X,
Class A-6 and Class A-X Certificates, including the possibility that if the rate
of Prepayments on the related Mortgage Loans is rapid, such investors may not
fully recoup their initial investments.
To illustrate the significance of different rates of Prepayments on the
distributions to the Class SA-5, Class SA-X, Class A-6 and Class A-X
Certificates, the following tables indicate the approximate pre-tax yields to
maturity (on a corporate bond equivalent basis) under the different percentages
of the BPA indicated. Because the rate of distribution of interest on the Class
SA-5, Class SA-X, Class A-6 and Class A-X Certificates, will be directly related
to the actual amortization (including Prepayments) of the Mortgage Loans in
related Loan Group. The pre-tax yields to maturity on the Class SA-5, Class
SA-X, Class A-6 and Class A-X Certificates are likely to differ from those shown
in the following tables even if all the Mortgage Loans in related Loan Group
prepay at the indicated constant percentages of the applicable BPA. Any
differences between such assumptions and the actual characteristics and
performance of the Mortgage Loans and of the Certificates may result in yields
to maturity being different from those shown in such tables. Discrepancies
between assumed and actual characteristics and performances underscore the
hypothetical nature of the tables, which are provided only to give a general
sense of the sensitivity of yields to maturity in varying prepayment scenarios.
In addition, it is highly unlikely that the Mortgage Loans will prepay at a
constant level of the BPA until maturity or that all of such Mortgage Loans will
prepay at the same rate. The timing of changes to the rate of Prepayments may
significantly affect the actual yield to maturity to an investor, even if the
average rate of Prepayments is consistent with an investor's expectation. In
general, the earlier a payment of principal of the Mortgage Loans, the greater
the effect on an investor's yield to maturity. As a result, the effect on an
investor's yield to maturity of Prepayments occurring at a rate higher (or
lower) than the rate anticipated by the investor during the period immediately
following the issuance of the Certificates will not be equally offset by a
subsequent like reduction (or increase) in the rate of Prepayments.
S-43
<PAGE> 49
In addition, the yield to maturity on the Class SA-5, Class SA-X, Class A-6
and Class A-X Certificates may be adversely affected if an optional termination
of the Trust Fund occurs. See "Description of the Certificates -- Termination;
Purchase of Mortgage Loans" herein.
The sensitivity tables for the Class SA-5, Class SA-X, Class A-6 and Class
A-X Certificates set forth below are based on the Modeling Assumptions and
assume further that the Certificates are purchased at prices equal to those set
forth in the tables (which include Accrued Interest). There can be no assurance
that the Mortgage Loans will have the assumed characteristics, will prepay at
any of the rates shown herein, or that the purchase prices of the Certificates
will be as assumed or that the pre-tax yields to maturity will correspond to any
of the pre-tax yields shown herein. The actual prices to be paid on the Class
SA-5, Class SA-X, Class A-6 and Class A-X Certificates have not been determined
and will be dependent on the characteristics of the Mortgage Pool as ultimately
constituted. In addition to any other factors an investor may deem material,
each investor must make its own decision as to the appropriate prepayment
assumptions to be used in deciding whether or not to purchase a Class of
Certificates.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS SA-5 CERTIFICATES TO PREPAYMENTS
AT AN ASSUMED PURCHASE PRICE OF APPROXIMATELY 12.23% OF THE CLASS SA-5 NOTIONAL
AMOUNT
<TABLE>
<CAPTION>
PERCENTAGE OF THE BPA
-------------------------------------
0% 100% 300% 350% 500%
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Pre-Tax Yield........................................ 62.3% 52.4% 28.6% 21.3% (3.3%)
</TABLE>
On the basis of a constant prepayment rate of 481% of the BPA used with
respect to Loan Group SA, a purchase price of approximately $138,189, which
includes accrued interest, and the assumptions described above, the pre-tax
yield to maturity of the Class SA-5 Certificates would be approximately 0%.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS SA-X CERTIFICATES TO PREPAYMENTS
AT AN ASSUMED PURCHASE PRICE OF APPROXIMATELY 1.50% OF THE CLASS SA-X NOTIONAL
AMOUNT
<TABLE>
<CAPTION>
PERCENTAGE OF THE BPA
-------------------------------------
0% 100% 300% 350% 500%
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Pre-Tax Yield........................................ 39.6% 32.5% 17.6% 13.7% 1.5%
</TABLE>
On the basis of a constant prepayment rate of 518% of the BPA used with
respect to Loan Group SA, a purchase price of approximately $2,452,894, which
includes accrued interest, and the assumptions described above, the pre-tax
yield to maturity of the Class SA-X Certificates would be approximately 0%.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS A-6 CERTIFICATES TO PREPAYMENTS
AT AN ASSUMED PURCHASE PRICE OF APPROXIMATELY 11.41% OF THE CLASS A-6 NOTIONAL
AMOUNT
<TABLE>
<CAPTION>
PERCENTAGE OF THE BPA
-------------------------------------
0% 100% 300% 350% 500%
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Pre-Tax Yield........................................ 68.4% 59.9% 39.2% 33.5% 16.1%
</TABLE>
On the basis of a constant prepayment rate of 643% of the BPA used with
respect to Loan Group A, a purchase price of approximately $268,306, which
includes accrued interest, and the assumptions described above, the pre-tax
yield to maturity of the Class A-6 Certificates would be approximately 0%.
S-44
<PAGE> 50
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS A-X CERTIFICATES TO PREPAYMENTS
AT AN ASSUMED PURCHASE PRICE OF APPROXIMATELY 1.49% OF THE CLASS A-X NOTIONAL
AMOUNT
<TABLE>
<CAPTION>
PERCENTAGE OF THE BPA
------------------------------------
0% 100% 300% 350% 500%
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pre-Tax Yield......................................... 35.3% 29.5% 17.6% 14.5% 5.1%
</TABLE>
On the basis of a constant prepayment rate of 578% of the BPA used with
respect to Loan Group A, a purchase price of approximately $2,788,339, which
includes accrued interest, and the assumptions described above, the pre-tax
yield to maturity of the Class A-X Certificates would be approximately 0%.
The pre-tax yields to maturity set forth in the preceding tables were
calculated by determining the monthly discount rates (whether positive or
negative) which, when applied to the assumed streams of cash flows to be paid on
the Class SA-5, Class SA-X, Class A-6 and Class A-X Certificates, would cause
the discounted present values of such assumed streams of cash flows to equal the
assumed purchase price, including accrued interest. These monthly discount rates
were converted to corporate bond equivalent rates, which are higher than the
monthly discount rates because they are based on semiannual compounding. These
yields to maturity do not take into account the different interest rates at
which investors may be able to reinvest funds received by them as distributions
on the Class SA-5, Class SA-X, Class A-6 and Class A-X Certificates and thus do
not reflect the return on any investment in the Class SA-5, Class SA-X, Class
A-6 and Class A-X Certificates when any reinvestment rates other than the
discount rates are considered.
There are no historical prepayment data available for the Mortgage Loans,
and comparable data is not available because the Mortgage Loans generally do not
constitute a representative sample of mortgage loans. In addition, historical
data available with respect to mortgage loans underlying mortgage pass-through
certificates issued by the GNMA, FNMA, and FHLMC may not be comparable to
prepayments expected to be experienced by the Mortgage Loans because the
Mortgage Loans may have characteristics which differ from the mortgage loans
underlying certificates issued by GNMA, FNMA and FHLMC.
The Depositor makes no representation that the Mortgage Loans will prepay
in the manner or at any of the rates assumed above. Each investor must make its
own decision as to the appropriate prepayment assumptions to be used in deciding
whether or not to purchase any of the Certificates. Since the rate of principal
payments (including Prepayments) with respect to, and repurchases of, the
Mortgage Loans will significantly affect the yields to maturity on the Offered
Certificates, prospective investors are urged to consult their investment
advisors as to both the anticipated rate of future principal payments (including
Prepayments) on the Mortgage Loans and the suitability of the Certificates to
their investment objectives.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
Holders of interest in a Residual Certificate may have tax liabilities with
respect to their Certificates during many or all of the years of the REMICs'
terms that substantially exceed any distributions payable thereon during any
such period. In addition, Holders of interests in a Residual Certificate may
have tax liabilities with respect to their Certificates the present value of
which substantially exceeds the present value of distributions payable thereon
and of any tax benefits that may arise with respect thereto. Accordingly, the
after-tax rate of return on a Residual Certificate may be negative or may
otherwise be significantly adversely affected. The timing and amount of taxable
income attributable to a Residual Certificate will depend on, among other
things, the timing and amounts of prepayments and losses experienced with
respect to the Mortgage Pool.
The Residual Certificateholders should consult their own tax advisors as to
the effect of taxes and the receipt of any payments made to such Holders in
connection with the purchase, ownership and disposition of interests in a
Residual Certificate and the after-tax rate of return thereon. See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
S-45
<PAGE> 51
ADDITIONAL INFORMATION
The Depositor intends to file with the Securities and Exchange Commission
certain additional yield tables and other computational materials with respect
to one or more Classes of the Offered Certificates on a Current Report on Form
8-K. Such tables and material were prepared by DLJ at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such prospective investors. Such tables and materials
are preliminary in nature, and the information contained therein is subject to,
and superseded by, the information in this Supplement.
FORMATION OF THE TRUST FUND AND TRUST PROPERTY
The FURST Mortgage Loan Trust 1998-A will be created and established
pursuant to the Pooling and Servicing Agreement. As of the Closing Date, the
Depositor will convey without recourse (subject to certain obligations to
repurchase Defective Mortgage Loans or replace Defective Mortgage Loans with
Eligible Substitute Mortgage Loans) the Initial Mortgage Loans to the Trust Fund
and will fund the Pre-Funding Account, Capitalized Interest Account and the
Class A-7 Reserve Fund, and the Trust Fund will issue the Offered Certificates
and the Junior Subordinate Certificates to the Depositor.
The property of the Trust Fund shall include (a) the Mortgage Loans
together with the related Mortgage Loan documents (including any guaranty
executed in connection therewith) and the Depositor's interest in any property
which secures a Mortgage Loan (the "Mortgaged Property") and all payments
thereon and proceeds of the conversion, voluntary or involuntary, of the
foregoing, (b) such amounts as may be held in the Distribution Account, the
Collection Account and the Class A-7 Reserve Fund, (d) any funds on deposit in
the Pre-Funding Account and the Capitalized Interest Account, and (e) proceeds
of all the foregoing (including, but not by way of limitation, all of any
mortgage insurance, hazard insurance and title insurance policy relating to the
Mortgage Loans, cash proceeds, accounts, accounts receivable, notes, drafts,
acceptances, chattel paper, checks, deposit accounts, rights to payment of any
and every kind, and other forms of obligations and receivables which at any time
constitute all or part of or are included in the proceeds of any of the
foregoing but excluding any net investment income from the investment of funds
in the Collection Account, if any, and the Distribution Account) to pay the
Certificates as specified in the Pooling and Servicing Agreement.
The Certificates will not represent an interest in or an obligation of, nor
will the Mortgage Loans be guaranteed by, the Depositor, the Seller, the
Servicer, the Trustee or any of their affiliates.
Prior to its formation the Trust Fund will have had no assets or
obligations. Upon formation, the Trust Fund will not engage in any business
activity other than acquiring, holding and collecting payments on the Mortgage
Loans, issuing the Certificates and distributing payments thereon. The Trust
Fund will not acquire any receivables or assets other than the Mortgage Loans,
investments in the Pre-Funding Account and investments in the Capitalized
Interest Account, and the rights appurtenant thereto. To the extent that
borrowers make scheduled payments under the Mortgage Loans the Trust Fund will
have sufficient liquidity to make distributions on the Certificates. As the
Trust Fund does not have any operating history and will not engage in any
business activity other than issuing the Certificates and making distributions
thereon, there has not been included any historical or pro forma ratio of
earnings to fixed charges with respect to the Trust Fund.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement among the Document Custodian, the Depositor, the Seller, the Servicer
and the Trustee. Reference is made to the Prospectus for additional information
regarding the terms and conditions of the Pooling and Servicing Agreement to the
extent not revised by the following description. To the extent that the
statements in this Prospectus Supplement modify statements in the Prospectus,
the statements in this Prospectus Supplement control.
The following summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
Pooling and Servicing Agreement. When particular provisions or
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terms used in the Pooling and Servicing Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
GENERAL
The Certificates will evidence all the beneficial ownership in a trust
established by the Depositor into which the mortgage loans (the "Mortgage
Loans") will be deposited. The Mortgage Pass-Through Certificates, Series 1998-A
(the "Certificates"), will consist of the following twenty-two classes: (i)
Class SA-1, Class SA-2, Class SA-3, Class SA-4, Class SA-5 and Class SA-X (the
"Class SA Certificates"), (ii) Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7 and Class A-X (the "Class A Certificates"), (iii)
Class M, Class B-1 and Class B-2 (the "Senior Subordinate Certificates"), (iv)
Class B-3, Class B-4 and Class B-5 (the "Junior Subordinate Certificates" and,
together with the Senior Subordinate Certificates, the "Subordinate
Certificates") and (v) Class R-I and Class R-II (the "Residual Certificates"
and, together with the Class SA and Class A Certificates, the "Senior
Certificates"). Only the Senior Certificates and the Senior Subordinate
Certificates (collectively, the "Offered Certificates") are offered hereby. The
Junior Subordinate Certificates are not offered hereby. The Class SA
Certificates, the Class A Certificates and the Subordinate Certificates are each
a "Certificate Group". The "Class Principal Balance" for any Class of
Certificates will equal the aggregate amount of principal to which such Class is
entitled, after giving effect to prior (i) distributions of principal to such
Class and (ii) allocations of losses required to be borne by such Class.
Notwithstanding the foregoing, the Class Principal Balance of the most
Subordinate Class of Certificates outstanding at any time is equal to the
aggregate Scheduled Principal Balance of all of the Mortgage Loans less the
Class Principal Balance of all other Classes of Certificates. As used herein the
"Principal Balance" of a Class means the Class Principal Balance thereof.
The "Certificate Principal Balance" for any Certificate will be the portion
of the corresponding Class Principal Balance represented by such Certificate.
The aggregate initial Certificate Principal Balance will be approximately equal
to the sum of (i) the aggregate principal balance of the Mortgage Loans as of
the Initial Cut-Off Date and (ii) the original Pre-Funded Amount. The Offered
Certificates, other than the Class A-2, Class A-4, Class A-5, Class A-7 and
Class R Certificates, are offered in minimum denominations equivalent to not
less than $25,000 initial Certificate Principal Balance or Notional Principal
Amount, as applicable, each and multiples of $1 in excess thereof. The Class
A-2, Class A-4, Class A-5 and Class A-7 Certificates are offered in minimum
denominations equivalent to not less than $1,000 initial Certificate Principal
Balance each and multiple of $1 in excess thereof. The Class R-I and Class R-II
Certificates, each of which will have an initial Class Principal Balance of $50,
will be offered in registered, certificated form in a single denomination of a
100% Percentage Interest each.
BOOK-ENTRY REGISTRATION
Each Class of Book-Entry Certificates will initially be represented by a
global Certificate registered in the name of the nominee of DTC. DTC has advised
the Depositor that DTC's nominee will be Cede & Co. ("Cede"). Accordingly, Cede
is expected to be the Holder of record of the Book-Entry Certificates. No
Beneficial Owners will be entitled to receive a certificate representing such
person's interest in such Certificate. Unless and until Definitive Certificates
(as defined below) are issued under the limited circumstances described herein,
all references herein to actions by Beneficial Owners shall refer to actions
taken by DTC upon instructions from DTC Participants (as defined below), and all
references herein to distributions, notices, reports, and statements to
Beneficial Owners shall refer to distributions, notices, reports, and statements
to Cede, as the registered Holder of such Certificates, for distribution to
Beneficial Owners in accordance with DTC procedures.
Certificateholders may hold their Book-Entry Certificate through DTC, if
they are DTC Participants (as defined below), or indirectly through
organizations which are DTC Participants. Transfers between DTC Participants
will occur in the ordinary way in accordance with DTC rules. Cede, as nominee of
DTC, will hold the global Certificates for the Book-Entry Certificates.
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DTC has advised the Depositor that it is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, 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 the provisions of Section
17A of the Securities Exchange Act of 1934, as amended. DTC holds securities
that its participants ("DTC Participants") deposit with DTC. DTC also
facilitates the settlement among DTC Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in DTC Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. DTC
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to the
DTC system also is available to other entities, such as banks, brokers, dealers,
and trust companies that clear through or maintain a custodial relationship with
a DTC Participant, either directly or indirectly ("Indirect DTC Participants").
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, unless Definitive
Certificates as issued, Certificateholders will receive all distributions of
principal and interest on the Book-Entry Certificates through DTC Participants.
Under a book-entry format, Beneficial Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede, as nominee for DTC, on each such date, DTC will forward such payments
to DTC Participants which thereafter will be required to forward them to
Indirect DTC Participants or Beneficial Owners. It is anticipated that the sole
"Certificateholder" (as such term is used in the Pooling and Servicing
Agreement) for each Class of Book-Entry Certificates will be Cede, as nominee of
DTC, and that Beneficial Owners will not be recognized by the Trustee as
Certificateholders under the Pooling and Servicing Agreement. Beneficial Owners
will be permitted to exercise the rights of Certificateholders under the Pooling
and Servicing Agreement only indirectly through DTC Participants, who in turn
will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers among
DTC Participants on whose behalf it acts with respect to the Book-Entry
Certificates and is required to receive and transmit payments of principal and
interest, if any, on such Book-Entry Certificates. DTC Participants and Indirect
DTC Participants with whom Beneficial Owners have accounts with respect to the
Book-Entry Certificates are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners of Book-Entry Certificates will not
possess Definitive Certificates, the Rules provide a mechanism by which owners
of the Book-Entry Certificates through their DTC Participants will receive
payments and will be able to transfer their interest.
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 otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Beneficial Owner under the Pooling and Servicing Agreement only at
the direction of one or more DTC Participants to whose account with DTC the
Certificates are credited. Additionally, DTC has advised the Depositor that it
will take such actions with respect to a Book-Entry Certificate only at the
direction of and on behalf of the DTC Participant whose holdings include that
Certificate. DTC may take conflicting actions with respect to other Book-Entry
Certificates to the extent that such actions are taken on behalf of DTC
Participants whose holdings include such Book-Entry Certificates.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Book-Entry Certificates among DTC Participants, it is under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
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DEFINITIVE CERTIFICATES
The Book-Entry Certificates will be issued in fully registered,
certificated form to Certificateholders or their nominees ("Definitive
Certificates"), rather than to DTC or its nominee, only if (i) the Depositor
advises the Trustee 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 or the Depositor is unable to locate a
qualified successor, (ii) the Depositor, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an Event of
Default, Certificateholders of Book-Entry Certificates evidencing not less than
66% of the aggregate outstanding Certificate Principal Balance advise the
Trustee and DTC through DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interest of the Certificateholders.
Upon notice of the occurrence of any of the events described in the
immediately preceding paragraph, DTC is required to notify all DTC Participants
of the availability of Definitive Certificates. Upon surrender by DTC of the
global Certificates and receipt from DTC of instructions for re-registration,
the Trustee will issue the Book-Entry Certificates in the form of Definitive
Certificates, and thereafter the Trustee will recognize the Holders of such
Definitive Certificates as Certificateholders under the Pooling and Servicing
Agreement.
Distributions of principal and interest on the Definitive Certificates, as
well as the other Classes of Certificates, will be made by the Trustee (or its
duly appointed paying agent, if any) directly to Holders of such Certificates in
accordance with the procedures set forth herein and in the Pooling and Servicing
Agreement. Distributions of principal and interest on each Distribution Date
will be made to Holders in whose names such Certificates were registered at the
close of business on the last business day of the month preceding the month of
such Distribution Date. Distributions will be made by wire transfer in
immediately available funds for the account of each such Holder or, if a Holder
has not provided wire instructions, by check mailed to the address of such
Holder as it appears on the register maintained by the Certificate Registrar.
The final payment on any Certificate (whether a Definitive Certificate or the
global Certificates registered in the name of Cede) will be made only upon
presentation and surrender of such Certificate at the offices of the Trustee or
its agent or such office or agency as is specified in the notice of final
distribution to Holders of Certificates being retired. The Trustee will provide
such notice to registered Certificateholders not later than the fifteenth day of
the month in which all remaining outstanding Certificates will be retired.
Definitive Certificates, as well as the other Classes of Certificates, will
be transferable and exchangeable at the offices of the Trustee or its agent. A
reasonable service charge may be imposed for any registration of transfer or
exchange, and the Trustee or such agent may require payment of a sum sufficient
to cover any tax or other governmental charge imposed in connection therewith.
On the Closing Date, upon the order of the Depositor concurrently with the
sale and assignment to the Trustee of the Trust Fund assets, the Trustee will
execute, deliver and authenticate the Certificates. ASSIGNMENT OF MORTGAGE LOANS
On the Closing Date, with respect to the Initial Mortgage Loans, and on
each Subsequent Transfer Date, with respect to the related Subsequent Mortgage
Loans, the Depositor will assign to the Trustee all of its right, title and
interest in and to the Mortgage Loans, including all payments of interest and
principal, from whatever source derived, which are received on or with respect
to the Mortgage Loans on or after the applicable Cut-Off Date, together with the
other assets and related documents (collectively, the "Related Documents")
included in the Trust Fund. Concurrently with such assignment, the Trustee will
deliver the Certificates to the Depositor. Each Mortgage Loan will be identified
in a schedule delivered to the Trustee.
Under the terms of the Pooling and Servicing Agreement, the Depositor will
deliver the Mortgages, the Mortgage Notes and certain of the other Related
Documents (together, the "Mortgage Files") to the Trustee, as Document
Custodian. The Document Custodian shall maintain possession of the Mortgage
Files. The Document Custodian will review such Mortgage Files within the period
specified in the Pooling and Servicing Agreement. Notwithstanding the foregoing,
the Document Custodian shall perform the review required by the Pooling and
Servicing Agreement as to each Mortgage File and shall deliver a certificate as
to the status of
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such review within 90 days, and a final review certificate within 180 days from
(i) the Closing Date with respect to Mortgage Files delivered on or before the
Closing Date and (ii) the date a Mortgage File is delivered, if delivered after
the Closing Date. If any document required to be included in any Mortgage File,
has not been received or is unrelated to the applicable Mortgage Loan, and such
defect is not cured as provided in the Pooling and Servicing Agreement following
receipt of notification thereof to the Seller by the Trustee, the Seller will be
required either to repurchase or to replace the affected Mortgage Loan in the
manner set forth below. In the Pooling and Servicing Agreement, Norwest Bank
Minnesota, National Association as Trustee of the Trust Fund will acknowledge
the assignment of the Mortgage Loans to the Trust Fund and the Document
Custodian will agree to hold the Mortgage Files for the Mortgage Loans for and
on behalf of the Trust Fund for so long as the Mortgage Loans are owned by the
Trust Fund. The Seller shall use its best efforts, within 180 days of the
Closing Date with respect to the Initial Mortgage Loans and of the applicable
Subsequent Transfer Date with respect to Subsequent Mortgage Loans, at its own
expense, to either (i) record the assignment of each Mortgage in favor of the
Trustee in the appropriate real property office or other records office or (ii)
deliver to the Trustee the assignment of each Mortgage in favor of the Trustee
in form for recordation, together with an opinion of counsel to the effect that
recording is not required to protect the Trustee's right, title and interest in
and to the related Mortgage Loan or, in the event a court should recharacterize
the conveyance of the Mortgage Loans as a loan or a security for a loan, to
perfect a first priority security interest in favor of the Trustee in the
related Mortgage Loan.
The Seller will make certain representations and warranties with respect to
each Mortgage Loan. In the event there is a breach of any representation or
warranty made by the Seller in the Pooling and Servicing Agreement as to a
Mortgage Loan that materially and adversely affects the interest of the
Certificateholders, the Seller will be required either to (i) repurchase the
related Mortgage Loan from the Trust Fund or (ii) prior to the expiration of two
years following the date the Offered Certificates are initially issued,
substitute therefor an Eligible Substitute Mortgage Loan, in each case in the
manner described below.
Any Mortgage Loan required to be repurchased by the Seller as a result of a
defect, omission or breach of representation or warranty will be repurchased at
a price (the "Purchase Price") equal to the sum of (i) the Loan Balance of such
Mortgage Loan as of the last day of the Collection Period ended immediately
preceding the date of repurchase, (ii) accrued and unpaid interest at the
applicable Loan Rate, (iii) any delinquent interest on such Mortgage Loan as to
which no monthly advance has been made, and (iv) all unreimbursed advances
relating to such Mortgage Loan. The Purchase Price will be deposited into the
Collection Account on the second Business Day next preceding the Distribution
Date in the month following expiration of the related cure period. "Business
Day" means any day other than (i) a Saturday or a Sunday or (ii) a day on which
(x) banking institutions in the State of North Carolina, the State of Minnesota
or the State of Maryland or (y) any depository holding certificates issued by
the Depositor are required or authorized by law or executive order to be closed.
As to any Eligible Substitute Mortgage Loan, the Seller will deposit into
the Collection Account the amount, if any, by which the conveyed balance of such
Eligible Substitute Mortgage Loan at the end of the Collection Period in which
the events giving rise to the related substitution occurred is less than the
Loan Balance of the related Mortgage Loan being removed from the Trust Fund at
the end of such Collection Period (the "Substitution Adjustment Amount"). The
Seller will substitute any Eligible Substitute Mortgage Loan, and deposit any
such Substitution Adjustment Amount into the Collection Account, on the second
Business Day next preceding the Distribution Date in the month following such
Collection Period. Upon substitution, an Eligible Substitute Mortgage Loan will
be subject to the terms of the Pooling and Servicing Agreement and the Seller
will be deemed to have made, with respect to such Eligible Substitute Mortgage
Loan, as of the date of substitution, the representations and warranties made by
the Seller with respect to all other Mortgage Loans in the Trust Fund. Upon
receipt by the Trustee of written notification of any such repurchase or
substitution, subject to certain conditions set forth in the Pooling and
Servicing Agreement, the Document Custodian will execute and deliver an
instrument of transfer or assignment necessary to vest in the Seller legal and
beneficial ownership of such Mortgage Loan (including any property acquired in
respect thereof or proceeds of any insurance policy with respect thereto). The
obligation of the Seller to repurchase or
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replace any such Mortgage Loan will be the sole remedy against the Seller
available to Certificateholders or the Trustee.
An "Eligible Substitute Mortgage Loan" is a Mortgage Loan that, as of the
substitution date, (i) has an outstanding Loan Balance not in excess of, and not
more than 10% less than, the Loan Balance of the Defective Mortgage Loan it
replaces as of the substitution date; (ii) has a Loan Rate not less than the
current Loan Rate of such Defective Mortgage Loan and not more than one percent
in excess thereof; (iii) complies with each representation and warranty set
forth in the Pooling and Servicing Agreement (deemed to be made as of the date
of substitution); (iv) has a remaining term to maturity not later than nor more
than six months earlier than the remaining term to maturity of such Defective
Mortgage Loan (provided that a Mortgage Loan that meets all the other
requirements of this definition, but has a remaining term to maturity that is
(A) not more than one year longer than that of the Defective Mortgage Loan and
(B) not later than the maturity date of the latest maturing Mortgage Loan then
owned by the Trust Fund, will not fail to qualify as an Eligible Substitute
Mortgage Loan if the Loan Balance of such Mortgage Loan on the date of such
substitution, when added to the Loan Balances (determined as of the date of the
substitution of such loan) that qualified as Eligible Substitute Mortgage Loans
in reliance upon the provisions of this proviso clause, does not exceed an
amount equal to $5,000,000); (v) has a Loan-to-Value Ratio not greater than that
of the Defective Mortgage Loan; and (vi) has an original principal balance of
not more than $1,000,000. More than one Eligible Substitute Mortgage Loan may be
substituted for a Defective Mortgage Loan if such Eligible Substitute Mortgage
Loans meet the foregoing attributes in the aggregate and such substitution is
approved in writing in advance by the Rating Agencies.
In the event the Seller repurchases or substitutes a Mortgage Loan as
provided above, there will be delivered to the Trustee an opinion of counsel as
to whether the repurchase or substitution (i) will be subject to tax as a result
of being deemed a prohibited transaction under section 860F(a)(2) of the Code;
(ii) will be deemed a contribution to the REMIC after the startup day that would
give rise to the tax specified under section 860G(d)(1) of the Code; or (iii)
will cause any portion of the Trust Fund to fail to qualify as a REMIC at any
time any Certificate is outstanding. The Seller will not be required to
repurchase or replace any Defective Mortgage Loan in the event such repurchase
or replacement, as evidenced by such opinion, would result in the imposition of
a prohibited transaction tax or be deemed a contribution to the REMIC after the
startup day, unless the Servicer has determined that there is an actual or
imminent default by the borrower with respect to the affected Mortgage Loan. The
Seller will not be required or permitted to repurchase or replace any Defective
Mortgage Loan if such repurchase or replacement, as evidenced by such opinion,
will cause any portion of the Trust Fund to fail to qualify as a REMIC.
Mortgage Loans required to be repurchased or substituted by the Seller as
described in the preceding paragraphs as a result of a defect, omission or
breach of a representation or warranty are referred to herein as "Defective
Mortgage Loans".
In the event any such repurchase results in a prohibited transaction tax,
such tax is required to be charged first against amounts otherwise distributable
to the Junior Subordinate Certificateholders and second, to the extent such
amounts are insufficient, against amounts otherwise distributable to the Holders
of the Offered Certificates, in each case on a pro rata basis among
Certificateholders of the applicable Class.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION AND DISTRIBUTION ACCOUNTS
Collection Account. The Servicer will, upon the occurrence and continuance
of the failure of any of the events described in clauses (i) or (ii) of the
third following paragraph, establish and maintain in the name of the Trustee
with an entity meeting the requirements of the definition of "Eligible Account,"
a separate trust account (the "Collection Account") for the benefit of the
Holders of the Certificates. Upon receipt by the Servicer of amounts in respect
of the Mortgage Loans (excluding amounts representing unreimbursed advances, the
Servicing Fee, Foreclosure Profits, fees or late charge penalties payable by
Mortgagors, amounts received by the Servicer for the accounts of Mortgagors for
application towards the payment of taxes, insurance premiums, assessments and
similar items and Payaheads received during such Collection Period intended for
application in subsequent Collection Periods), the Servicer will deposit such
amounts in the
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Collection Account. Amounts so deposited may be invested in Eligible Investments
(as described in the Pooling and Servicing Agreement) maturing no later than one
Business Day prior to the date on which the amount on deposit therein is
required to be deposited in the Distribution Account or on such Distribution
Date if approved by the Rating Agencies and the Trustee. The Servicer shall
retain all Foreclosure Profits.
The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date or, if the Servicer is
not required to make deposits to the Collection Account, amounts received from
the Servicer. The Distribution Account will be an Eligible Account.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by S&P, (ii) one or more accounts with a
depository institution which accounts are fully insured by either the SAIF or
the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
established by such fund with a minimum long-term unsecured debt rating of BBB
by S&P, (iii) a segregated trust account maintained with the corporate trust
departments of (A) the Trustee or an affiliate of the Trustee in its fiduciary
capacity or (B) an institution with capital and surplus of not less than
$50,000,000 and with a minimum long-term secured debt rating of BBB by S&P or
(iv) otherwise acceptable to each Rating Agency as evidenced by a letter from
each Rating Agency to the Trustee, without reduction or withdrawal of their then
current ratings of the Certificates.
Notwithstanding anything in the Pooling and Servicing Agreement to the
contrary, (i) for so long as (A) the Servicer remains an affiliate of the
Seller, (B) no Event of Default shall have occurred and be continuing and (C)
the Seller maintains a short-term rating of at least A-1 by S&P, and for five
Business Days following any reduction in either such rating, or (ii) following
the occurrence and continuation of certain events described in the Pooling and
Servicing Agreement, an arrangement is established that is satisfactory to the
Rating Agencies and which does not in itself result in any reduction of (I) any
rating issued in respect of the Offered Certificates or (II) any reduction below
investment grade of the Offered Certificates, the Servicer need not establish or
make the daily deposits to the Collection Account as provided herein, but may
make a single deposit in the Distribution Account in immediately available funds
not later than 12:00 noon, New York City time, on the second Business Day
immediately preceding a Distribution Date in a net amount equal to the amount
that would have been on deposit with respect to the immediately preceding
Collection Period in the Collection Account.
ADVANCES
Not later than two Business Days prior to each Distribution Date, the
Servicer will remit to the Trustee for deposit in the Distribution Account an
amount, to be distributed on the related Distribution Date, equal to the sum of
the scheduled payment of principal and interest due on each Mortgage Loan for
the related Due Date but not received by the Servicer as of the close of
business on such date and not previously advanced (net of the Servicing Fee)
(the "Monthly Advance"). Such obligation of the Servicer continues with respect
to each Mortgage Loan until such Mortgage Loan becomes a Liquidated Mortgage
Loan. The Servicer may distribute Payaheads paid to the Servicer not yet due in
lieu of a required advance of scheduled principal and interest, but must
increase its advances in subsequent months for which such Payaheads are due to
cover scheduled payments represented thereby.
In the course of performing its servicing obligations, the Servicer will
pay all reasonable and customary "out-of-pocket" costs and expenses incurred in
the performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration and protection of the Mortgaged
Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related Mortgage Loan. Each such expenditure
will constitute a "Servicing Advance."
The Servicer's right to reimbursement for Servicing Advances is limited to
late collections on the related Mortgage Loan, including Liquidation Proceeds,
related Mortgaged Property proceeds, Insurance Proceeds and such other amounts
as may be collected by the Servicer from the related Mortgagor or otherwise
relating
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to the Mortgage Loan in respect of which such unreimbursed amounts are owed. The
Servicer's right to reimbursement for Monthly Advances shall be limited to late
collections of principal and interest on any Mortgage Loan and to Liquidation
Proceeds and Insurance Proceeds on the related Mortgage Loan. The Servicer's
right to such reimbursements is prior to the rights of Certificateholders.
Notwithstanding the foregoing, the Servicer is not required to make any
Monthly Advance or Servicing Advance if in the good faith judgment and sole
discretion of the Servicer, the Servicer determines that such advance will not
be ultimately recoverable from collections received from the Mortgagor in
respect of the related Mortgage Loan or other recoveries in respect of such
Mortgage Loan (a "Nonrecoverable Advance"). However, if any outstanding
Servicing Advance or Monthly Advance is later determined by the Servicer to be
nonrecoverable from such sources, the amount of such Nonrecoverable Advance may
be reimbursed to the Servicer from other amounts on deposit in the Collection
Account.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
No later than two Business Days prior to each Distribution Date, the
following amounts in respect of the previous Collection Period shall be
deposited into the Distribution Account and shall constitute the "Available
Funds" for such Distribution Date: (i)(a) payments of principal and interest on
the Mortgage Loans received during such Collection Period (net of amounts
representing the Servicing Fee with respect to each Mortgage Loan, the Trustee
Fee for such Distribution Date, reimbursement for related Monthly Advances and
Servicing Advances, and Payaheads received during such Collection Period
intended for application in subsequent Collection Periods) and (b) Payaheads
received in prior Collection Periods intended for application in such Collection
Period; (ii) Prepayments (including Curtailments and Payoffs) received during
the such Collection Period; (iii) Net Liquidation Proceeds received during such
Collection Period; (iv) the Purchase Price for repurchased Defective Mortgage
Loans and any Substitution Adjustments Amounts in respect of such Collection
Period; (v) any amounts required to be distributed to the Holders of the
Certificates from amounts or deposit in the Pre-Funding Account, Capitalized
Interest Account or Class A-7 Reserve Fund; and (vi) payments from the Servicer
in connection with (a) Monthly Advances, (b) Compensating Interest and (c) the
termination of the Trust Fund with respect to the Mortgage Loans as provided in
the Pooling and Servicing Agreement.
A "Payahead" is a required monthly payment received by the Servicer with
the required monthly payment for the current Due Date, intended by the related
Mortgagor to be applied on a subsequent Due Date (for example, because the
Mortgagor intends to be on vacation the following month). Payaheads will be held
by the Servicer until deposited to the Distribution Account as part of the
Available Funds for the Collection Period in which the Due Date that the
Mortgagor designates for the application of monthly payment occurs.
The Servicer may distribute Payaheads paid to the Servicer not yet due in
lieu of a required advance of scheduled principal and interest, but must
increase its advances in subsequent months for which such Payaheads are due to
cover scheduled payments represented thereby.
STATEMENTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Trustee
will forward to each Certificateholder a statement (based on information
received from the Servicer) setting forth among other items with respect to each
Distribution Date:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on such Distribution Date;
(ii) the amount of distribution set forth in paragraph (i) above in
respect of interest;
(iii) the amount of distribution set forth in paragraph (i) above in
respect of principal;
(iv) the Available Distribution Amount for each Loan Group for such
Distribution Date;
(v) the aggregate Servicing Fee;
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<PAGE> 59
(vi) the Aggregate Loan Balance, as of the close of business on the
last day of the preceding Collection Period;
(vii) the Class Principal Balance for each Class after giving effect
to payments allocated to principal above;
(viii) the number and aggregate Loan Balances of the Mortgage Loans as
to which the scheduled monthly payment is delinquent for 30-59 days, 60-89
days and 90 or more days, respectively, as of the end of the Collection
Period;
(ix) the book value of any real estate which is acquired by the Trust
Fund through foreclosure or grant of deed in lieu of foreclosure;
(x) the aggregate amount of Prepayments received on the Mortgage Loans
during the previous Collection Period;
(xi) the aggregate amount of scheduled principal payments received on
the Mortgage Loans during the previous Collection Period;
(xii) the weighted average maturity of the Mortgage Loans as of the
first day of the month prior to the Distribution Date;
(xiii) the weighted average Loan Rate on the Mortgage Loans as of the
first day of the month prior to the Distribution Date;
(xiv) the aggregate amount of Realized Losses related to such
Collection Period;
(xv) the Group SA Aggregate Loan Balance, the Group SA Weighted
Average Loan Rate, the Group A Aggregate Loan Balance and the Group A
Weighted Average Loan Rate; and
(xvi) the Notional Principal Amount of each of the Class SA-5, Class
SA-X, Class A-6 and Class A-X Certificates.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each person, if requested in writing by such person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
PRIORITY OF DISTRIBUTIONS
Commencing in May 1998, on the 25th day of each month, or if such 25th day
is not a business day, on the immediately succeeding business day (each, a
"Distribution Date"), prior to the Credit Support Depletion Date (as defined
herein), distributions will be made concurrently between (a) and (b) in the
order and priority as follows:
(a) with respect to the Class SA Certificates, Subordinate
Certificates and Class R Certificates, to the extent of the Group SA
Available Distribution Amount on such Distribution Date:
(i) first, to the Class SA Certificates and Class R Certificates
then entitled to receive accrued and unpaid interest at their respective
Certificate Rates on their respective Class Principal Balances or
Notional Principal Amounts, as the case may be (as described in
"-- Distributions of Interest" below);
(ii) second, to the Class SA Certificates then entitled to
principal and the Class R Certificates in the order described in
"-- Distributions of Principal -- Class SA Certificate Principal
Distributions" below;
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(iii) third, to the Subordinate Certificates, interest and then
principal, as described in "-- Distributions of Interest" and
"-- Distribution of the Principal -- Subordinate Certificate Principal
Distributions" below; and
(iv) fourth, to the Class R-II Certificates, the remainder, if any,
of the Group SA Available Distribution Amount for such Distribution
Date.
(b) with respect to the Class A Certificates and Subordinate
Certificates, to the extent of the Group A Available Distribution Amount
for such Distribution Date:
(i) first, to the Class A Certificates, then entitled to receive
accrued and unpaid interest at their respective Certificate Rates on
their respective Class Principal Balances or Notional Principal Amounts
(as described in "-- Distributions of Interest" below);
(ii) second, to the Class A Certificates then entitled to receive
principal in the order described in "-- Distributions of
Principal -- Class A Certificate Principal Distributions" below;
(iii) third, to the Subordinate Certificates, interest and then
principal, as described in "-- Distributions of Interest" and
"-- Distributions of Principal -- Subordinate Certificate Principal
Distributions" below; and
(iv) fourth, to the Class R-II Certificates, the remainder, if any,
of the Group A Available Distribution Amount for such Distribution Date.
With respect to the Subordinate Certificates, notwithstanding the
foregoing, on any Distribution Date on which the Subordination Level (as defined
herein) for any Class of Subordinate Certificates is less than the Subordination
Level as of the Closing Date, the portion of the Subordinate Principal
Prepayments Distribution Amount (as defined herein) for each Certificate Group
otherwise allocable to the Class or Classes of the Subordinate Certificates
junior to such Class will be allocated to the most senior Class of Subordinate
Certificates for which the Subordination Level is less than such percentage as
the Closing Date and to the Class or Classes of Subordinate Certificates senior
thereto, pro rata according to the Class Principal Balances of such Classes.
The "Subordination Level" on any specified date with respect to any Class
of Subordinate Certificates is the percentage obtained by dividing the sum of
the Class Principal Balances of all Classes of Certificates which are
subordinate in right of payment to such Class by the sum of the Class Principal
Balances of all Classes of Certificates as of such date prior to giving effect
to distributions or allocations of realized losses on the Mortgage Loans on such
date.
On each Distribution Date on or after the Credit Support Depletion Date,
distributions will be made in the order and priority as follows:
(a) with respect to the Class SA Certificates and Class R
Certificates, to the extent of the Group SA Available Distribution Amount
on such Distribution Date:
(i) first, to the Class SA, Class R-I and Class R-II Certificates
then entitled to receive interest, accrued and unpaid interest at their
respective Certificate Rates on their respective Class Principal
Balances or Class Notional Amounts;
(ii) second, to the Class SA, Class R-I and Class R-II
Certificates, principal pro rata according to their respective Class
Principal Balances;
(iii) third, to the Class A Certificates then entitled to receive
interest, accrued and unpaid interest to the extent the Group A
Available Distribution Amount for such Distribution Date was
insufficient for such purpose;
(iv) fourth, to the Class A Certificates, principal pro rata
according to their respective Class Principal Balances to the extent the
Group A Available Distribution Amount for such Distribution Date was
insufficient for such purpose; and
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(v) fifth, to the Class R-II Certificates, the remaining portion,
if any, of the Group SA Available Distribution Amount for such
Distribution Date.
(b) with respect to the Class A Certificates, to the extent of the
Group A Available Distribution Amount on such Distribution Date:
(i) first, to the Class A Certificates, accrued and unpaid interest
at their respective Certificate Rates on their respective Class
Principal Balances or Class Notional Amounts;
(ii) second, to the Class A Certificates, principal pro rata
according to their respective Class Principal Balances;
(iii) third, to the Class SA Certificates then entitled to receive
interest, accrued and unpaid interest to the extent the Group SA
Available Distribution Amount for such Distribution Date was
insufficient for such purpose;
(iv) fourth, to the Class SA Certificates, principal pro rata
according to their respective Class Principal Balances to the extent the
Group SA Available Distribution Amount for such Distribution Date was
insufficient for such purpose; and
(v) fifth, to the Class R-II Certificates, the remaining portion,
if any, of the Group A Available Distribution Amount for such
Distribution Date.
The "Credit Support Depletion Date" is the first Distribution Date on which
the aggregate of the Class Principal Balances of the Subordinate Certificates
has been or will be reduced to zero.
Cross-Collateralization Provisions. In addition to the foregoing
distributions, the Class SA or Class A Certificates may receive additional
principal distributions on any Distribution Date prior to the Credit Support
Depletion Date under the circumstances specified in (A) and (B) below:
(A) On any Distribution Date after the date on which the aggregate
Class Principal Balance of the Class SA Certificates or the Class A
Certificates has been reduced to zero, all principal (in excess of the
amount necessary to reduce such aggregate Class Principal Balance of the
Class SA Certificates or Class A Certificates to zero) on the Mortgage
Loans in the Loan Group relating to such Certificates that have been paid
in full will be paid as principal to the remaining Senior Certificates in
the other Loan Group (other than Class R Certificates) in accordance with
the order set forth under "-- Distributions of Principal -- Class SA
Certificate Principal Distributions" or "-- Group A Certificate Principal
Distributions", in reduction of the Principal Balances thereof, provided
that on such Distribution Date either (a) the Aggregate Subordinate
Percentage for such Distribution Date is less than 200% of the initial
Aggregate Subordinate Percentage, or (b) the average outstanding principal
balance of the Mortgage Loans in either Loan Group delinquent 60 days or
more over the last six months, as a percentage of the corresponding Group
SA or Group A Subordinate Amount (as defined herein), is greater than or
equal to 50%. For purposes of the foregoing, the "Aggregate Subordinate
Percentage" for any Distribution Date is equal to the aggregate of the
Class Principal Balances of the Subordinate Certificates immediately prior
to such Distribution Date divided by the aggregate Scheduled Principal
Balance of all of the Mortgage Loans immediately prior to such Distribution
Date.
(B) If on any Distribution Date on which the aggregate Class Principal
Balance of the Class SA or Class A Certificates would be greater than the
aggregate Scheduled Principal Balance of the Mortgage Loans in the related
Loan Group (the "Undercollateralized Group"), after giving effect to
distributions to be made on such Distribution Date, the portion of
Available Funds in respect of principal on the Mortgage Loans in the other
Loan Group (the "Overcollateralized Group") otherwise allocable to the
Subordinate Certificates will be distributed to the Classes of Certificates
of the Certificate Group relating to the Undercollateralized Group (in
accordance with the priorities set forth herein), in reduction of the Class
Principal Balances thereof, until the aggregate Class Principal Balance of
the Certificates included in the Undercollateralized Group is equal to the
aggregate Scheduled Principal Balance of the Mortgage Loans in the related
Loan Group. Moreover, the Available Funds from the Overcollateralized Group
will be further reduced (after distributions of interest to Classes
included in the Overcollateralized Group) in
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an amount equal to one month's interest on the amount by which the
Undercollateralized Group is undercollateralized at 7% per annum, plus any
shortfall of such amounts from prior Distribution Dates, with accrued
interest thereon; provided, however, that in no case will the Available
Funds from the Overcollateralized Group be so reduced by more than the sum
of (a) the portion of the Available Funds in respect of principal on such
Overcollateralized Group (after distributions of principal to the Senior
Certificates of such Overcollateralized Group) and (b) interest on its
Senior Overcollateralized Amount at the weighted average Certificate Rate
for such Overcollateralized Group (after distributions of interest to the
Senior Certificates of such Overcollateralized Group.)
For each Loan Group on each Distribution Date, the "Senior
Overcollateralized Amount" will equal the excess, if any, of the aggregate
Scheduled Principal Balance of the Mortgage Loans in such Loan Group over the
aggregate Class Principal Balance of the Senior Certificates of the related
Certificate Group. Such amounts will be distributed to the applicable Classes of
Certificates in the priority of interest payable on such Distribution Date.
Except under the limited circumstances set forth herein, distributions of
interest and principal to the Class SA Certificates and the Class A Certificates
will be based solely on payments received with respect to the Group SA Mortgage
Loans and the Group A Mortgage Loans, respectively. Except in the event of an
Undercollateralized Group, distributions of interest and principal on the
Subordinate Certificates will be based on payments received with respect to both
the Group SA Mortgage Loans and the Group A Mortgage Loans.
DISTRIBUTIONS OF INTEREST
With respect to each Class of Certificates, interest will be passed through
monthly on each Distribution Date, commencing in May 1998. With respect to each
Distribution Date, an amount of interest will accrue on each Class of
Certificates at a rate generally equal to 1/12th of the applicable Certificate
Rate for such Class multiplied by the related Class Principal Balance or Class
Notional Amount, as applicable. Interest to be distributed on the Certificates
on any Distribution Date will consist of accrued and unpaid interest as of the
previous Distribution Dates and interest accrued during the preceding calendar
month. All distributions of interest for each Class of Certificates will
generally be made only to the extent of the Available Distribution Amount for
the related Loan Group as described herein under "-- Priority of Distributions".
The Certificate Rates for the Offered Certificates are as set forth on the
cover page hereof.
The "Class SA-5 Notional Amount" with respect to any Distribution Date will
equal the product of (x) the Class Principal Balance of the Class SA-2
Certificates immediately prior to such Distribution Date and (y) approximately
1.42857%. The Class SA-5 Notional Amount as of the Closing Date will be
approximately $1,129,732.
The "Class SA-X Notional Amount" with respect to any Distribution Date will
equal the aggregate Loan Balance of the Group SA Mortgage Loans as of the
preceding Determination Date, or with respect to the initial Distribution Date,
as of the Initial Cut-Off Date. The Class SA-X Notional Amount as of the Closing
Date will be approximately $162,984,201.
The "Class A-6 Notional Amount" with respect to any Distribution Date will
equal the product of (x) the Class Principal Balance of the Class A-1
Certificates immediately prior to such Distribution Date and (y) approximately
1.85714%. The Class A-6 Notional Amount as of the Closing Date will be
approximately $2,352,122.
The "Class A-X Notional Amount" with respect to any Distribution Date will
equal the aggregate Loan Balance of the Group A Mortgage Loans as of the
preceding Determination Date, or with respect to the initial Distribution Date,
as of the Initial Cut-Off Date. The Class A-X Notional Amount as of the Closing
Date will be approximately $187,069,027.
The Class SA-5 Notional Amount, the Class SA-X Notional Amount, the Class
A-6 Notional Amount and the Class A-X Notional Amounts each constitute a
"Notional Principal Amount" with respect to a Certificate and a "Class Notional
Amount" with respect to a Class of Certificates.
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Compensating Interest. The Servicer, is obligated to remit Compensating
Interest to the Distribution Account on the second business day prior to each
Distribution Date with respect to the Mortgage Loans in each Loan Group in an
amount equal to the lesser of (a) any shortfall for the related month of
interest collections resulting from (i) the timing of Payoffs made other than on
the first day of the month or (ii) Curtailments and (b) the applicable monthly
Servicing Fee payable to the Servicer.
DISTRIBUTIONS OF PRINCIPAL
General. On each Distribution Date, Certificateholders of each Certificate
Group will be entitled to receive principal distributions from the related
Available Distribution Amount to the extent and in the priority described
herein. See "-- Priority of Distributions" herein. Except in the limited
circumstances described herein, the Class SA Certificates will receive principal
collected from Group SA Mortgage Loans and the Class A Certificates will receive
principal collected from the Group A Mortgage Loans. The Subordinate
Certificates will receive principal collected from each Loan Group.
The Class SA-5, Class SA-X, Class A-6 and Class A-X Certificates will not
receive any distributions of principal.
Class SA Certificate Principal Distributions
On each Distribution Date prior to the Credit Support Depletion Date, the
Group SA Senior Principal Distribution Amount (as defined below) for such
Distribution Date, will be distributed as principal from the Group SA Available
Distribution Amount (after payments made in respect of interest to the Class SA
and Class R Certificates) and, in certain limited circumstances set forth
herein, from the Group A Available Distribution Amount to the following Classes
of Class SA Certificates and Class R Certificates in the following order of
priority:
(i) first, to the Class SA-4 Certificates, the Class SA-4 Lockout
Principal Distribution Amount (as defined below) for such Distribution
Date, until the Class SA-4 Principal Balance has been reduced to zero;
(ii) second, to the Class R Certificates, the portion of the Group SA
Senior Principal Distribution Amount remaining after the distribution
described above, until the Class R-I Principal Balance and the Class R-II
Principal Balance have been reduced to zero; and
(iii) third, the portion of the Group SA Senior Principal Distribution
Amount remaining after the distributions described above, sequentially as
follows:
(A) first, to the Class SA-1 and Class SA-2 Certificates, pro rata,
until the Class SA-1 Principal Balance and the Class SA-2 Principal
Balance have been reduced to zero;
(B) second, to the Class SA-3 Certificates, until the Class SA-3
Principal Balance has been reduced to zero; and
(C) third, to the Class SA-4 Certificates, until the Class SA-4
Principal Balance has been reduced to zero.
On each Distribution Date on and after the Credit Support Depletion Date,
an amount up to the Group SA Available Principal Distribution Amount for such
Distribution Date will be distributed as provided above under "-- Priority of
Distributions."
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 or similar proceeding or any moratorium or
similar waiver or grace period) as of the first day of the month preceding the
month of such Distribution Date, after giving effect to any previously applied
Curtailments, the payment of principal due on such first day of the month and
any reduction of the principal balance of such Mortgage Loan by a bankruptcy
court, irrespective of any delinquency in payment by the related Mortgagor.
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<PAGE> 64
The "Group SA Senior Principal Distribution Amount" for any Distribution
Date will equal the sum of (i) the Group SA Senior Percentage (as defined below)
of the Principal Payment Amount (as defined herein) for the Group SA Mortgage
Loans, (ii) the Group SA Senior Prepayment Percentage (as defined under
"-- Principal Prepayments" below) of the Principal Prepayment Amount for the
Group SA Mortgage Loans, and (iii) the Group SA Senior Liquidation Amount (as
defined below).
The "Group SA Senior Percentage" for any Distribution Date will equal the
lesser of (a) 100% and (b) the sum of the Class Principal Balances of the Class
SA and Class R Certificates divided by the aggregate Scheduled Principal Balance
of the Group SA Mortgage Loans immediately preceding such Distribution Date. The
Group SA Senior Percentage as of the Closing Date will be approximately 95.50%.
The "Group SA Senior Liquidation Amount" is the aggregate, for each Group
SA Mortgage Loan which became a Liquidated Mortgage Loan during the calendar
month preceding the month of the Distribution Date, of the lesser of (i) the
Group SA Senior Percentage of the principal balance of such Mortgage Loan and
(ii) the Group SA Senior Prepayment Percentage of the Liquidation Principal with
respect to such Mortgage Loan.
"Liquidation Principal" is the principal portion of Liquidation Proceeds
received with respect to each Mortgage Loan which became a Liquidated Mortgage
Loan (as defined herein) (but not in excess of the principal balance thereof)
during the calendar month preceding the month of the Distribution Date. A
"Liquidated Mortgage Loan" is a Mortgage Loan as to which the Servicer has
determined that all amounts which it expects to recover from or on account of
such Mortgage Loan, whether from Insurance Proceeds, Liquidation Proceeds or
otherwise have been recovered.
The "Class SA-4 Lockout Principal Distribution Amount" for any Distribution
Date will equal the sum of (i) the Class SA-4 Lockout Percentage of the
Principal Payment Amount for the Group SA Mortgage Loans, (ii) the Class SA-4
Lockout Prepayment Percentage (as defined herein) of the Principal Prepayment
Amount for Group SA Mortgage Loans and (iii) the Class SA-4 Lockout Liquidation
Amount (as defined below).
The "Class SA-4 Lockout Percentage" for any Distribution Date will equal
the Class Principal Balance of the Class SA-4 Certificates divided by the
aggregate Scheduled Principal Balance of all Group SA Mortgage Loans immediately
preceding such Distribution Date. The Class SA-4 Lockout Percentage as of the
Closing Date will be approximately 9.36%.
The "Class SA-4 Lockout Liquidation Amount" for any Distribution Date is
the aggregate, for each Group SA Mortgage Loan which became a Liquidated
Mortgage Loan during the calendar month preceding the month of the Distribution
Date, of the lesser of (i) the Class SA-4 Lockout Percentage of the principal
balance of such Mortgage Loan and (ii) the Class SA-4 Lockout Percentage on any
Distribution Date occurring prior to the fifth anniversary of the first
Distribution Date, and the Class SA-4 Lockout Prepayment Percentage (as defined
herein) on any Distribution Date thereafter, in each case, of the Liquidation
Principal with respect to such Mortgage Loan.
The "Class SA-4 Lockout Prepayment Percentage" will equal the product of
(a) the Class SA-4 Lockout Percentage and (b) the Class SA-4 Stepdown
Percentage.
The "Class SA-4 Step Down Percentage" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
CLASS SA-4
STEP-DOWN
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
- ------------------------------ -----------
<S> <C>
May 1998 through April 2003................................. 0%
May 2003 through April 2004................................. 30%
May 2004 through April 2005................................. 40%
May 2005 through April 2006................................. 60%
May 2006 through April 2007................................. 80%
May 2007 and thereafter..................................... 100%
</TABLE>
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Class A Certificate Principal Distributions
On each Distribution Date prior to the Credit Support Depletion Date, the
Group A Senior Principal Distribution Amount (as defined below) for such
Distribution Date, will be distributed as principal from the Group A Available
Distribution Amount (after payments made in respect of interest to the Class A
Certificates) and, in certain limited circumstances set forth herein, from the
Group SA Available Distribution Amount to the following Classes of Class A
Certificates in the following order of priority:
(i) first, to the Class A-3 Certificates, the Class A-3 Lockout
Principal Distribution Amount (as defined below) for such Distribution
Date, until the Class A-3 Principal Balance has been reduced to zero; and
(ii) second, the portion of the Group A Senior Principal Distribution
amount remaining after the distribution described above, sequentially as
follows:
(A) first, to the Class A-1 Certificates, until the Class A-1
Principal Balance has been reduced to zero;
(B) second, to the Class A-2 Certificates, until the Class A-2
Principal Balance has been reduced to zero;
(C) third, to the Class A-4 and Class A-7 Certificates, pro rata,
until the Class A-4 Principal Balance and Class A-7 Principal Balance
have been reduced to zero;
(D) fourth, to the Class A-5 Certificates, until the Class A-5
Principal Balance has been reduced to zero; and
(E) fifth, to the Class A-3 Certificates, until the Class A-3
Principal Balance has been reduced to zero.
On each Distribution Date on and after the Credit Support Depletion Date,
an amount up to the Group A Available Principal Distribution Amount for such
Distribution Date will be distributed as provided above under "-- Priority of
Distributions."
The "Group A Senior Principal Distribution Amount" for any Distribution
Date will equal the sum of (i) the Group A Senior Percentage (as defined below)
of the Principal Payment Amount (as defined herein) for the Group A Mortgage
Loans, (ii) the Group A Senior Prepayment Percentage (as defined under
"-- Principal Prepayments" below) of the Principal Prepayment Amount for the
Group A Mortgage Loans, and (iii) the Group A Senior Liquidation Amount (as
defined below).
The "Group A Senior Percentage" for any Distribution Date will equal the
lesser of (a) 100% and (b) the sum of the Class Principal Balances of the Class
A Certificates divided by the sum of (i) the aggregate Scheduled Principal
Balance of Group A Mortgage Loans immediately preceding such Distribution Date
and (ii) the balance of the Pre-Funding Account immediately preceding such
Distribution Date. The Group A Senior Percentage as of the Closing Date will be
approximately 95.50%.
The "Group A Senior Liquidation Amount" is the aggregate, for each Group A
Mortgage Loan which became a Liquidated Mortgage Loan during the calendar month
preceding the month of the Distribution Date, of the lesser of (i) the Group A
Senior Percentage of the principal balance of such Mortgage Loan and (ii) the
Group A Senior Prepayment Percentage of the Liquidation Principal with respect
to such Mortgage Loan.
The "Class A-3 Lockout Principal Distribution Amount" for any Distribution
Date will equal the sum of (i) zero, on any Distribution Date occurring prior to
the fifth anniversary of the first Distribution Date, and on any Distribution
Date thereafter, the Class A-3 Lockout Percentage (as defined below) of the
Principal Payment Amount for Group A Mortgage Loans, (ii) the Class A-3 Lockout
Prepayment Percentage (as defined herein) of the Principal Prepayment Amount for
the Group A Mortgage Loans and (iii) the Class A-3 Lockout Liquidation Amount
(as defined below).
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The "Class A-3 Lockout Percentage" for any Distribution Date will equal the
Class A-3 Principal Balance divided by the sum of (i) the aggregate Scheduled
Principal Balance of the Group A Mortgage Loans immediately preceding such
Distribution Date and (ii) the balance of the Pre-Funding Account immediately
preceding such Distribution Date. The Class A-3 Lockout Percentage as of the
Closing Date will be approximately 9.69%.
The "Class A-3 Lockout Liquidation Amount" for any Distribution Date is the
aggregate, for each Group A Mortgage Loan which became a Liquidated Mortgage
Loan during the calendar month preceding the month of the Distribution Date, of
the lesser of (i) the Class A-3 Lockout Percentage of the principal balance of
such Mortgage Loan and (ii) the Class A-3 Lockout Percentage (as defined herein)
on any Distribution Date occurring prior to the fifth anniversary of the first
Distribution Date, and the Class A-3 Lockout Prepayment Percentage (as defined
herein) on any Distribution Date thereafter, in each case, of the Liquidation
Principal with respect to such Mortgage Loan.
The "Class A-3 Lockout Prepayment Percentage" will equal the product of (a)
the Class A-3 Lockout Percentage and (b) the Class A-3 Step Down Percentage.
The "Class A-3 Step Down Percentage" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
CLASS A-3
STEP DOWN
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
- ------------------------------ ----------
<S> <C>
May 1998 through April 2003................................. 0%
May 2003 through April 2004................................. 30%
May 2004 through April 2005................................. 40%
May 2005 through April 2006................................. 60%
May 2006 through April 2007................................. 80%
May 2007 and thereafter..................................... 100%
</TABLE>
Subordinate Certificate Principal Distributions
Subordinate Principal Distribution Amount. On each Distribution Date, an
amount calculated for each Loan Group, up to the applicable Subordinate
Principal Distribution Amount (as defined below) for such Distribution Date,
will be distributed collectively as principal to the Subordinate Certificates.
On each Distribution Date, except Distribution Dates on which the Subordination
Level for any Class of Subordinate Certificates is less than such Subordination
Level as of the Closing Date, each Class of the Subordinate Certificates will be
entitled to receive its pro rata (by Class Principal Balance) share of each
subordinate Principal Distribution Amount, to the extent of the Available
Distribution Amount for each Loan Group remaining after distributions of
interest and principal to the applicable Senior Certificates, distributions of
interest and principal to all Classes of Subordinate Certificates senior to such
Class and distributions of interest to such Class. See "-- Priority of
Distributions" herein. The relative seniority, from highest to lowest, of the
Subordinate Certificates shall be as follows: Class M, Class B-1, Class B-2,
Class B-3, Class B-4 and Class B-5.
The "Subordinate Principal Distribution Amount" for any Distribution Date
for each Loan Group will be equal to the sum of (i) the applicable Subordinate
Percentage of the Principal Payment Amount for such Loan Group, (ii) the
applicable Subordinate Principal Prepayments Distribution Amount (as defined
below) and (iii) the applicable Subordinate Liquidation Amount (as defined
below); provided, however, that the Subordinate Principal Distribution Amount
for any Distribution Date shall be reduced (first as an offset to the amount
calculated in clause (i) above, second clause (iii) above and then clause (ii)
above) to the extent of any amounts required to be distributed to the Senior
Certificates pursuant to the provisions described above under "-- Priority of
Distributions -- Cross-Collateralization Provisions". The "Subordinate Principal
Prepayments Distribution Amount" as of any Distribution Date is the Subordinate
Prepayment Percentage of the Principal Prepayment Amount for such Loan Group.
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The "Subordinate Percentage" as to each Loan Group is equal to 100% minus
the applicable Senior Percentage of such Loan Group. Initially, the Subordinate
Percentage for the Group SA Mortgage Loans and the Group A Mortgage Loans will
be approximately 4.50% and 4.50%, respectively.
The "Subordinate Liquidation Amount" will equal the excess, if any, of the
aggregate Liquidation Principal for the Mortgage Loans in each Loan Group which
became Liquidate Mortgage Loans during the calendar month preceding the month of
the Distribution Date, over the applicable Senior Liquidation Amount for such
Distribution Date.
The "Subordinate Prepayment Percentage" for any Distribution Date will be
equal to 100% minus the applicable Senior Prepayment Percentage. Initially the
Subordinate Prepayment Percentage for the Group SA Mortgage Loans and the Group
A Mortgage Loans will be 0%.
The rights of the Holders of the Subordinate Certificates to receive
distributions of interest and principal are subordinated to the rights of the
Holders of the Class SA Certificates and Class A Certificates to receive
scheduled distributions of interest and principal. See "-- Subordination and
Allocation of Losses" herein.
For any Distribution Date and for any Loan Group, the "Principal Payment
Amount" is the sum with respect to the Mortgage Loans in such group of (i)
scheduled principal payments on the Mortgage Loans due on the related Due Date,
(ii) the principal portion of repurchase proceeds received with respect to any
Mortgage Loan which was repurchased as permitted or required by the Pooling and
Servicing Agreement during the calendar month preceding the month of the
Distribution Date and (iii) any other unscheduled payments of principal which
were received on the Mortgage Loans during the preceding calendar month, other
than Payoffs, Curtailments or Liquidation Principal. For any Distribution Date
and for any Loan Group, the "Principal Prepayment Amount" is the sum with
respect to the Mortgage Loans in such group of all Curtailments and all Payoffs
from the Mortgage Loans in such group which were received during the applicable
Collection Period. Principal distributions to each of the Class SA Certificates,
the Class A Certificates and the Subordinate Certificates will be based on the
Principal Payment Amounts, Principal Prepayment Amount and Liquidation Principal
for the related Loan Group.
PRINCIPAL PREPAYMENTS
The "Group SA Senior Prepayment Percentage" and "Group A Senior Prepayment
Percentage" for any Distribution Date occurring prior to the month of the fifth
anniversary of the first Distribution Date will equal 100%. The "Group SA Senior
Prepayment Percentage" and "Group A Senior Prepayment Percentage" in each of the
months of the fifth through ninth anniversaries of the first Distribution Date
will be as follows: for any Distribution Date in or after the month of the fifth
anniversary of the month of the first Distribution Date but before the sixth
anniversary of the month of the first Distribution Date, the Group SA or Group A
Senior Percentage, as applicable, for such Distribution Date plus 70% of the
related Group SA or Group A Subordinate Percentage for such Distribution Date;
for any Distribution Date in or after the month of the sixth anniversary of the
month of the first Distribution Date but before the seventh anniversary of the
month of the first Distribution Date, the Group SA or Group A Senior Percentage,
as applicable, for such Distribution Date, plus 60% of the related Group SA or
Group A Subordinate Percentage for such Distribution Date; for any Distribution
Date in or after the month of the seventh anniversary of the month of the first
Distribution Date but before the eighth anniversary of the month of the first
Distribution Date, the Group SA or Group A Senior Percentage, as applicable, for
such Distribution Date plus 40% of the related Group SA or Group A Subordinate
Percentage for such Distribution Date; and for any Distribution Date in or after
the month of the eighth anniversary of the month of the first Distribution Date
but before the ninth anniversary of the month of the first Distribution Date,
the Group SA or Group A Senior Percentage, as applicable, for such Distribution
Date plus 20% of the related Group SA or Group A Subordinate Percentage for such
Distribution Date. For any Distribution Date in or after the month of the ninth
anniversary of the month of the first Distribution Date, the Group SA or Group A
Senior Prepayment Percentage will be the Group SA or Group A Senior Percentage,
respectively, for such Distribution Date.
Notwithstanding the foregoing, if on any Distribution Date either the Group
SA or Group A Senior Percentage for such Distribution Date exceeds the initial
Group SA or Group A Senior Percentage,
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respectively, as of the Closing Date, then both the Group SA or Group A Senior
Prepayment Percentage for such Distribution Date will equal 100%. The scheduled
reductions in the Group SA and Group A Senior Prepayment Percentages for
Distribution Dates occurring on or after the month of the fifth anniversary of
the month of the first Distribution Date will be subject to certain conditions
specified in the Pooling and Servicing Agreement. Such conditions may include
requirements that no such reduction may occur if delinquencies or losses on the
Mortgage Loans in the related Loan Group exceed specified limits at the time of,
or on a date preceding, the Distribution Date for which such reduction would
otherwise be applicable. Notwithstanding the foregoing, on any Distribution Date
if the delinquencies or losses on the Mortgage Loans in a Loan Group exceed such
limits such that the Pooling and Servicing Agreement restricts a reduction of
the Group SA or Group A Senior Prepayment Percentage, as applicable, then the
Group SA and Group A Senior Prepayment Percentages for such Distribution Date
will equal 100% for such Distribution Date. If on any Distribution Date the
allocation to the Class SA or Class A Certificates in the percentage required
would reduce the sum of the Class Principal Balances of such Certificates below
zero, the Group SA or Group A Senior Prepayment Percentage, as applicable, for
such Distribution Date will be limited to the percentage necessary to reduce
such sum to zero.
SUBORDINATION AND ALLOCATION OF LOSSES
The Subordinate Certificates will be subordinate in right of payment to and
provide credit support to the Senior Certificates, the Junior Subordinate
Certificates will be subordinate in right of payment to and provide credit
support to the Senior Subordinate Certificates and each Class of Senior
Subordinate Certificates will be subordinate in right or payment to and provide
credit support to each Class of Senior Subordinate Certificates with a lower
Class designation. The support provided by the Subordinate Certificates is
intended to afford the Senior Certificates protection against certain losses.
The protection afforded a Class of Senior Subordinate Certificates by the
Classes of Senior Subordinate Certificates with higher Class designations will
be accomplished by the preferential right of those Classes with lower Class
designations to receive distributions of principal and interest prior to
distributions of principal and interest to those Classes of Senior Subordinate
Certificates with higher Class designations. The support provided by the Junior
Subordinate Certificates to the Senior Subordinate Certificates is intended to
enhance the likelihood of regular receipt by such Senior Subordinate
Certificates of the full amount of monthly distributions of interest and
principal to which they are entitled and to afford such Certificateholders
protection against certain losses. The protection afforded to the Senior
Subordinate Certificates by the Junior Subordinate Certificates will be
accomplished by the preferential right on each Distribution Date of such Senior
Subordinate Certificates to receive distributions of interest and principal,
prior to distributions of interest and principal to such Junior Subordinate
Certificates.
Except for Special Hazard Losses, Fraud Losses and Bankruptcy Losses in
excess of the designated amounts of the applicable Special Hazard Coverage,
Fraud Coverage and Bankruptcy Coverage (each, as defined herein) for a Loan
Group, any loss realized with respect to a Mortgage Loan will be allocated among
the Certificates related to such Mortgage Loan (i) for losses allocable to
principal (a) first, to the Junior Subordinate Certificates, until the aggregate
of the Class Principal Balances thereof has been reduced to zero, (b) second, to
the Class B-2 Certificates, until the Class Principal Balance thereof has been
reduced to zero, (c) third, to the Class B-1 Certificates, until the Class
Principal Balance thereof has been reduced to zero, (d) fourth, to the Class M
Certificates, until the Class Principal Balance thereof has been reduced to
zero, (e) fifth, to the Senior Certificates related to such Mortgage Loan (other
than the Class SA-5, Class SA-X, Class A-6 and Class A-X Certificates), pro
rata, according to their Class Principal Balances in reduction of their
respective Class Principal Balances, as applicable; and (ii) for losses
allocable to interest (a) first, to the Junior Subordinate Certificates, in
reduction of accrued but unpaid interest thereon and then in reduction of the
Class Principal Balances of such Certificates, (b) second, to the Class B-2
Certificates, in reduction of accrued but unpaid interest thereon and then in
reduction of the Class Principal Balance of such Certificates, (c) third, to the
Class B-1 Certificates, in reduction of accrued but unpaid interest thereon and
then in reduction of the Class Principal Balance of such Certificates, (d)
fourth, to the Class M Certificates, in reduction of accrued but unpaid interest
thereon and then in reduction of the Class Principal Balance of such
Certificates, and (e) fifth, to the applicable Senior Certificates related to
such Mortgage Loan, pro rata
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according to accrued but unpaid interest thereon and then pro rata according to
their Class Principal Balances in reduction of their respective Class Principal
Balances, as applicable.
The allocation of the principal portion of losses relating to a Mortgage
Loan in a given Loan Group to all Classes of Certificates in the related
Certificate Group (other than the Class SA-5, Class SA-X, Class A-6 and Class
A-X Certificates) and to the Subordinate Certificates (in the limited
circumstances described below) pro rata according to their respective
Certificate Principal Balances, and the allocation of the interest portion of
such losses to the Certificates related to such Mortgage Loan pro rata according
to the amount of interest accrued but unpaid on each such Class in reduction
thereof and then in reduction of their related Class Principal Balances, is
hereinafter referred to as "Pro Rata Allocation." For purposes of any Pro Rata
Allocation in part to the Subordinate Certificates, each Class of Subordinate
Certificates will be deemed to have a Class Principal Balance (and to accrue
interest thereon) equal to the actual Class Principal Balance thereof times a
fraction, the numerator of which is the Group SA Subordinate Amount (for a loss
on a Group SA Mortgage Loan) or the Group A Subordinate Amount (for a loss on a
Group A Mortgage Loan), and the denominator of which is the aggregate of the
Group SA Subordinate Amount and the Group A Subordinate Amount.
The "Group SA Subordinate Amount" for any Distribution Date will equal the
excess of the aggregate Scheduled Principal Balance of the Group SA Mortgage
Loans over the aggregate Class Principal Balance of the Class SA and Class R
Certificates.
The "Group A Subordinate Amount" for any Distribution Date will equal the
excess of the aggregate Scheduled Principal Balance of the Group A Mortgage
Loans over the aggregate Class Principal Balance of the Class A Certificates.
On each Distribution Date, if the aggregate Class Principal Balance of all
outstanding Classes of Certificates exceeds the aggregate principal balance of
the Mortgage Loans in both Loan Groups (after giving effect to distributions of
principal and the allocation of all losses on the Classes of Certificates in
such Certificate Group on such Distribution Date), such excess will be deemed a
principal loss and will be allocated to the most junior Class of Subordinate
Certificates then outstanding.
Investors in the Senior Certificates should be aware that because the
Subordinate Certificates represent interests in both Loan Groups, the
Certificate Principal Balances of Subordinate Certificates could be reduced to
zero as a result of a disproportionate amount of losses on the Mortgage Loans in
one Loan Group. Therefore, notwithstanding that losses on the Mortgage Loans in
one Loan Group may only be allocated to the related Senior Certificates (except
for Special Hazard Losses, Fraud Losses and Bankruptcy Losses in excess of the
applicable coverage amounts), the allocation to the Subordinate Certificates of
losses on the Mortgage Loans in the other Loan Group will increase the
likelihood that losses may be allocated to such Senior Certificates.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy court
may establish the value of the Mortgaged Property at an amount less than the
then outstanding Principal Balance of the Mortgage Loan secured by such
Mortgaged Property (a "Deficient Valuation"). The amount of the secured debt
could be reduced to such value, and the Holder of such Mortgage Loan thus would
become an unsecured creditor to the extent the outstanding principal balance of
such Mortgage Loan exceeds the value so assigned to the Mortgaged Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding, including the reduction
of the amount of the Monthly Payment on the related Mortgage Loan (a "Debt
Service Reduction," Debt Service Reductions and Deficient Valuations,
collectively, are defined as "Bankruptcy Losses"). "Fraud Losses" are losses on
Mortgage Loans arising from fraud, dishonesty or misrepresentation of the
Mortgagor in the origination of such Mortgage Loans. "Special Hazard Losses" are
losses relating to Mortgage Loans that become liquidated and have been the
subject of certain hazards (including earthquakes, tidal waves and related water
damage, war, civil insurrection, certain governmental actions, errors in design,
faulty workmanship or materials, nuclear reaction and chemical contamination)
not insured against under any applicable insurance policy and not resulting from
reasonable wear and tear.
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Special Hazard Losses incurred on a Mortgage Loan in excess of the Special
Hazard Coverage will be allocated to the outstanding related Class or Classes of
Senior Certificates and to the Subordinate Certificates by Pro Rata Allocation.
The "Special Hazard Coverage" is expected to equal approximately $2,941,436 as
of the Initial Cut-Off Date. On each anniversary of the Initial Cut-Off Date,
the Special Hazard Coverage will be reduced, but not increased, to an amount
equal to the lesser of (i) the greatest of (a) the aggregate principal balance
of the Mortgage Loans located in the single zip code area containing the largest
aggregate principal balance of such Mortgage Loans, (b) 1.0% of the aggregate
unpaid principal balance of the Mortgage Loans and (c) twice the unpaid
principal balance of the largest single Mortgage Loan, in each case calculated
as of the Determination Date in the immediately preceding month and (ii) the
Special Hazard Coverage as of the Initial Cut-Off Date as reduced by the Special
Hazard Losses allocated to the Certificates since the Initial Cut-Off Date.
Fraud Losses incurred on a Mortgage Loan in excess of the Fraud Coverage
will be allocated to the outstanding related Class or Classes of Senior
Certificates and to the Subordinate Certificates by Pro Rata Allocation. The
"Fraud Coverage" is expected to equal approximately $3,500,532 as of the Initial
Cut-Off Date. Fraud Coverage will be reduced, from time to time, by the amount
of Fraud Losses allocated to the Certificates. As of any date of determination
after the Initial Cut-Off Date, the Fraud Coverage will generally be equal to
(a) prior to the second anniversary of the Initial Cut-Off Date, an amount equal
to 1.00% of the sum of (i) the Initial Cut-Off Date Aggregate Loan Balance and
(ii) the original Pre-Funded Amount minus the aggregate amounts allocated to the
Certificates with respect to Fraud Losses on such Mortgage Loans up to such date
of determination and (b) from the second to the fifth anniversary of the Initial
Cut-Off Date, an amount equal to (i) 0.50% of the aggregate principal balance of
all of the Mortgage Loans as of the most recent anniversary of the Initial
Cut-Off Date minus (ii) the aggregate amounts allocated to the Certificates with
respect to Fraud Losses on the Mortgage Loans since the most recent anniversary
of the Initial Cut-Off Date up to such date of determination. On and after the
fifth anniversary of the Initial Cut-Off Date, the Fraud Coverage will be zero.
Bankruptcy Losses incurred on a Mortgage Loan in excess of the Bankruptcy
Coverage will be allocated to the outstanding related Class or Classes of Senior
Certificates and to the Subordinate Certificates by Pro Rata Allocation. The
"Bankruptcy Coverage" is expected to equal approximately $100,000 as of the
Initial Cut-Off Date. Bankruptcy Coverage will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the Certificates.
Special Hazard Coverage, Fraud Coverage or Bankruptcy Coverage may also be
reduced upon written confirmation from the Rating Agencies that such reduction
will not adversely affect the then current ratings assigned to the Offered
Certificates by the Rating Agencies. Such a reduction, in the event of Special
Hazard Losses, Fraud Losses or Bankruptcy Losses on the Mortgage Loans, could
adversely affect the level of protection afforded the Senior Certificates by
subordination of the Subordinate Certificates or the level of protection
afforded the Senior Subordinate Certificates by subordination of the Junior
Subordinate Certificates.
Investors in the Senior Certificates should be aware that the applicable
coverages for such losses cover Mortgage Loans in both Loan Groups. Therefore,
in the event Mortgage Loans in a Loan Group suffer a high level of Special
Hazard Losses, Fraud Losses or Bankruptcy Losses, such losses will reduce the
available coverage for the Senior Certificates in both Loan Groups and may cause
Senior Certificates relating to the other Loan Group to suffer losses in the
event Mortgage Loans in either Loan Group suffer losses after the available
coverage has been exhausted.
THE CLASS R CERTIFICATES
The Class R Certificates consist of the Class R-I Certificates and the
Class R-II Certificates. The Class R-I Certificates represent the sole residual
interest in REMIC I and the Class R-II Certificates represent the sole residual
interest in REMIC II.
On each Distribution Date, in addition to payments of interest and
principal to the Class R Certificates described herein, any amounts remaining
(which are expected to be zero) in the Certificate Account from the
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Available Distribution Amount for each Loan Group after distributions of
interest and principal on the Certificates and payment of expenses, if any, of
REMIC II will be distributed to the Class R-II Certificateholders, if any.
Distributions of such remaining amounts with respect to the Class R-II
Certificate will be subordinate to all payments required to be made with respect
to the other Offered Certificates on any Distribution Date.
Any amounts remaining in the Collection Account upon reduction of the
aggregate Certificate Principal Balance of the Certificates to zero, payment of
any outstanding expenses and termination of the REMIC II will be distributable
to the Class R-II Certificateholder. Such remaining assets are expected to be
minimal. See "-- Termination; Purchase of Mortgage Loans" herein.
ADVANCES
With respect to each Mortgage Loan, the Servicer will make Monthly Advances
to the Collection Account not later than two Business Days prior to each
Distribution Date to cover any shortfall between (i) payments scheduled to be
received in respect of such Mortgage Loan and (ii) the amounts actually
deposited in the Collection Account on account of such payments; provided that
the Servicer determines, in good faith, on such date that such Monthly Advances
will be recoverable from insurance proceeds, Liquidation Proceeds or other
amounts received with respect to such Mortgage Loan. Monthly Advances are
reimbursable to the Servicer from cash in the Collection Account with respect to
Mortgage Loans prior to payments to the Certificateholders if the Servicer
determines that any such Monthly Advances previously made are not recoverable
from Insurance Proceeds, Liquidation Proceeds or other amounts recoverable with
respect to the applicable Mortgage Loan and so notifies the Trustee.
AVAILABLE DISTRIBUTION AMOUNT
On each Distribution Date, the Available Distribution Amount for any
Distribution Date which will be determined separately with respect to each Loan
Group, and, in each case, will generally include scheduled principal and
interest payments due on the related Due Date, Curtailments received in the
previous calendar month (as set forth below), Payoffs received in the applicable
Collection Period to the extent set forth below and amounts received with
respect to liquidations of Mortgage Loans with respect to such Loan Group in the
previous calendar month, will be distributed by or on behalf of the Trustee to
the Certificateholders, as specified herein.
The determination date (the "Determination Date") is the eighth day (or if
such day is not a Business Day, the Business Day immediately succeeding such
eighth day) preceding the related Distribution Date in the month in which such
Distribution Date occurs.
The "Available Distribution Amount" for any Distribution Date for each Loan
Group (the "Group SA Available Distribution Amount" and the "Group A Available
Distribution Amount", respectively) as more fully described in the Pooling and
Servicing Agreement, will equal the sum, with respect to the Mortgage Loans in
such Loan Group, of the following amounts:
(1) the total amount of all cash received by or on behalf of the
Servicer with respect to such Mortgage Loans by the Determination Date for
such Distribution Date and not previously distributed (including
Liquidation Proceeds), except:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Date;
(b) all Curtailments received after the previous Collection Period
(together with any interest payment received with such prepayments to
the extent that it represents the payment of interest accrued on such
Mortgage Loans for the period subsequent to the previous calendar
month);
(c) all Payoffs received after the previous Collection Period
immediately preceding such Determination Date (together with any
interest payment received with such a Payoff to the extent
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that it represents the payment of interest accrued on the related
Mortgage Loan for the period subsequent to the previous calendar month);
(d) Liquidation Proceeds and Insurance Proceeds received on such
Mortgage Loans after the previous calendar month;
(e) all amounts in the Collection Account which are due and
reimbursable to the Servicer pursuant to the terms of the Pooling and
Servicing Agreement;
(f) the Servicing Fee for each such Mortgage Loan and the Trustee
Fee; and
(g) the excess, if any, of aggregate Liquidation Proceeds on such
Mortgage Loans received during the previous calendar month over the
amount that would have been received if Payoffs had been made with
respect to such Mortgage Loans on the date such Liquidation Proceeds
were received ("Excess Liquidation Proceeds");
(2) the total, to the extent not previously distributed, of the
following amounts, to the extent advanced or received, as applicable, by
the Servicer:
(a) all Monthly Advances made by the Servicer to the Trustee with
respect to such Distribution Date relating to such Mortgage Loans; and
(b) any amounts payable as Compensating Interest by the Servicer on
such Distribution Date relating to such Mortgage Loans;
(3) the total amount of any cash received by the Trustee or the
Servicer in respect of the obligation of the Seller to repurchase any such
Mortgage Loans; and
(4) with respect to Loan Group A, any amounts required to be
distributed to the Holders of Certificates from amounts on deposit in the
Pre-Funding Account or the Capitalized Interest Account.
LAST SCHEDULED DISTRIBUTION DATE
The "Last Scheduled Distribution Date" for the Class SA Certificates is the
Distribution Date in April 2025, which is the Distribution Date occurring in the
month after the scheduled maturity date for the latest maturing Group SA
Mortgage Loan.
The "Last Scheduled Distribution Date" for the Class A Certificates, the
Subordinate Certificates and the Class R Certificates is the Distribution Date
in August 2028, which is the distribution Date occurring in the month after the
scheduled maturity date for the latest maturing Group A Mortgage Loan.
The actual last Distribution Date on the Certificates will depend on the
rate of payments of principal (including Prepayments) on the related Mortgage
Loans which, in turn, may be influenced by a variety of economic, geographic and
social factors, as well as the level of prevailing interest rates. No assurance
can be given as to the actual payment experience on the Mortgage Loans.
CLASS A-7 RESERVE FUND
A reserve fund of approximately $12,500 (the "Class A-7 Reserve Fund") for
the benefit of the Holders of the Class A-7 Certificates, which will be part of
the REMIC II, will be established at the time the Certificates are issued. No
additional amounts will be deposited into the Class A-7 Reserve Fund after the
initial deposit. The funds on deposit in the Class A-7 Reserve Fund will not be
invested.
A withdrawal from the Class A-7 Reserve Fund will be made on each of the
first twelve Distribution Dates equal to the product of (i) the Certificate
Principal Balance of the Class A-7 Certificates on the day immediately preceding
each such Distribution Date and (ii) 0.04167%. The Holders of the Class A-7
Certificates will receive such amount as a distribution of interest on each of
the first twelve Distribution Dates and zero thereafter.
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Any amounts remaining in the Class A-7 Reserve Fund at the end of such
twelve month period will be distributed to the Holders of the Class R-II
Certificate.
SHIFTING OF INTERESTS
The Senior Certificates of a Certificate Group entitled to principal, other
than the Class SA-4 and Class A-3 Certificates (the "Lockout Certificates")
(unless the Credit Support Depletion Date has occurred or the related Senior
Certificates have been retired), will receive 100% of Prepayments received with
respect to the Mortgage Loans in the related Loan Group until the fifth
anniversary of the first Distribution Date or until retired. During the next
four years, such Senior Certificates, other than the related Lockout
Certificates (unless the Credit Support Depletion Date has occurred), will
receive a disproportionately large, but decreasing, share of Prepayments
received with respect to the Mortgage Loans in the related Loan Group. This will
result in an acceleration of the amortization of such Senior Certificates,
subject to the priorities described in "-- Distributions of Principal" herein,
enhancing the likelihood that Holders of such Classes of Certificates will be
paid the full amount of principal to which they are entitled.
Although the Class A-3 Certificates are Senior Certificates, the Holders of
the Class A-3 Certificates will generally not be entitled to receive principal
distributions (other than the Class A-3 Lockout Liquidation Amount) until the
Distribution Date in May 2003 and thereafter will not be entitled to receive the
disproportionate allocation of Prepayments from Group A Mortgage Loans that the
other Class A Certificates are entitled to receive.
See "-- Distributions of Principal" herein.
PRE-FUNDING ACCOUNT
On the Closing Date, the Pre-Funded Amount of $57,744,845 will be deposited
in the Pre-Funding Account, which account shall be in the name of and maintained
by the Trustee and shall be part of the Trust Fund, and may be used to acquire
Subsequent Mortgage Loans. During the Funding Period, the Pre-Funded Amount will
be maintained in the Pre-Funding Account. The Pre-Funded Amount will be reduced
during the Funding Period by the amount thereof used to purchase Subsequent
Mortgage Loans in accordance with the Pooling and Servicing Agreement. Any
Pre-Funded Amount remaining at the end of the Funding Period will be distributed
to the Holders of the Class or Classes of Class A Certificates entitled to
receive principal distributions on the Distribution Date immediately following
the end of such Funding Period, thus resulting in a partial principal prepayment
of certain Classes of Class A Certificates. See "Prepayment and Yield
Considerations -- Mandatory Prepayment" herein.
Amounts on deposit in the Pre-Funding Account will be invested in Eligible
Investments. All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Distribution
Account, as part of the funds to be paid to the Holders of Class A Certificates,
prior to each Distribution Date during the Funding Period. The Pre-Funding
Account will not be an asset of either of the REMICs.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, cash will be deposited in the Capitalized Interest
Account which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust Fund. The amount on deposit in the Capitalized
Interest Account, including reinvestment income thereon, will be used by the
Trustee to fund the excess, if any, on any Distribution Date during the Funding
Period and on the first Distribution Date following the end of the Funding
Period, of (i) the product of (a) the balance of the Pre-Funding Account and (b)
the sum of (I) 1/12 of 7% plus (II) 1/12 of the Trustee Fee, over (ii) the
amount of any reinvestment income earned on amounts in the Pre-Funding Account
deposited to the Distribution Account since the previous Distribution Date. The
Pooling and Servicing Agreement provides that certain amounts on deposit in the
Capitalized Interest Account that are determined not to be required to fund such
payments will be periodically distributed to the Seller. In addition, any
amounts remaining in the Capitalized Interest Account at the end of the
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Funding Period and not needed for such purpose will be paid to the Seller and
will not thereafter be available for distribution to the Holders of any
Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested in
Eligible Investments. The Capitalized Interest Account will not be an asset of
either of the REMICs.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Servicer with
respect to each Collection Period in respect of its servicing activities
relating to the Certificates (the "Servicing Fee") will be retained by it from
collections of interest on the Mortgage Loans in the Trust Fund at the time such
collections are required to be deposited into the Distribution Account (or the
Collection Account, if the Servicer is required to make deposits therein) and
will be equal to not more than 0.44% (the "Servicing Fee Rate") per annum
(depending on the Mortgage Loan) of the outstanding Loan Balance of each such
Mortgage Loan as of the first day of each such Collection Period. In addition,
the Servicer will receive any net investment income from the investment of funds
in the Collection Account, if any, and the Servicer and the Trustee will be
entitled to any net investment income from the investment of funds in the
Distribution Account. All assumption fees and late payment charges, to the
extent collected from borrowers shall be retained by the Servicer.
The Servicer will pay certain ongoing expenses associated with the Trust
Fund and incurred by it in connection with its responsibilities under the
Pooling and Servicing Agreement. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Mortgage Loans and in connection with the restoration or maintenance of
Mortgaged Properties or the lien of the Mortgage thereon, such right of
reimbursement being prior to the rights of Certificateholders to receive any
Liquidation Proceeds.
HAZARD INSURANCE AND FLOOD INSURANCE
The Servicer will cause to be maintained fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is located,
in an amount which is at least equal to the lesser of (i) the outstanding Loan
Balance on the Mortgage Loan, (ii) the full insurable value of the premises
securing the Mortgage Loan and (iii) the minimum amount required to compensate
for damage or loss on a replacement cost basis in each case in an amount not
less than such amount as is necessary to avoid the application of any
co-insurance clause contained in the related hazard insurance policy. If the
Mortgaged Property is in an area identified in the Federal Register by the Flood
Emergency Management Agency as having special flood hazards and flood insurance
has been made available, the Servicer will cause to be maintained a flood
insurance policy with a generally acceptable insurance carrier, in an amount
representing coverage not less than the least of (i) the outstanding principal
balance of the Mortgage Loan, (ii) the maximum insurable value of the
improvements securing such Mortgage Loan or (iii) the maximum amount of
insurance which is available under the National Flood Insurance Act of 1968, as
amended, and the Flood Disaster Protection Act of 1973, as amended. The Servicer
shall also maintain on the REO Property for the benefit of the Trust Fund, (x)
fire and hazard insurance with extended coverage in an amount which is at least
equal to the replacement cost of the improvements which are part of such
property, (y) public liability insurance and, (z) to the extent required and
available under the National Flood Insurance Act of 1968, as amended, and the
Flood Disaster Protection Act of 1973, as amended, flood insurance in an amount
as provided above. Any amounts collected by the Servicer under any such policies
(other than amounts to be applied to the restoration or repair of the Mortgaged
Property, or to be released to the Mortgagor in accordance with customary
mortgage servicing procedures) will be deposited in the Collection Account,
subject to retention by the Servicer to the extent such amounts constitute
servicing compensation or to withdrawal pursuant to the Pooling and Servicing
Agreement.
In the event that the Servicer obtains and maintains a blanket policy as
provided in the Pooling and Servicing Agreement insuring against fire and
hazards of extended coverage on all of the Mortgage Loans, then, to the extent
such policy names the Servicer as loss payee and provides coverage in an amount
equal to the aggregate unpaid principal balance of the Mortgage Loans without
coinsurance, and otherwise complies
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with the requirements of the first paragraph of this subsection, the Servicer
will be deemed conclusively to have satisfied its obligations with respect to
fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Pooling and Servicing Agreement, no satisfactory arrangements can be made for
the collection of delinquent payments. In connection with such foreclosure or
other conversion, the Servicer will follow such practices as it deems necessary
or advisable and as are in keeping with its general mortgage servicing
activities, provided the Servicer will not be required to expend its own funds
in connection with foreclosure or other conversion, or restoration of any
property unless, in its sole judgment, such foreclosure or restoration will
increase Net Liquidation Proceeds. The Servicer will be reimbursed out of
Liquidation Proceeds for advances of its own funds as liquidation expenses
before any Net Liquidation Proceeds are distributed to Certificateholders.
"Insurance Proceeds" means any proceeds paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan, net of any component thereof (i)
covering any expenses incurred by or on behalf of the Servicer in connection
with obtaining such proceeds, (ii) that is applied to the restoration or repair
of the related Mortgaged Property, or (iii) released to the Mortgagor in
accordance with the Servicer's normal servicing procedures.
"Liquidation Expenses" means all out-of-pocket expenses (exclusive of
overhead) which are incurred by the Servicer in connection with the liquidation
of any Mortgage Loan and not recovered under any insurance policy, such expenses
including, without limitation, legal fees and expenses, any unreimbursed
Servicing Advances respecting the related Mortgage Loan and any related and
unreimbursed expenditures for real estate property taxes or for property
restoration, preservation or insurance against casualty loss or damage.
"Liquidation Proceeds" means all proceeds (including Insurance Proceeds)
received in connection with the liquidation of any Mortgage Loan or related REO
or any condemnation or taking by eminent domain, whether through trustee's sale,
foreclosure sale or otherwise (including rental income).
"Net Liquidation Proceeds" means, with respect to any Liquidated Mortgage
Loan, Liquidation Proceeds net of Liquidation Expenses.
"REO" means any Mortgaged Property that is acquired by the Trustee in
foreclosure or by deed in lieu of foreclosure.
"Foreclosure Profit" means, with respect to a Liquidated Mortgage Loan, the
amount, if any, by which (i) the aggregate of its Net Liquidation Proceeds
exceeds (ii) the related Loan Balance (plus accrued and unpaid interest thereon
at the applicable Loan Rate from the date interest was last paid through the
date of receipt of the final Liquidation Proceeds) of such Liquidated Mortgage
Loan immediately prior to the initial recovery of its Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement provides for delivery on or before the
last day of the fifth month following the end of the Servicer's fiscal year,
beginning in 1999, to the Trustee, the Depositor and the Rating Agencies of an
annual statement signed by an officer of the Servicer to the effect that the
Servicer has fulfilled its material obligations under the Pooling and Servicing
Agreement throughout the preceding fiscal year, except as specified in such
statement.
On or before the last day of the fifth month following the end of the
Servicer's fiscal year, beginning in 1999, the Servicer will furnish a report
prepared by a firm of nationally recognized independent public accountants (who
may also render other services to the Servicer or the Depositor) to the Trustee,
the Depositor and the Rating Agencies to the effect that such firm has examined
certain documents and the
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records relating to servicing of the Mortgage Loans under the Uniform Single
Attestation Program for Mortgage Bankers and such firm's conclusion with respect
thereto.
The Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Pooling and Servicing Agreement provides that the Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations 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 presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Servicer has proposed a successor servicer to the Trustee in
writing and such proposed successor servicer is reasonably acceptable to the
Trustee; and (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Servicer will not result
in the reduction or withdrawal of the then current rating of the Certificates.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the Pooling and
Servicing Agreement.
The Servicer may perform any of its duties and obligations under the
Pooling and Servicing Agreement through one or more subservicers or delegates,
which may be affiliates of the Servicer. Notwithstanding any such arrangement,
the Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Servicer's duties and obligations under the Pooling
and Servicing Agreement, without any diminution of such duties and obligations
and as if the Servicer itself were performing such duties and obligations.
The Servicer may agree to changes in the terms of a Mortgage Loan,
provided, however, that such changes (i) will not cause any REMIC of the Trust
Fund to fail to qualify as a REMIC and do not adversely affect the interests of
the Certificateholders, (ii) are consistent with prudent business practices and
(iii) do not change the Loan Rate of such Mortgage Loan or extend the maturity
date of such Mortgage Loans in excess of one year. Any changes to the terms of a
Mortgage Loan that would cause any REMIC of the Trust Fund to fail to qualify as
a REMIC, however, may be agreed to by the Servicer, provided the Servicer has
determined such changes are necessary to avoid a prepayment of such Mortgage
Loans, such changes are in accordance with prudent business practices and the
Servicer purchases such Mortgage Loan in accordance with the terms of the
Pooling and Servicing Agreement.
The Pooling and Servicing Agreement provides that the Servicer will
indemnify the Trust Fund and the Trustee from and against any loss, liability,
expense, damage or injury suffered or sustained as a result of the Servicer's
actions or omissions in connection with the servicing and administration of the
Mortgage Loans which are not in accordance with the provisions of the Pooling
and Servicing Agreement. The Pooling and Servicing Agreement provides that
neither the Depositor nor the Servicer nor their directors, officers, employees
or agents will be under any other liability to the Trust Fund, the Trustee, the
Certificateholders or any other person for any action taken or for refraining
from taking any action pursuant to the Pooling and Servicing Agreement. However,
neither the Depositor nor the Servicer will be protected against any liability
which would otherwise be imposed by reason of willful misconduct, bad faith or
gross negligence of the Depositor or the Servicer in the performance of its
duties under the Pooling and Servicing Agreement or by reason of reckless
disregard of its obligations thereunder. In addition, the Pooling and Servicing
Agreement provides that the Servicer will not be under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under the Pooling and Servicing Agreement. The
Servicer may, in its sole discretion, undertake any such legal action which it
may deem necessary or desirable with respect to the Pooling and Servicing
Agreement and the rights and duties of the parties thereto and the interest of
the Certificateholders thereunder.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any corporation succeeding to the business of
the Servicer shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything in the Pooling and Servicing Agreement to the contrary
notwithstanding.
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EVENTS OF DEFAULT
"Events of Default" will consist of (i) (A) any failure by the Servicer to
make any required Monthly Advance or (B) any other failure of the Servicer to
deposit in the Collection Account or Distribution Account any deposit required
to be made under the Pooling and Servicing Agreement, which failure continues
unremedied for two Business Days after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
any Certificateholder; (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements, or the
breach of certain representations and warranties of the Servicer, in the Pooling
and Servicing Agreement which, in each case, materially and adversely affects
the interests of the Certificateholders and continues unremedied for 60 days
after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by any Certificateholder; (iii) any
failure by the Servicer to make any required Servicing Advance, which failure
continues unremedied for a period of 30 days after the giving of written notice
of such failure to the Servicer by the Trustee, or to the Servicer and the
Trustee by any Certificateholder; (iv) the loss and delinquency experience with
respect to the Mortgage Loans exceeds certain specified levels; or (v) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings relating to the Servicer and certain actions
by the Servicer indicating insolvency, reorganization or inability to pay its
obligations (an "Insolvency Event").
Upon the occurrence and continuation beyond the applicable grace period of
the event described in clause (i)(A) above, if any Monthly Advance is not made
by 4:00 P.M. New York time on the second Business Day following written notice
to the Servicer of such event, the Trustee or a successor servicer will
immediately assume the duties of the Servicer.
Upon removal or resignation of the Servicer, the Trustee will be the
Successor Servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, will be obligated to make Monthly Advances and Servicing Advances and
certain other advances unless it determines reasonably and in good faith that
such advances would not be recoverable. If, however, the Trustee is unwilling or
unable to act as Successor Servicer, or if the majority of Certificateholders so
requests, the Trustee may appoint, or petition a court of competent jurisdiction
to appoint, any established mortgage loan servicing institution having a net
worth of not less than $50,000,000 as the Successor Servicer in the assumption
of all or any part of the responsibilities, duties or liabilities of the
Servicer.
Notwithstanding the foregoing, a delay in or failure of the performance
referred to under clause (i) above for a period of ten Business Days or referred
to under clause (ii) above for a period of 30 Business Days, shall not
constitute an Event of Default if such delay or failure could not be prevented
by the exercise of reasonable diligence by the Servicer and such delays or
failure was caused by an act of God or other similar occurrence. Upon the
occurrence of any such event the Servicer shall not be relieved from using its
best efforts to perform its obligations in a timely manner in accordance with
the terms of the Pooling and Servicing Agreement and the Servicer shall provide
the Trustee, the Depositor and the Certificateholders prompt notice of such
failure or delay by it, together with a description of its efforts to so perform
its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Default remains unremedied, any of the Trustee or
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust Fund, may terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement and in and
to the Mortgage Loans, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Pooling and
Servicing Agreement and will be entitled to similar compensation arrangements.
In the event that the Trustee would be obligated to succeed the Servicer but is
unwilling or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a housing and home finance institution or
other mortgage loan servicer with all licenses and permits required to perform
its obligations under the Pooling and Servicing Agreement and having a net worth
of at least $50,000,000 to act as successor to the Servicer under the Pooling
and Servicing Agreement. Pending such appointment, the Trustee will be obligated
to act in such capacity unless prohibited by law. Such successor will be
entitled to receive the same
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compensation that the Servicer would otherwise have received (or such lesser
compensation as the Trustee and such successor may agree). A receiver or
conservator for the Servicer may be empowered to prevent the termination and
replacement of the Servicer if the only Event of Default that has occurred is an
Insolvency Event.
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time by the
Seller, the Servicer, the Depositor, the Document Custodian and the Trustee, but
without the consent of the Certificateholders, to cure any ambiguity, to correct
or supplement any provisions therein which may be inconsistent with any other
provisions of the Pooling and Servicing Agreement, to add to the duties of the
Depositor or the Servicer, to comply with any requirements imposed by the
Internal Revenue Code or any regulation thereunder, or to add or amend any
provisions of the Pooling and Servicing Agreement as required by the Rating
Agencies in order to maintain or improve any rating of the Offered Certificates
(it being understood that, after obtaining the ratings in effect on the Closing
Date, neither the Depositor, the Trustee nor the Servicer is obligated to
obtain, maintain or improve any such rating) or to add any other provisions with
respect to matters or questions arising under the Pooling and Servicing
Agreement which shall not be inconsistent with the provisions of the Pooling and
Servicing Agreement, provided that such action will not, as evidenced by an
opinion of counsel, materially and adversely affect the interests of any
Certificateholder; provided, that any such amendment will not be deemed to
materially and adversely affect the Certificateholders and no such opinion will
be required to be delivered if the person requesting such amendment obtains a
letter from each of the Rating Agencies stating that such amendment would not
result in a downgrading of the then current rating of the Offered Certificates.
The Pooling and Servicing Agreement may also be amended from time to time by the
Seller, the Servicer, the Depositor, the Document Custodian and the Trustee,
with the consent of Certificateholders evidencing at least 51% of the Percentage
Interests of each Class affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Pooling and Servicing Agreement or of modifying in any manner the rights of
the Certificateholders, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, collections of payments on the
Certificates without the consent of each of the affected Certificateholders or
(ii) reduce the aforesaid percentage required to consent to any such amendment,
without the consent of the Holders of all Certificates then outstanding.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust Fund will terminate on the Distribution Date following the
earliest of (i) the Distribution Date on which the aggregate Class Principal
Balance of all Certificates has been reduced to zero, (ii) the final payment or
other liquidation of the last Mortgage Loan in the Trust Fund, (iii) the
optional purchase by the Servicer of the Mortgage Loans, as described below and
(iv) the Distribution Date in May, 2029.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, the Servicer may, at its option,
terminate the Pooling and Servicing Agreement on any date on which the Aggregate
Loan Balance is less than 5% of the sum of (i) the Initial Cut-Off Date
Aggregate Loan Balance and (ii) the original Pre-Funded Amount, by purchasing,
on the next succeeding Distribution Date, all of the outstanding Mortgage Loans
at a price equal to the sum of the outstanding Class Principal Balance of all
Certificates (subject to reduction as provided in the Pooling and Servicing
Agreement if the purchase price is based in part on the appraised value of any
REO Property included in the Trust Fund and such appraised value is less than
the Loan Balance of the related Mortgage Loan) and accrued and unpaid interest
thereon at the weighted average of the Loan Rates through the end of the
Collection Period preceding the final Distribution Date.
Any such purchase shall be accomplished by deposit into the Distribution
Account of the purchase price specified above.
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DESCRIPTION OF THE MORTGAGE LOAN PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust Fund by the Depositor
will be purchased by the Depositor from First Union National Bank (the "Seller")
pursuant to the Mortgage Loan Purchase Agreement to be entered into between the
Depositor, as purchaser of the Mortgage Loans, and the Seller, as seller of the
Mortgage Loans (the "Mortgage Loan Purchase Agreement"). Under the Mortgage Loan
Purchase Agreement, the Seller will agree to transfer the Mortgage Loans to the
Depositor. Pursuant to the Pooling and Servicing Agreement, the Mortgage Loans
will be immediately transferred by the Depositor to the Trust Fund, and the
Depositor will assign its rights in, to and under the Mortgage Loan Purchase
Agreement, to the Trust Fund. The following summary describes certain terms of
the form of the Mortgage Loan Purchase Agreement and is qualified in its
entirety by reference to the form of Mortgage Loan Purchase Agreement.
TRANSFER OF MORTGAGE LOANS
Pursuant to the Mortgage Loan Purchase Agreement, the Seller will transfer
and assign to the Depositor all of its right, title and interest in and to the
Mortgage Loans and the Mortgage Files. The purchase price of the Mortgage Loans
is a specified percentage of the face amount thereof as of the time of transfer
and is payable by the Depositor, as applicable, in cash.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Depositor that, among other
things, as of the Closing Date, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Mortgage Loan Purchase Agreement.
The Seller will also represent and warrant to the Depositor that, among
other things, (a) the information with respect to the applicable Mortgage Loan
set forth in the schedule attached to the Mortgage Loan Purchase Agreement is
true and correct in all material respects, (b) immediately prior to the sale of
the Mortgage Loans to the Depositor, the Seller was the sole owner and holder of
the Mortgage Loans free and clear of any and all liens and security interests,
and (c) each Mortgage Loan complied at the time of origination, in all material
respects, with applicable state and federal laws. The Seller will make similar
representations and warranties in the Pooling and Servicing Agreement. The
Seller will also represent and warrant to the Depositor, that, among other
things, as of the Closing Date, the Mortgage Loan Purchase Agreement constitutes
a legal, valid and binding obligation of the Seller. In the event of a breach of
any such representations and warranties which has a material adverse effect on
the interests of the Certificateholders, the Seller will repurchase or
substitute for the Mortgage Loans as described herein under "Description of the
Certificates -- Assignment of Mortgage Loans."
The Seller has also agreed to indemnify the Depositor and the Trust Fund
from and against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Mortgage Loan Purchase
Agreement.
ASSIGNMENT TO THE TRUST FUND
The Seller expressly acknowledges and consents to the Depositor's transfer
of its rights relating to the Mortgage Loans under the Mortgage Loan Purchase
Agreement to the Trust Fund. The Seller also agrees to perform its obligations
under the Mortgage Loan Purchase Agreement for the benefit of the Trust Fund.
TERMINATION
The Mortgage Loan Purchase Agreement will terminate upon the termination of
the Trust Fund.
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THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, has been named Trustee pursuant to the Pooling and Servicing
Agreement. The Trustee's "Corporate Trust Office" for purposes of the
presentment and surrender of the Offered Certificates for the final distribution
thereon and for all other purposes is located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota 55479, Attention: Corporate Trust Services (FURST
98-A), or such other address as the Trustee may designate from time to time by
notice to the Certificateholders, the Depositor and the Servicer. The Trustee
also maintains operations offices in Columbia, Maryland and Frederick, Maryland.
The Trustee will at all times be required to be either a national banking
association or a corporation incorporated and doing business under the laws of
the United States of America or any state authorized under such laws to exercise
corporate trust powers, having a combined capital and surplus of at least
$50,000,000, subject to supervision or examination by federal or state authority
and having (or in the case of a corporation including a bank holding company
system, the related bank holding company shall have) a rating with respect to
its long-term unsecured debt obligations of at least BBB- by S&P (or such lower
rating as such rating agency may from time to time agree). If at any time the
Trustee shall cease to be eligible in accordance with the provisions described
in this paragraph, it will be required to resign immediately in the manner
described below.
No resignation or removal of the Trustee and no appointment of a successor
trustee shall become effective until the acceptance of appointment by a
successor trustee.
In addition to being required to resign in the circumstances described
above, the Trustee, or any trustee or trustees hereafter appointed, may resign
at any time in the manner set forth in the Pooling and Servicing Agreement. Upon
receiving notice of resignation, the Seller is required promptly to appoint a
successor trustee or trustees acceptable to the Servicer meeting the eligibility
requirements in the manner to be set forth in the Pooling and Servicing
Agreement. If no successor trustee shall have been appointed and have accepted
appointment within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee. Such court may thereupon, after such notice,
if any, as it may deem proper and prescribe, appoint a successor trustee.
If the Trustee shall cease to be eligible and fail to resign after written
request by the Seller, or if the Trustee is legally unable to act or becomes
insolvent or a tax is imposed or threatened with respect to the Trust Fund, the
Seller may remove the Trustee. The Seller is required to promptly appoint a
successor trustee.
The Seller will be required to give notice of any removal of the Trustee to
the Certificateholders, which notice will be required to include the name of the
successor trustee and the address of its corporate trust office. The Seller also
will be required to give notice to the Certificateholders of the acceptance by a
successor of its appointment.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
GENERAL -- LIEN PRIORITY
The Mortgage Loans will be secured by either deeds of trust, deeds to
secure debt or mortgages (each, a "Security Instrument"), depending upon the
prevailing practice in the state in which the Mortgaged Property is located. A
mortgage creates a lien upon the real property described in the mortgage. It is
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. A deed of trust formally has three parties: the homeowner, called the
grantor (similar to a mortgagor), a lender (similar to the mortgagee), called
the beneficiary, and a third-party grantee, called the trustee. Under a deed of
trust, the grantor grants the property, irrevocably until the debt is paid, "in
trust, with the power of sale" to the trustee to secure payment of the
obligation. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by law,
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the express provisions of the deed of trust or the mortgage, and, in some cases
under a deed of trust, the direction of the beneficiary.
Priority between Security Instruments of record generally depends in the
first instance on the order of filing with the appropriate government records
office. Priority also may be affected by the express terms of the Security
Instrument or other documents, such as subordination agreements.
Therefore, since a title report or title policy only is accurate as of the
date it is issued, it provides no assurance that a Security Instrument will
retain perpetually the lien priority it had when it was filed. The Security
Instruments securing the Mortgage Loans include a requirement that each borrower
maintain the lien priority of each Security Instrument.
FORECLOSURE
If a borrower defaults under a loan secured by a Security Instrument the
lender generally may bring suit against the borrower. The lender generally also
may attempt to collect the loan by causing the Security Instrument to be
enforced against the property it encumbers.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or security deed which authorizes the sale of the property to a
third party upon any default by the borrower under the terms of the note, deed
of trust or security deed. In some states, the trustee must record a notice of
default and send a copy to the borrower-grantor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest in the real property, including any junior lien Holders. 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 obligations.
Generally, state laws require that a through advertisements and other means,
notice of the sale be given to all parties having an interest in the real
property; in certain states such notice may include posting a copy of the notice
on the property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
Judicial foreclosure proceedings are sometimes not contested by any of the
parties defendant.
In the case of foreclosure under a Security Instrument, the sale by the
referee or other designated officer or by the trustee, as applicable, is a
public sale. It is not uncommon for the lender to purchase the property at
foreclosure. In many cases where the lender purchases at foreclosure, it usually
purchases the property for an amount equal to the principal amount of the
Security Instrument, accrued and unpaid interest and the expense of foreclosure.
Because (i) there may be no equity in the security property, (ii) there is
a requirement that the purchaser pay to bid for the property in cash or by
cashiers check, (iii) a potential buyer at the sale may find it difficult to
determine the exact status of title and other facts about the security property
and (iv) the physical condition of the security property may have deteriorated,
it generally is more common for the lender, rather than an unrelated third
party, to purchase the security property at foreclosure. The lender (or other
purchaser at the trustee's sale) will be subject to the burdens of ownership,
including the obligations to obtain hazard insurance and to make such repairs at
its own expense as are necessary to render the security property suitable for
resale. The lender commonly will attempt to resell the security property and
obtain the services of a real estate broker and agree to pay the broker a
commission in connection with the resale. Depending upon market conditions, the
ultimate proceeds of the resale of the security property may not be high enough
to equal the lender's investment. Property securing a Mortgage Loan that is
acquired through a trustee's sale or judicial foreclosure must be sold by the
Trustee within three years after the date on which it is acquired, in order to
satisfy certain federal income tax requirements.
The proceeds received from the sale generally are applied first to the
costs, fees and expenses of sale and then in satisfaction of the indebtedness
secured by the Security Instrument under which the sale was
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conducted. Any remaining proceeds generally are payable to the holders of junior
Security Instruments and other liens and claims in order of their priority. Any
balance remaining generally is payable to the grantor or mortgagor. Following
the sale, if there are insufficient proceeds to repay the secured debt, the
beneficiary under the foreclosed lien generally may obtain a deficiency judgment
against the grantor or mortgagor. See " -- Anti-Deficiency Legislation;
Bankruptcy and Consumer Protection Legislation" below.
Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under deeds of trust receive
notices in addition to the statutorily prescribed minimum. For the most part,
the courts in these cases have upheld the notice provisions and procedures
described above.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION; BANKRUPTCY AND CONSUMER PROTECTION LEGISLATION
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or security deed or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain, or prohibit the beneficiary or mortgagee from obtaining, a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
received upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a Security Instrument by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon the sale of the collateral and/or
enforce a deficiency judgment. For example, with respect to federal bankruptcy
law, a court with federal bankruptcy jurisdiction may permit a debtor through
his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on such debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender as a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
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The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes 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 such loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing adequately to maintain the property or
the borrower executing a second Security Instrument affecting the property.
Finally, some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust or mortgages receive notices
in addition to the statutory prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
To the extent that the Mortgage Loans contain due-on-sale clauses, the
Servicer may declare the unpaid amounts thereof due and payable upon the sale or
transfer of all or any part of the underlying Mortgaged Property without the
Servicer's prior written consent. The enforceability of due-on-sale clauses in
certain situations has been restricted by the laws of some states. However,
federal law now preempts state statutory and case law which prohibits
enforcement of due-on-sale clauses and permits the enforcement of due-on-sale
clauses, subject to certain exceptions. The Servicer intends to enforce the
due-on-sale clause contained in any Mortgage Loan to the extent that it has
knowledge of the conveyance or proposed transfer of the underlying Mortgaged
Property and it believes that it is entitled to do so under applicable federal
laws and regulations.
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, 1990. 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. In addition, even where Title V is not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges. In the
Pooling and Servicing Agreement, the Seller will represent and warrant that each
Mortgage Loan was originated in compliance with applicable state law in all
material respects.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for certain costs on property that
is the subject of a cleanup action by the state on account of hazardous wastes
or hazardous substances released or disposed of on the property. Such a lien
will generally have priority over all subsequent liens on the property and, in
certain of these states, will have priority over prior recorded liens including
the lien of a Security Instrument. In addition, under federal environmental
legislation and possibly under state law in a number of states, a secured party
which takes a deed in lieu of foreclosure or acquires a security property at a
foreclosure sale may be liable for the
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costs of cleaning up a contaminated site. Although such costs could be
substantial, it is unclear whether they would be imposed on a secured lender
(such as the Trust Fund) without the presence of certain other facts.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6.00% per annum, on obligations (including mortgage loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service and (iii) may have the maturity of such obligations incurred
prior to military service extended, the payments lowered and the payment
schedule readjusted for a period of time after the completion of military
service. However, the benefits of (i), (ii), or (iii) above are subject to
challenge by creditors and if, in the opinion of the court, the ability of a
person to comply with such obligations is not materially impaired by military
service, the court may apply equitable principles accordingly.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates prepared by Kilpatrick Stockton LLP, counsel to the Seller
("Tax Counsel"). The discussion is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), existing and proposed Treasury regulations thereunder,
including regulations (the "REMIC Regulations" and the "OID Regulations")
promulgated under the real estate mortgage investment conduit and original issue
discount provisions of the Code, published rulings and court decisions, any of
which is subject to change, possibly with retroactive effect. The discussion
does not purport to deal with all federal tax consequences applicable to all
categories of investors, some of whom may be subject to special rules. Investors
should consult their tax advisors in determining the particular federal, state,
local and any other tax consequences to them of the purchase, ownership and
disposition of the Offered Certificates.
REMIC ELECTION
Pursuant to the Pooling and Servicing Agreement, the Trustee will elect to
treat each of REMIC I and REMIC II as a REMIC for federal income tax purposes.
Qualification as a REMIC requires ongoing compliance with certain conditions.
Tax Counsel will advise the Seller that, in its opinion, for federal income tax
purposes, assuming (i) the REMIC elections are properly made and (ii) the
Pooling and Servicing Agreement is complied with, REMIC I and REMIC II will each
be treated as a REMIC, the Senior Certificates, other than the Class R-I and
Class R-II Certificate, and the Subordinate Certificates (collectively, the
"Regular Certificates") will be treated as regular interests in REMIC II and the
Class R-II Certificate will be treated as the sole residual interest in REMIC II
and the Class R-I Certificate will be treated as the sole residual interest in
REMIC I.
As a REMIC, neither REMIC II nor REMIC I will be subject to federal income
tax except with respect to (i) any income from prohibited transactions, (ii) any
"Net Income from Foreclosure Property" and (iii) certain contributions, if any,
to the Trust Fund after the Startup Day (see "--Taxes That May be Imposed on the
Trust Fund" below).
CERTAIN SPECIAL RULES RELATING TO THE REGULAR CERTIFICATES
Regular Certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets described in Section
7701(a)(19)(C) of the Code and Regular Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code. If less than 95% of the assets comprising a
REMIC constitute assets qualifying under any of the foregoing sections of the
Code, then the Regular Certificates will be qualifying assets under such
sections only to the extent that the assets comprising the REMIC are qualifying
assets. Owners of Regular Certificates should be aware that Regular Certificates
held by certain financial institutions will be "evidences of
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indebtedness" within the meaning of Section 582(c) of the Code. Interest on the
Regular Certificates will be interest described in Section 856(c)(3)(B) of the
Code to the extent that the Regular Certificates are treated as "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code. The Small
Business Job Protection Act of 1996 (the "SBJPA") repealed the reserve method
for bad debts of domestic building and loan associations and mutual savings
banks, thus eliminating 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 that applicable 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" within the meaning of Code
Section 7701(a)(19)(C)(v), but only if such loans were made to acquire,
construct or improve the related real property, and generally not for the
purpose of refinancing. No effort has been or will be made to identify the
portion of the Mortgage Loans meeting this requirement, and no representation is
made in this regard.
INTEREST; ORIGINAL ISSUE DISCOUNT AND PREMIUM
For federal income tax purposes, regular interests in a REMIC generally are
treated as debt instruments issued by the REMIC, and not as ownership interests
in the REMIC or its assets. Owners of Regular Certificates, including these that
otherwise report income under the cash method of accounting, will be required to
include in income all interest and original issue discount, if any, on such
Certificates in accordance with accrual method of accounting.
The Class SA-5 Certificates, Class SA-X Certificates, Class A-6
Certificates, and Class A-X Certificates will be (and certain other classes of
Offered Certificates may be) issued with "original issue discount" ("OID")
within the meaning of Section 1273(a) of the Code. The prepayment assumption
that will be used in determining the rate of accrual of OID, and market discount
and premium, if any, for federal income tax purposes is 300% of the BPA for each
of the Group SA Loans and Group A Loans. No representation is made that the
Mortgage Loans will prepay at any given percentage of the BPA. For federal
income tax purposes, owners of Regular Certificates issued with OID must include
in gross income original issue discount on an economic accrual basis generally
in advance of the receipt of the cash attributable to such income. Information
with respect to the accrual of OID on Regular Certificates will be reported
annually (or more often, if required) by the Trustee to the Internal Revenue
Service (the "Service") and will also be provided, at such times and in the
manner required by the Service, to owners of such Regular Certificates, and
relevant brokers and middlemen.
Under current law, it is not entirely clear the manner in which income
should be accrued on regular interest Certificates, such as the Class SA-5,
Class SA-X, Class A-6 and Class A-X Certificates, the payments on which consist
solely of interest on a notional principal amount. The most reasonable method is
to treat all of the income derived from such Certificates as constituting OID.
This is the position that will be taken by REMIC II. Among other possibilities,
the Service could assert that these Classes of Certificates should instead be
taxable under certain Treasury regulation provisions governing bonds issued with
contingent payments.
If actual prepayments on the Mortgage Loans were to differ significantly
from the 300% BPA, the calculation of OID for certain Classes of Offered
Certificates might produce a negative amount of OID for certain accrual periods
("Negative OID"). In such event, Certificateholders of any Classes of
Certificates giving rise to Negative OID likely will not be entitled to a
deduction for the Negative OID amount, but instead will be required to carry
such amount forward as an offset to OID, if any, accruing in future periods.
Certain Classes of Certificates may be treated for federal income tax
purposes as having been issued at a premium. Holders should consult their tax
advisors regarding the possibility of making an election to amortize any such
premium. See "Certain Federal Income Tax Consequences -- REMIC -- Regular
Certificates -- Premium" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences --
REMIC -- Regular Certificates" in the Prospectus.
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NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations (the "New Regulations")
which make certain modifications to the withholding, backup withholding and
information reporting rules described in the Prospectus. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will be effective for payments made after December 31, 1998,
subject to certain transition rules. Prospective investors are urged to consult
their tax advisors regarding the New Regulations.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO THE CLASS R-I AND CLASS R-II
CERTIFICATES
The Class R Certificateholders likely will be required to report an amount
of taxable income (including excess inclusions, which generally may not be
offset with any other losses of the Holder) in earlier accrual periods in
respect of their Class R Certificates significantly in excess of cash
distributions received on such Certificates for such periods. In addition, the
inclusion of taxable income in respect of the ownership of Class R Certificates
during earlier accrual periods and the deferral of corresponding tax losses or
deductions on these Certificates until later accrual periods or until the
ultimate sale or disposition of a Class R Certificate (or possibly even later
pursuant to the application of the "wash sale" rules under Section 1091 of the
Code) may cause the present value of a Class R Certificateholder's resulting tax
liabilities attributable to the ownership of a Class R Certificate to
substantially exceed the sum of any tax benefits and any cash distributions on
the Class R Certificate over its life.
Moreover, as discussed above and in the Prospectus, the rules for accrual
of original issue discount with respect to certain Classes of Offered
Certificates (and other REMIC Certificates) are subject to significant
complexity and uncertainty. Because original issue discount on applicable
Certificates will be deducted in determining REMIC taxable income, any changes
required by the Service in the application of the OID rules to such Certificates
may significantly affect the timing of the REMIC's original issue discount
deductions and therefore the amount of taxable income allocable to Holders of
Class R Certificates.
The REMIC Regulations impose certain restrictions on the transfer or
acquisition of certain residual interests, including the Class R Certificates.
In addition, the REMIC Regulations contain restrictions that apply to the
transfer of "noneconomic" residual interest to United States persons.
The Pooling and Servicing Agreement generally prohibits the transfer of the
Class R Certificates to non-United States persons (as defined therein).
Moreover, the REMIC Regulations provide that a transfer to a United States
person of a "noneconomic" residual interest will be disregarded for all federal
income tax purposes, and the purported transferor of the "noneconomic" residual
interest will continue to remain liable for any taxes due with respect to the
income on such residual interest, unless no significant purpose of the transfer
was to impede the assessment or collection of tax. It is expected that the Class
R Certificates will constitute noneconomic residual interests at all times.
Accordingly, any purported transfer of a Class R Certificate to a United States
person will not be given effect for federal income tax purposes, and the
purported transferor will remain liable for any taxes due with respect to the
income on the Class R Certificate, unless no significant purpose of such a
transfer is to impede the assessment or collection of tax. See also "Certain
Federal Income Tax Consequences -- REMIC -- Tax-Related Restrictions on
Transfers of Residual Certificates" in the Prospectus.
The SBJPA modified the rules for determining the effect of excess
inclusions on the alternative minimum taxable income ("AMTI") of a residual
interest Holder. Under these rules, in general, the AMTI of a residual interest
Holder is determined without regard to the special REMIC rule that taxable
income of a Holder of a residual interest for a taxable year cannot be less than
such Holder's excess inclusions for the year. In addition, the alternative
minimum tax rules provide that a residual Holder's AMTI for a taxable year
cannot be less than the Holder's excess inclusions for the year. Also, these
rules provide that the amount of any alternative minimum tax net operating loss
must be computed without regard to any excess inclusions. Purchasers of Class R
Certificates are encouraged to consult their tax advisors with respect to the
application of the alternative minimum tax to the purchase, ownership, and
disposition of Class R Certificates.
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The Servicing Fees and Trustee Fees, and other administrative expenses
properly allocable to a REMIC will be allocated for federal income tax
information reporting purposes entirely to the respective Class R Certificate.
An individual, trust or estate that holds (whether directly or indirectly
through certain pass-through entities) an interest in a Class R Certificate may
be subject to certain limitations on the deductibility of these fees and
expenses in computing such Certificateholder's regular tax liability. Moreover,
such fees or expenses will not be deductible to any extent in computing such
Certificateholder's alternative minimum tax liability. See "Certain Federal
Income Tax Consequences -- Residual Certificates" and "-- Taxation of the REMIC
- -- Net Losses of the REMIC" in the Prospectus.
PURCHASERS OF CLASS R CERTIFICATES ARE STRONGLY ENCOURAGED TO CONSULT THEIR
TAX ADVISORS AS TO THE ECONOMIC, TAX AND OTHER LEGAL CONSEQUENCES OF AN
INVESTMENT IN THESE CERTIFICATES.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Certain Federal Income Tax
Consequences -- Residual Certificates" and "-- Taxation of the REMIC" in the
Prospectus. For further information regarding the federal income tax
consequences of investing in the Certificates, see "Certain Federal Income Tax
Consequences" in the Prospectus.
STATE, LOCAL AND OTHER TAXES
The foregoing does not address any aspect of state, local, foreign or other
tax consequences to an investor from the purchase, ownership or disposition of a
Certificate, and the Depositor makes no representation in this regard. All
investors should consult their tax advisors regarding the particular federal,
state, local, foreign or other tax consequences to them from the purchase,
ownership and disposition of the Certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans subject to ERISA ("ERISA
Plans") and on persons who have certain specified relationships with respect to
such Plans. Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and church plans (as defined in Section 3(33)
of ERISA, provided no election has been made under Section 410(b) of the Code),
are not subject to ERISA, and assets of such plans may be invested in the
Certificates without regard to the mandatory application of the ERISA
restrictions described below, but may be subject to restrictions imposed under
other applicable federal and state law. However, any such governmental or church
plan which is qualified under Section 401(a) of the Code and exempt from
taxation under Section 501(a) of the Code is subject to the prohibited
transaction rules set forth in Section 503(b) of the Code.
INVESTMENTS BY ERISA PLANS ARE SUBJECT TO ERISA AND ERISA'S GENERAL
FIDUCIARY REQUIREMENTS. ACCORDINGLY, BEFORE INVESTING IN AN OFFERED CERTIFICATE,
AN ERISA PLAN FIDUCIARY SHOULD DETERMINE WHETHER SUCH AN INVESTMENT IS PERMITTED
IN ACCORDANCE WITH THE DOCUMENTS GOVERNING THE ERISA PLAN AND IS PRUDENT FOR THE
ERISA PLAN IN VIEW OF ITS OVERALL INVESTMENT POLICY AND THE COMPOSITION AND
DIVERSIFICATION OF ITS PORTFOLIO AND IS OTHERWISE CONSISTENT WITH THE
REQUIREMENTS OF ERISA.
PROHIBITED TRANSACTIONS
In addition to imposing general fiduciary standards, provisions of ERISA,
and the corresponding provisions of the Code, prohibit a broad range of
transactions involving assets of ERISA Plans, individual retirement accounts,
Keogh plans covering only a sole proprietor or partners (collectively, the
"Plans") and persons having certain specified relationships to such a Plan
("parties in interest" and "disqualified persons"). Such transactions are
treated as "prohibited transactions" under Sections 406 and 407 of ERISA and
excise
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taxes are imposed on such persons under Section 4975 of the Code (and, in some
cases, a civil penalty may be assessed pursuant to Section 502 (i) of ERISA)
unless a statutory or administrative exemption applies to the transaction.
The Department of Labor ("DOL") has issued a final regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan. This regulation provides that, as a general rule, the underlying assets
and properties of corporations, partnerships, trusts, and certain other entities
in which a Plan makes an "equity investment" will be deemed for purposes of
ERISA to be assets of the investing Plan unless certain exceptions apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in an Offered Certificate, and such
plan assets would include an undivided interest in the Mortgage Loans and any
other assets held by the Trust Fund. In such an event, the Seller, Servicer,
Trustee, and other persons or affiliates, might be considered parties in
interest or disqualified persons with respect to a Plan, subject to the
fiduciary responsibility provisions of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA (and of Section 4975 of the
Code), with respect to transactions involving the assets of the Trust Fund
unless a statutory or administrative exemption is available.
The regulation provides that the underlying assets of an entity will not be
considered plan assets if the aggregate equity participation in the entity by
Plans is not "significant" (i.e., less than 25% of the value of each class of
equity interest is held in the aggregate by "benefit plan investors," which
includes Plans and certain other employee benefit plans not subject to ERISA).
Plan investors should be aware, however, that the Pooling and Servicing
Agreement contains no restrictions on the ownership of Offered Certificates by
benefit plan investors.
Whether or not a Plan's assets would be deemed to include an undivided
ownership interest in the Mortgage Loans and any other assets held by the Trust
Fund, the DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 (48 Fed. Reg. 895, January 7, 1983) ("PTE 83-1") which
exempts from the application of the prohibited transaction rules certain
transactions relating to (1) the creation, maintenance, and termination of
certain residential mortgage pool investment trusts, (2) the acquisition and
holding of certain residential mortgage pool pass-through certificates, and (3)
the servicing, operation, and management of such residential mortgage pool
investment trusts; provided that the general conditions and certain other
conditions set forth in PTE 83-1 are satisfied. Although the Seller believes
that the certificates and the residential mortgage pool investment trust
described in PTE 83-1 would include the Offered Certificates and the Trust Fund,
respectively, there can be no assurances that the exemptive relief of PTE 83-1
will apply or if it applies, will protect a Plan investor from the unfavorable
application of the prohibited transaction rules of ERISA and the Code.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Offered Certificates
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. Among other things, before purchasing any
Offered Certificates, a fiduciary of a Plan subject to the fiduciary
responsibility provisions of ERISA or an employee benefit plan subject to the
prohibited transaction provisions of the Code should make its own determination
as to the availability of the exemptive relief provided in PTE 83-1, and also
consider the availability of any other prohibited transaction exemptions. THERE
CAN BE NO ASSURANCE THAT ANY EXEMPTION FROM THE UNFAVORABLE APPLICATION OF THE
PROHIBITED TRANSACTION RULES WILL BE AVAILABLE TO A PLAN INVESTOR.
EXEMPTION
The DOL has granted to First Union Corporation, the parent of First Union
Capital Markets ("FCM"), an administrative exemption (the "Exemption") from
certain of the prohibited transaction provisions of Sections 406(a) and (b) and
407(a) of ERISA, and the excise taxes imposed on such prohibited transactions
pursuant to Sections 4975(a) and (b) of the Code with respect to the initial
purchase, the holding and the
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subsequent resale by Plans of certificates representing interests in
asset-backed pass-through trusts that consist of certain receivables, loans, and
other obligations that meet the conditions and requirements of the Exemption.
The receivables covered by the Exemption apply to mortgage loans such as the
Mortgage Loans in the Trust Fund. The Exemption will apply to the acquisition,
holding and resale of the Class SA and Class A Certificates, underwritten by an
"Underwriter," as hereinafter defined, provided that certain conditions set
forth in the Exemption application are satisfied. For purposes of this
discussion, the term "Underwriter" shall include (a) FCM and DLJ, (b) any person
directly or indirectly, through one or more intermediaries, controlling,
controlled by, or under common control with FCM or DLJ and (c) any member of the
underwriting syndicate or selling group of which FCM or DLJ or a person
described in (b) is a manager or co-manager with respect to the Class SA and
Class A Certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale, and holding of the Class SA and
Class A Certificates to be eligible for exemptive relief under the Exemption.
First, the acquisition of the Class SA and Class A Certificates by a Plan must
be on terms that are at least as favorable to the Plan as they would be in an
arm's length transaction with an unrelated party. Second, the rights and
interests evidenced by the Class SA and Class A Certificates must not be
subordinated to the rights and interests evidenced by the other certificates of
the same trust. Third, the Class SA and Class A Certificates at the time of
acquisition by the Plan must be rated in one of the three highest generic rating
categories by S&P, Moody's Investors Service, Inc., DCR or Fitch Investors
Service, Inc. Fourth, the Trustee cannot be an affiliate of any other member of
the "restricted group," which consists of any Underwriter, the Depositor, the
Servicer, any subservicer, the Trustee, the provider of any credit enhancement,
any borrower with respect to Mortgage Loans constituting more than 5% of the
Initial Cut-Off Date Aggregate Loan Balance and their affiliates. Fifth, the sum
of all payments made to and retained by the Underwriter must represent not more
than reasonable compensation for underwriting or placing the Class SA and Class
A Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Mortgage Loans to the Trust Fund must
represent not more than the fair market value of such Mortgage Loans; and the
sum of all payments made to and retained by the Servicer and any subservicer
must represent 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. Sixth, the investing Plan must be
an accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Because the Class SA and Class A Certificates are not subordinated to any
other Class of Certificates, the second general condition set forth above is
satisfied with respect to the Class SA and Class A Certificates. It is a
condition of the issuance of the Class SA and Class A Certificates that they be
rated not lower than "AAA" by S&P and DCR; thus, the third general condition set
forth above is satisfied with respect to the Class SA and Class A Certificates
as of the Closing Date. In addition, the fourth general condition set forth
above concerning the Trustee not being an affiliate of any other member of the
restricted group is also satisfied as of the Closing Date. A fiduciary of a Plan
contemplating purchasing a Class SA and Class A Certificate in the secondary
market must make its own determination that, at the time of such purchase, the
Class SA and Class A Certificates continue to satisfy the third and fourth
general conditions set forth above. A fiduciary of a Plan contemplating any
purchase of a Class SA or Class A Certificate must make its own determination
that the first, fifth and sixth general conditions set forth above will be
satisfied with respect to such Class SA or Class A Certificate as of the date of
such purchase.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and church plans (as defined in Section 3(33) of ERISA, provided
no election has been made under Section 410(b) of the Code) are not subject to
ERISA requirements. Accordingly, assets of such plans may be invested in the
Class SA or Class A Certificates without regard to the mandatory application of
the ERISA restrictions described above, including the duty of care and
prohibited transaction restrictions subject to applicable provisions of other
federal and state laws.
Any Plan fiduciary who proposes to cause a Plan to purchase Class SA or
Class A Certificates should consult with its own counsel with respect to the
potential consequences under ERISA and the Code of the Plan's acquisition and
ownership of Class SA or Class A Certificates. Assets of a Plan or individual
retirement
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account should not be invested in the Class SA or Class A Certificates unless it
is clear that the assets of the Trust Fund will not be plan assets or unless it
is clear that the Exemption or another prohibited transaction exemption will
apply and exempt all potential prohibited transactions.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Offered Certificates will be applied by the Depositor to the purchase price of
the Mortgage Loans and expenses connected with pooling the Mortgage Loans and
issuing the Certificates, including funding the Pre-Funding Account and the
Capitalized Interest Account.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates (other than the Class B-1 and Class B-2
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 nationally
recognized statistical rating organization. As such, the Offered Certificates
(other than the Class B-1 and Class B-2 Certificates) are legal investments for
certain entities to the extent provided in the SMMEA. The Depositor makes no
representation as to the ability of particular investors to purchase the Offered
Certificates under applicable legal investment or other restrictions. All
institutions whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements of review by regulatory
authorities should consult with their own legal advisors in determining whether
and to what extent the Offered Certificates constitute legal investments for
them or are subject to investment, capital or other restrictions. It should also
be noted that certain states recently have enacted, or have proposed enacting,
legislation limiting to varying extents the ability of certain entities (in
particular insurance companies) to invest in mortgage related securities.
Investors should consult with their own legal advisors in determining whether
and to what extent the Offered Certificates constitute legal investments for
such investors. See "Legal Investment" in the Prospectus.
UNDERWRITING
First Union Capital Markets and DLJ (the "Underwriters") have agreed, on
the terms and conditions of the Underwriting Agreement (the "Underwriting
Agreement") relating to the Offered Certificates, to purchase all the Offered
Certificates offered hereby if any Offered Certificates are purchased.
The distribution of the Offered Certificates by the Underwriters may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined, in each case, at the time of sale. This
Prospectus Supplement and the Prospectus may be used by First Union Capital
Markets in connection with offers and sales related to market-making
transactions in the Offered Certificates. First Union Capital Markets may act as
principal or agent in such transactions.
The Underwriters may effect such transactions by selling the Offered
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriters. In connection with the sale of the Offered Certificates, the
Underwriters may be deemed to have received compensation from the Depositor in
the form of underwriting compensation. The Underwriters and any dealers that
participate with the Underwriters in the distribution of the Offered
Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Offered Certificates positioned by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933, as amended.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriters or by such investor's
representative within the period during which there is
S-85
<PAGE> 91
an obligation to deliver a Prospectus Supplement and Prospectus, the applicable
Underwriter will promptly deliver to such investor a paper copy of the
Prospectus Supplement and Prospectus.
The Depositor, the Seller and the Servicer are all affiliates of First
Union Capital Markets. The Underwriters or agents and their associates may be
customers of (including borrowers from), engage in transactions with, and/or
perform services for the Depositor, its affiliates, and the Trustee in the
ordinary course of business.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor by Kilpatrick Stockton LLP, Charlotte, North
Carolina. Certain legal matters will be passed upon for the Underwriters by
Kennedy Covington Lobdell & Hickman, L.L.P., Charlotte, North Carolina.
CERTIFICATE RATING
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates each be rated "AAA" (except for the Class SA-5, Class SA-X,
Class A-6 and Class A-X Certificates, which will be rated "AAAr") by Standard &
Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. ("S&P")
and "AAA" by Duff & Phelps Credit Rating Co. ("DCR"), that the Class M
Certificates be rated not less than "AA" by DCR, that the Class B-1 Certificates
be rated not less than "A" by DCR, that the Class B-2 Certificates be rated not
less than "BBB" by DCR, that the Class B-3 Certificates be rated not less than
"BB" by DCR, and that the Class B-4 Certificates be rated not less than "B" by
DCR. A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. The ratings assigned to the Offered Certificates address the likelihood
of the receipt of distributions due on the Offered Certificates according to
their terms. The ratings take into consideration, among other things, the credit
quality of the Mortgage Loans and the structural and legal aspects associated
with the Offered Certificates. An adverse change in any of such factors or in
other factors may be a basis for the downward revision or withdrawal of the
rating of the Offered Certificates affected by such change. The ratings assigned
to the Offered Certificates do not represent any assessment of the likelihood
that principal prepayments might differ from those originally anticipated. The
rating does not address the possibility that the Holders of the Offered
Certificates might suffer a lower than anticipated yield. There can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or if it does, what rating it will assign to the Offered
Certificates.
S-86
<PAGE> 92
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1934 Act.................................................... iv
Aggregate Loan Balance...................................... S-1
Aggregate Subordinate Percentage............................ S-56
AMTI........................................................ S-81
Appraised Values............................................ S-24
Available Distribution Amount............................... S-66
Available Funds............................................. S-53
Bankruptcy Coverage......................................... S-65
Bankruptcy Losses........................................... S-64
Basic Prepayment Assumption................................. S-41
BIF......................................................... S-52
Book-Entry Certificates..................................... S-21
BPA......................................................... S-41
Business Day................................................ S-50
Cede........................................................ S-47
Certificate Group........................................... S-47
Certificate Principal Balance............................... S-47
Certificate Rate............................................ S-3
Certificateholders.......................................... ii
Certificates................................................ i
Class A Certificates........................................ i
Class A-3 Lockout Liquidation Amount........................ S-61
Class A-3 Lockout Percentage................................ S-61
Class A-3 Lockout Prepayment Percentage..................... S-61
Class A-3 Lockout Principal Distribution Amount............. S-60
Class A-3 Step Down Percentage.............................. S-61
Class A-6 Notional Amount................................... i
Class A-7 Reserve Fund...................................... S-14
Class A-X Notional Amount................................... i
Class B Certificates........................................ i
Class Notional Amounts...................................... S-57
Class Principal Balance..................................... S-47
Class R Certificates........................................ S-2
Class SA Certificates....................................... i
Class SA-4 Lockout Liquidation Amount....................... S-59
Class SA-4 Lockout Percentage............................... S-59
Class SA-4 Lockout Prepayment Percentage.................... S-59
Class SA-4 Lockout Principal Distribution Amount............ S-59
Class SA-4 Step Down Percentage............................. S-59
Class SA-5 Notional Amount.................................. i
Class SA-X Notional Amount.................................. i
Closing Date................................................ i
Code........................................................ S-16
Collection Account.......................................... S-51
Collection Period........................................... S-1
Compensating Interest....................................... S-9
Credit Support Depletion Date............................... S-8
Curtailments................................................ S-10
Cut-Off Date................................................ ii
</TABLE>
S-87
<PAGE> 93
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cut-Off Date Aggregate Loan Balance......................... ii
Cut-Off Date Loan Balance................................... S-1
DCR......................................................... iv
Debt Service Reduction...................................... S-64
Defective Mortgage Loans.................................... S-51
Deficient Valuation......................................... S-64
Definitive Certificates..................................... S-49
Depositor................................................... ii
Determination Date.......................................... S-66
Distribution Account........................................ S-52
Distribution Date........................................... S-7
DLJ......................................................... i
Document Custodian.......................................... ii
DOL......................................................... S-83
DTC......................................................... S-18
DTC Participants............................................ S-48
Due Date.................................................... S-36
Eligible Account............................................ S-51
Eligible Substitute Mortgage Loan........................... S-51
ERISA....................................................... S-16
ERISA Plan.................................................. S-16
Events of Default........................................... S-72
Excess Liquidation Proceeds................................. S-67
Exemption................................................... S-83
FCM......................................................... S-83
First Union................................................. S-1
First Union Capital Markets................................. i
Foreclosure Profit.......................................... S-70
Fraud Coverage.............................................. S-65
Fraud Losses................................................ S-64
Funding Period.............................................. S-7
FURST....................................................... S-1
Group A Available Distribution Amount....................... S-66
Group A Loans............................................... i
Group A Mortgage Loans...................................... ii
Group A Senior Liquidation Amount........................... S-60
Group A Senior Percentage................................... S-60
Group A Senior Prepayment Percentage........................ S-62
Group A Senior Principal Distribution Amount................ S-60
Group A Subordinate Amount.................................. S-64
Group A Weighted Average Rate............................... i
Group SA Available Distribution Amount...................... S-66
Group SA Mortgage Loans..................................... ii
Group SA Senior Liquidation Amount.......................... S-59
Group SA Senior Percentage.................................. S-59
Group SA Senior Prepayment Percentage....................... S-62
Group SA Senior Principal Distribution Amount............... S-59
Group SA Subordinate Amount................................. S-64
Group SA Weighted Average Rate.............................. i
Holders..................................................... ii
Indirect DTC Participants................................... S-48
</TABLE>
S-88
<PAGE> 94
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Initial Cut-off Date........................................ ii
Initial Cut-off Date Aggregate Loan Balance................. ii
Initial Mortgage Loans...................................... ii
Insolvency Event............................................ S-72
Insurance Proceeds.......................................... S-70
Junior Subordinate Certificates............................. i
Liquidated Mortgage Loan.................................... S-59
Liquidation Expenses........................................ S-70
Liquidation Principal....................................... S-59
Liquidation Proceeds........................................ S-70
Loan Balance................................................ S-1
Loan Group.................................................. ii
Loan Group A................................................ ii
Loan Group SA............................................... ii
Loan Rate................................................... S-1
Loan-to-Value Ratio......................................... S-26
Lockout Certificates........................................ S-68
Modeling Assumptions........................................ S-42
Monthly Advance............................................. S-52
Mortgage.................................................... S-24
Mortgage Files.............................................. S-49
Mortgage Loan Purchase Agreement............................ S-74
Mortgage Loans.............................................. ii
Mortgage Notes.............................................. S-24
Mortgaged Properties........................................ S-1
Negative OID................................................ S-80
Net Liquidation Proceeds.................................... S-70
Net Loan Rate............................................... i
New Regulations............................................. S-81
Nonrecoverable Advance...................................... S-53
Notional Principal Amount................................... S-57
Offered Certificates........................................ i
OID......................................................... S-80
OID Regulations............................................. S-79
Overcollateralized Group.................................... S-56
Payahead.................................................... S-53
Payoffs..................................................... S-10
Percentage Interest......................................... iv
Plans....................................................... S-82
Pooling and Servicing Agreement............................. ii
Pre-Funding Account......................................... ii
Pre-Funded Amount........................................... ii
Prepayments................................................. S-20
Principal Balance........................................... S-47
Principal Payment Amount.................................... S-62
Principal Prepayment Amount................................. S-62
Pro Rata Allocation......................................... S-64
Prospectus.................................................. ii
PTE 83-1.................................................... S-83
Purchase Price.............................................. S-50
Rating Agencies............................................. iv
</TABLE>
S-89
<PAGE> 95
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Regular Certificates........................................ S-76
Regular Interest............................................ iii
Related Documents........................................... S-49
REMIC....................................................... iii
REMIC I..................................................... iii
REMIC II.................................................... iii
REMIC Regulations........................................... S-79
REO......................................................... S-70
Residual Certificates....................................... i
Residual Interest........................................... iii
Rules....................................................... S-48
SBJPA....................................................... S-80
S&P......................................................... iv
Scheduled Principal Balance................................. S-58
Security Instrument......................................... S-75
Seller...................................................... ii
Senior Certificates......................................... i
Senior Overcollaterized Amount.............................. S-57
Senior Subordinate Certificates............................. i
Service..................................................... S-80
Servicer.................................................... ii
Servicing Advance........................................... S-49
Servicing Fee............................................... S-15
Servicing Fee Rate.......................................... S-69
SMMEA....................................................... S-17
Special Hazard Coverage..................................... S-65
Special Hazard Losses....................................... S-64
Startup Day................................................. S-24
Subordinate Certificates.................................... i
Subordination Level......................................... S-55
Subordinate Liquidation Amount.............................. S-62
Subordinate Percentage...................................... S-62
Subordinate Prepayment Percentage........................... S-62
Subordinate Principal Distribution Amount................... S-61
Subordinate Principal Prepayments Distribution Amount....... S-61
Subsequent Cut-off Date..................................... S-7
Subsequent Mortgage Loans................................... ii
Subsequent Transfer Date.................................... S-7
Subservicer................................................. S-37
Substitution Adjustment Amount.............................. S-50
Successor Servicer.......................................... S-72
Tax Counsel................................................. S-79
Title V..................................................... S-78
Transfer Date............................................... S-7
Trust Fund.................................................. ii
Trustee..................................................... S-15
Trustee Fee................................................. S-14
Undercollateralized Group................................... S-56
Underwriters................................................ i
Underwriting Agreement...................................... S-85
Weighted Average Life....................................... S-3
</TABLE>
S-90
<PAGE> 96
APPENDIX A
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE
OUTSTANDING AT VARIOUS PERCENTAGES OF THE
BASIC PREPAYMENT ASSUMPTION
CLASS SA-1
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 98 91 76 72 61
April, 2000................................................. 96 82 57 51 35
April, 2001................................................. 94 74 41 34 17
April, 2002................................................. 92 67 29 21 4
April, 2003................................................. 89 59 19 12 0
April, 2004................................................. 87 53 11 5 0
April, 2005................................................. 84 47 6 0 0
April, 2006................................................. 80 42 2 0 0
April, 2007................................................. 77 37 0 0 0
April, 2008................................................. 73 32 0 0 0
April, 2009................................................. 69 28 0 0 0
April, 2010................................................. 65 24 0 0 0
April, 2011................................................. 60 20 0 0 0
April, 2012................................................. 55 17 0 0 0
April, 2013................................................. 50 13 0 0 0
April, 2014................................................. 44 10 0 0 0
April, 2015................................................. 37 7 0 0 0
April, 2016................................................. 30 4 0 0 0
April, 2017................................................. 23 1 0 0 0
April, 2018................................................. 14 0 0 0 0
April, 2019................................................. 8 0 0 0 0
April, 2020................................................. 1 0 0 0 0
April, 2021................................................. 0 0 0 0 0
April, 2022................................................. 0 0 0 0 0
April, 2023................................................. 0 0 0 0 0
April, 2024................................................. 0 0 0 0 0
April, 2025................................................. 0 0 0 0 0
April, 2026................................................. 0 0 0 0 0
April, 2027................................................. 0 0 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 13.8 7.6 2.9 2.5 1.7
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-1
<PAGE> 97
CLASS SA-2
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 98 91 76 72 61
April, 2000................................................. 96 82 57 51 35
April, 2001................................................. 94 74 41 34 17
April, 2002................................................. 92 67 29 21 4
April, 2003................................................. 89 59 19 12 0
April, 2004................................................. 87 53 11 5 0
April, 2005................................................. 84 47 6 0 0
April, 2006................................................. 80 42 2 0 0
April, 2007................................................. 77 37 0 0 0
April, 2008................................................. 73 32 0 0 0
April, 2009................................................. 69 28 0 0 0
April, 2010................................................. 65 24 0 0 0
April, 2011................................................. 60 20 0 0 0
April, 2012................................................. 55 17 0 0 0
April, 2013................................................. 50 13 0 0 0
April, 2014................................................. 44 10 0 0 0
April, 2015................................................. 37 7 0 0 0
April, 2016................................................. 30 4 0 0 0
April, 2017................................................. 23 1 0 0 0
April, 2018................................................. 14 0 0 0 0
April, 2019................................................. 8 0 0 0 0
April, 2020................................................. 1 0 0 0 0
April, 2021................................................. 0 0 0 0 0
April, 2022................................................. 0 0 0 0 0
April, 2023................................................. 0 0 0 0 0
April, 2024................................................. 0 0 0 0 0
April, 2025................................................. 0 0 0 0 0
April, 2026................................................. 0 0 0 0 0
April, 2027................................................. 0 0 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 13.8 7.6 2.9 2.5 1.7
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-2
<PAGE> 98
CLASS SA-3
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 100 100 100 100 100
April, 2000................................................. 100 100 100 100 100
April, 2001................................................. 100 100 100 100 100
April, 2002................................................. 100 100 100 100 100
April, 2003................................................. 100 100 100 100 45
April, 2004................................................. 100 100 100 100 0
April, 2005................................................. 100 100 100 100 0
April, 2006................................................. 100 100 100 68 0
April, 2007................................................. 100 100 100 47 0
April, 2008................................................. 100 100 79 35 0
April, 2009................................................. 100 100 61 26 0
April, 2010................................................. 100 100 48 20 0
April, 2011................................................. 100 100 36 15 0
April, 2012................................................. 100 100 28 11 0
April, 2013................................................. 100 100 21 8 0
April, 2014................................................. 100 100 15 5 0
April, 2015................................................. 100 100 11 4 0
April, 2016................................................. 100 100 7 2 0
April, 2017................................................. 100 100 5 2 0
April, 2018................................................. 100 78 3 1 0
April, 2019................................................. 100 51 2 0 0
April, 2020................................................. 100 27 1 0 0
April, 2021................................................. 50 11 0 0 0
April, 2022................................................. 23 5 0 0 0
April, 2023................................................. 7 1 0 0 0
April, 2024................................................. 0 0 0 0 0
April, 2025................................................. 0 0 0 0 0
April, 2026................................................. 0 0 0 0 0
April, 2027................................................. 0 0 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 23.3 21.3 12.7 10.0 5.0
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-3
<PAGE> 99
CLASS SA-4
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 98 98 98 98 98
April, 2000................................................. 96 96 96 96 96
April, 2001................................................. 94 94 94 94 94
April, 2002................................................. 92 92 92 92 92
April, 2003................................................. 90 90 90 90 90
April, 2004................................................. 88 86 82 82 72
April, 2005................................................. 85 81 74 72 43
April, 2006................................................. 82 76 63 60 26
April, 2007................................................. 79 69 52 48 16
April, 2008................................................. 75 62 41 36 11
April, 2009................................................. 71 55 32 27 7
April, 2010................................................. 67 49 25 20 5
April, 2011................................................. 63 43 19 15 3
April, 2012................................................. 58 38 14 11 2
April, 2013................................................. 53 32 11 8 1
April, 2014................................................. 48 27 8 6 1
April, 2015................................................. 41 22 6 4 0
April, 2016................................................. 35 18 4 3 0
April, 2017................................................. 28 13 3 2 0
April, 2018................................................. 20 9 2 1 0
April, 2019................................................. 14 6 1 1 0
April, 2020................................................. 8 3 0 0 0
April, 2021................................................. 3 1 0 0 0
April, 2022................................................. 2 1 0 0 0
April, 2023................................................. 0 0 0 0 0
April, 2024................................................. 0 0 0 0 0
April, 2025................................................. 0 0 0 0 0
April, 2026................................................. 0 0 0 0 0
April, 2027................................................. 0 0 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 14.5 12.2 9.6 9.2 7.1
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-4
<PAGE> 100
CLASS A-1
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 99 95 86 84 78
April, 2000................................................. 97 86 66 61 47
April, 2001................................................. 96 77 45 38 18
April, 2002................................................. 94 68 27 19 0
April, 2003................................................. 92 60 13 4 0
April, 2004................................................. 90 53 3 0 0
April, 2005................................................. 89 46 0 0 0
April, 2006................................................. 86 40 0 0 0
April, 2007................................................. 84 35 0 0 0
April, 2008................................................. 82 30 0 0 0
April, 2009................................................. 79 25 0 0 0
April, 2010................................................. 76 21 0 0 0
April, 2011................................................. 73 16 0 0 0
April, 2012................................................. 70 13 0 0 0
April, 2013................................................. 67 9 0 0 0
April, 2014................................................. 63 5 0 0 0
April, 2015................................................. 59 2 0 0 0
April, 2016................................................. 54 0 0 0 0
April, 2017................................................. 49 0 0 0 0
April, 2018................................................. 44 0 0 0 0
April, 2019................................................. 38 0 0 0 0
April, 2020................................................. 32 0 0 0 0
April, 2021................................................. 25 0 0 0 0
April, 2022................................................. 18 0 0 0 0
April, 2023................................................. 10 0 0 0 0
April, 2024................................................. 2 0 0 0 0
April, 2025................................................. 0 0 0 0 0
April, 2026................................................. 0 0 0 0 0
April, 2027................................................. 0 0 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 17.2 7.3 2.9 2.6 2.0
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-5
<PAGE> 101
CLASS A-2
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 100 100 100 100 100
April, 2000................................................. 100 100 100 100 100
April, 2001................................................. 100 100 100 100 100
April, 2002................................................. 100 100 100 100 88
April, 2003................................................. 100 100 100 100 0
April, 2004................................................. 100 100 100 65 0
April, 2005................................................. 100 100 69 18 0
April, 2006................................................. 100 100 33 0 0
April, 2007................................................. 100 100 8 0 0
April, 2008................................................. 100 100 0 0 0
April, 2009................................................. 100 100 0 0 0
April, 2010................................................. 100 100 0 0 0
April, 2011................................................. 100 100 0 0 0
April, 2012................................................. 100 100 0 0 0
April, 2013................................................. 100 100 0 0 0
April, 2014................................................. 100 100 0 0 0
April, 2015................................................. 100 100 0 0 0
April, 2016................................................. 100 92 0 0 0
April, 2017................................................. 100 73 0 0 0
April, 2018................................................. 100 54 0 0 0
April, 2019................................................. 100 36 0 0 0
April, 2020................................................. 100 19 0 0 0
April, 2021................................................. 100 3 0 0 0
April, 2022................................................. 100 0 0 0 0
April, 2023................................................. 100 0 0 0 0
April, 2024................................................. 100 0 0 0 0
April, 2025................................................. 53 0 0 0 0
April, 2026................................................. 0 0 0 0 0
April, 2027................................................. 0 0 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 27.1 20.3 7.6 6.4 4.4
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-6
<PAGE> 102
CLASS A-3
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 100 100 100 100 100
April, 2000................................................. 100 100 100 100 100
April, 2001................................................. 100 100 100 100 100
April, 2002................................................. 100 100 100 100 100
April, 2003................................................. 100 100 100 100 100
April, 2004................................................. 99 97 93 92 89
April, 2005................................................. 97 93 84 82 71
April, 2006................................................. 95 88 74 70 45
April, 2007................................................. 93 82 62 57 30
April, 2008................................................. 91 75 49 44 20
April, 2009................................................. 89 69 40 34 14
April, 2010................................................. 87 63 32 26 10
April, 2011................................................. 84 58 25 20 6
April, 2012................................................. 81 53 20 15 4
April, 2013................................................. 78 48 16 12 3
April, 2014................................................. 75 43 12 9 2
April, 2015................................................. 72 38 10 7 1
April, 2016................................................. 68 34 8 5 1
April, 2017................................................. 64 30 6 4 1
April, 2018................................................. 59 26 4 3 0
April, 2019................................................. 55 23 3 2 0
April, 2020................................................. 49 19 2 1 0
April, 2021................................................. 44 16 2 1 0
April, 2022................................................. 38 13 1 1 0
April, 2023................................................. 31 10 1 0 0
April, 2024................................................. 24 7 1 0 0
April, 2025................................................. 16 5 0 0 0
April, 2026................................................. 9 3 0 0 0
April, 2027................................................. 3 1 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 20.6 15.5 11.0 10.4 8.5
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-7
<PAGE> 103
CLASS A-4
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 100 100 100 100 100
April, 2000................................................. 100 100 100 100 100
April, 2001................................................. 100 100 100 100 100
April, 2002................................................. 100 100 100 100 100
April, 2003................................................. 100 100 100 100 92
April, 2004................................................. 100 100 100 100 14
April, 2005................................................. 100 100 100 100 0
April, 2006................................................. 100 100 100 81 0
April, 2007................................................. 100 100 100 52 0
April, 2008................................................. 100 100 86 35 0
April, 2009................................................. 100 100 64 22 0
April, 2010................................................. 100 100 47 12 0
April, 2011................................................. 100 100 33 4 0
April, 2012................................................. 100 100 21 0 0
April, 2013................................................. 100 100 12 0 0
April, 2014................................................. 100 100 5 0 0
April, 2015................................................. 100 100 0 0 0
April, 2016................................................. 100 100 0 0 0
April, 2017................................................. 100 100 0 0 0
April, 2018................................................. 100 100 0 0 0
April, 2019................................................. 100 100 0 0 0
April, 2020................................................. 100 100 0 0 0
April, 2021................................................. 100 100 0 0 0
April, 2022................................................. 100 81 0 0 0
April, 2023................................................. 100 58 0 0 0
April, 2024................................................. 100 36 0 0 0
April, 2025................................................. 100 15 0 0 0
April, 2026................................................. 94 0 0 0 0
April, 2027................................................. 12 0 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 28.6 25.4 12.2 9.6 5.5
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-8
<PAGE> 104
CLASS A-5
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 100 100 100 100 100
April, 2000................................................. 100 100 100 100 100
April, 2001................................................. 100 100 100 100 100
April, 2002................................................. 100 100 100 100 100
April, 2003................................................. 100 100 100 100 100
April, 2004................................................. 100 100 100 100 100
April, 2005................................................. 100 100 100 100 0
April, 2006................................................. 100 100 100 100 0
April, 2007................................................. 100 100 100 100 0
April, 2008................................................. 100 100 100 100 0
April, 2009................................................. 100 100 100 100 0
April, 2010................................................. 100 100 100 100 0
April, 2011................................................. 100 100 100 100 0
April, 2012................................................. 100 100 100 89 0
April, 2013................................................. 100 100 100 68 0
April, 2014................................................. 100 100 100 51 0
April, 2015................................................. 100 100 95 39 0
April, 2016................................................. 100 100 74 29 0
April, 2017................................................. 100 100 57 22 0
April, 2018................................................. 100 100 43 16 0
April, 2019................................................. 100 100 33 12 0
April, 2020................................................. 100 100 24 8 0
April, 2021................................................. 100 100 18 6 0
April, 2022................................................. 100 100 13 4 0
April, 2023................................................. 100 100 9 3 0
April, 2024................................................. 100 100 5 2 0
April, 2025................................................. 100 100 3 1 0
April, 2026................................................. 100 90 1 0 0
April, 2027................................................. 100 25 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 29.5 28.7 20.3 17.0 6.6
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-9
<PAGE> 105
CLASS A-7
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 100 100 100 100 100
April, 2000................................................. 100 100 100 100 100
April, 2001................................................. 100 100 100 100 100
April, 2002................................................. 100 100 100 100 100
April, 2003................................................. 100 100 100 100 92
April, 2004................................................. 100 100 100 100 14
April, 2005................................................. 100 100 100 100 0
April, 2006................................................. 100 100 100 81 0
April, 2007................................................. 100 100 100 52 0
April, 2008................................................. 100 100 86 35 0
April, 2009................................................. 100 100 64 22 0
April, 2010................................................. 100 100 47 12 0
April, 2011................................................. 100 100 33 4 0
April, 2012................................................. 100 100 21 0 0
April, 2013................................................. 100 100 12 0 0
April, 2014................................................. 100 100 5 0 0
April, 2015................................................. 100 100 0 0 0
April, 2016................................................. 100 100 0 0 0
April, 2017................................................. 100 100 0 0 0
April, 2018................................................. 100 100 0 0 0
April, 2019................................................. 100 100 0 0 0
April, 2020................................................. 100 100 0 0 0
April, 2021................................................. 100 100 0 0 0
April, 2022................................................. 100 81 0 0 0
April, 2023................................................. 100 58 0 0 0
April, 2024................................................. 100 36 0 0 0
April, 2025................................................. 100 15 0 0 0
April, 2026................................................. 94 0 0 0 0
April, 2027................................................. 12 0 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 28.6 25.4 12.2 9.6 5.5
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-10
<PAGE> 106
CLASS M, CLASS B-1 AND CLASS B-2
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 100% 300% 350% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial..................................................... 100 100 100 100 100
April, 1999................................................. 99 99 99 99 99
April, 2000................................................. 97 97 97 97 97
April, 2001................................................. 96 96 96 96 96
April, 2002................................................. 94 94 94 94 94
April, 2003................................................. 92 92 92 92 92
April, 2004................................................. 90 89 85 84 81
April, 2005................................................. 88 85 77 75 69
April, 2006................................................. 86 80 67 64 54
April, 2007................................................. 84 74 55 51 40
April, 2008................................................. 81 67 44 39 27
April, 2009................................................. 78 61 35 30 18
April, 2010................................................. 75 55 27 23 12
April, 2011................................................. 72 49 21 17 8
April, 2012................................................. 68 44 17 13 5
April, 2013................................................. 64 39 13 10 4
April, 2014................................................. 60 34 10 7 2
April, 2015................................................. 56 30 8 5 2
April, 2016................................................. 51 25 6 4 1
April, 2017................................................. 45 21 4 3 1
April, 2018................................................. 39 18 3 2 0
April, 2019................................................. 34 14 2 1 0
April, 2020................................................. 29 11 1 1 0
April, 2021................................................. 24 9 1 1 0
April, 2022................................................. 20 7 1 0 0
April, 2023................................................. 16 5 0 0 0
April, 2024................................................. 12 4 0 0 0
April, 2025................................................. 8 2 0 0 0
April, 2026................................................. 5 1 0 0 0
April, 2027................................................. 1 0 0 0 0
April, 2028................................................. 0 0 0 0 0
Weighted Average Life (Years)(1)............................ 17.2 13.5 10.1 9.6 8.6
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
A-11
<PAGE> 107
PROSPECTUS
FIRST UNION RESIDENTIAL SECURITIZATION TRANSACTIONS, INC.,
Depositor
RESIDENTIAL MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to Residential Mortgage Pass-Through Certificates
(the "Certificates"), which may be sold from time to time in one or more Series
(each, a "Series") by First Union Residential Securitization Transactions, Inc.
(the "Depositor") on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. The Certificates of a Series
will evidence interests in a trust fund (a "Trust Fund"). As specified in the
related Prospectus Supplement, the Trust Fund for a Series of Certificates will
include certain mortgage related assets (the "Mortgage Assets") consisting of
(i) promissory notes or other evidences of indebtedness secured by first, second
or more junior liens on fee simple or leasehold interests in one- to four-family
properties, including participations in any of the foregoing ("Mortgage Loans"),
(ii) mortgage pass-through securities (the "Agency Securities") issued or
guaranteed by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC") or (iii) mortgage-backed securities that are not
guaranteed by GNMA, FNMA or FHLMC ("Private Mortgage-Backed Securities").
Private Mortgage-Backed Securities will have been previously offered and sold
pursuant to an effective registration statement under the Securities Act of
1933. The Mortgage Assets will be acquired by the Depositor from one or more
institutions (each, a "Seller"), which may be affiliates of the Depositor, and
conveyed by the Depositor to the related Trust Fund. A Trust Fund also may
include insurance policies, cash accounts, reserve funds, reinvestment income,
guaranties, letters of credit or other forms of credit enhancement described
herein and in the related Prospectus Supplement, or any combination thereof. In
addition, if so specified in the related Prospectus Supplement, the property of
the Trust Fund will include monies on deposit in a trust account (the
"Pre-Funding Account") to be established with the Trustee, which will be used to
purchase at a predetermined price additional Mortgage Assets (the "Subsequent
Mortgage Assets") from the Depositor from time to time within three months after
the issuance of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that are senior or subordinate in
right of payment to one or more other classes of Certificates of such Series.
One or more classes of Certificates of a Series may be entitled to receive
principal distributions with disproportionate, nominal or no interest
distributions or interest distributions with disproportionate, nominal or no
principal distributions or any combination thereof prior to one or more other
classes of Certificates of such Series or after the occurrence of specified
events, in each case as specified in the related Prospectus Supplement.
Distributions among classes of Certificates in a Series may differ as to timing,
sequential order and priority.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Certificates of any
Series, and there can be no assurance that a secondary market for any
Certificates will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment continue for the life of the
Certificates. This Prospectus may not be used to consummate sales of a Series of
Certificates unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, including First Union Capital
Markets, a division of Wheat First Securities, Inc. ("First Union Capital
Markets") an affiliate of the Depositor, as more fully described under "Method
of Distribution" herein and "Underwriting" in the related Prospectus Supplement.
Distributions to Certificateholders will be made monthly, quarterly,
semi-annually or at such other intervals and on the dates specified in the
related Prospectus Supplement. Distributions on the Certificates of a Series
will be made from the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Certificateholders as specified in the related
Prospectus Supplement.
The Certificates of any Series will not represent an obligation of or
interest in the Depositor or any affiliate thereof, including, without
limitation, First Union National Bank, and will not be insured or guaranteed by
any governmental agency or instrumentality or, unless otherwise specified in the
related Prospectus Supplement, by any other person. Unless otherwise specified
in the related Prospectus Supplement, the only obligations of the Depositor with
respect to a Series of Certificates will be to obtain certain representations
and warranties from each Seller and to assign to the Trustee for the related
Series of Certificates the Depositor's rights with respect to such
representations and warranties. The principal obligations of the Master Servicer
named in the related Prospectus Supplement with respect to the related Series of
Certificates will be limited to obligations pursuant to certain representations
and warranties and to its contractual servicing obligations, including any
obligation it may have to advance delinquent payments on the Mortgage Assets in
the related Trust Fund.
The yield on each class of Certificates of a Series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the Mortgage Assets in the related Trust Fund and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
Fund may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat a
Trust Fund or specified portion thereof as one or more "real estate mortgage
investment conduits" ("REMICs") for federal income tax purposes. See "Certain
Federal Income Tax Consequences."
(continued on next page)
The date of this Prospectus is April 24, 1998.
<PAGE> 108
(cover continued from previous page)
This Prospectus and the related Prospectus Supplements may be used by First
Union Capital Markets in connection with offers and sales related to
market-making transactions in any Series of the Certificates. First Union
Capital Markets may act as principal or agent in such transactions. Such sales
will be made at prices related to prevailing market prices at the time of the
sale.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series to be
offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the class or classes of
Certificates and the related Pass-Through Rate or method of determining the
amount of interest, if any, to be passed through to each such class; (ii) the
initial aggregate Certificate Balance (which may be a notional principal amount)
of each class of Certificates included in such Series, Distribution Dates
relating to such Series and, if applicable, the initial and final scheduled
Distribution Dates for each class; (iii) information as to the assets comprising
the Trust Fund, including the general characteristics of the Mortgage Assets
included therein and, if applicable, the insurance, surety bonds, guaranties,
letters of credit or other instruments or agreements included in the Trust Fund,
and the amount and source of any Reserve Fund; (iv) the circumstances, if any,
under which the Trust Fund may be subject to early termination; (v) the method
used to calculate the amount of principal, if any, to be distributed with
respect to each class of Certificates; (vi) the order of application of
distributions to each of the classes within such Series, whether sequential, pro
rata, or otherwise; (vii) the Distribution Dates with respect to such Series;
(viii) additional information with respect to the plan of distribution of such
Certificates; (ix) whether one or more REMIC elections will be made and
designation of the regular interests and residual interests; (x) the aggregate
original percentage ownership interest in the Trust Fund to be evidenced by each
class of Certificates; (xi) information as to the nature and extent of
subordination with respect to any class of Certificates that is subordinate in
right of payment to any other class; and (xii) information as to the Seller, the
Master Servicer and the Trustee.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Certificates contains summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511; and New York Regional Office, Suite 1300 Seven
World Trade Center, New York, New York 10048. Publicly filed information,
including information regarding the Depositor, is available at the Commission's
web site at www.sec.gov.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Certificates are required under the related Agreement to be forwarded to
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, such reports will not be examined and reported on by an independent
public accountant. See "Description of the Certificates -- Reports to
Certificateholders."
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund 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
Depositor 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 the
related Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act, since the Depositor'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 Depositor should be directed to: First Union
Residential Securitization Transactions, Inc., 301 South College Street,
Charlotte, North Carolina 28288-0600, telephone number (704) 383-3624.
(continued on next page)
(ii)
<PAGE> 109
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series offered thereby. The Prospectus Supplement
for each Series will specify the extent (if any) to which the terms of such
Series or the related Trust Fund vary from the general description of the
Certificates and Trust Funds which is contained in this Prospectus. Capitalized
terms used herein shall have the respective meanings assigned them in the "Index
to Defined Terms."
Title of Securities........ Residential Mortgage Pass-Through Certificates (the
"Certificates"), issuable in series (each, a
"Series"). Each Series will be issued under a
separate Pooling and Servicing Agreement (each, an
"Agreement") to be entered into with respect to
each such Series.
Depositor.................. First Union Residential Securitization
Transactions, Inc., a North Carolina corporation.
The Depositor is a wholly-owned, limited purpose
subsidiary of First Union National Bank ("FUNB"), a
national banking association (a wholly-owned
subsidiary of First Union Corporation, a North
Carolina corporation). Neither First Union
Corporation nor any of its affiliates, including
the Depositor, has guaranteed, or is or will be
otherwise obligated with respect to, the
Certificates of any Series.
Trustee.................... The trustee (the "Trustee") for each Series of
Certificates will be specified in the related
Prospectus Supplement. See "The Pooling and
Servicing Agreement" herein for a description of
the Trustee's rights and obligations.
Master Servicer............ The entity or entities named as Master Servicer
(the "Master Servicer") in the related Prospectus
Supplement, one of which may be an affiliate of the
Depositor. See "The Pooling and Servicing
Agreement -- Certain Matters Regarding the Master
Servicer and the Depositor."
Sub-Servicer............... A "Sub-Servicer" may be specified in the related
Prospectus Supplement, which may be an affiliate of
the Depositor.
Closing Date............... The date (the "Closing Date") of initial issuance
of a Series of Certificates, as specified in the
related Prospectus Supplement.
Trust Fund Assets.......... The Trust Fund for a Series of Certificates will
include certain mortgage related assets (the
"Mortgage Assets") consisting of (a) a pool (a
"Mortgage Pool") of Mortgage Loans, (b) Agency
Securities or (c) Private Mortgage-Backed
Securities, together with payments in respect of
such Mortgage Assets and certain other accounts,
obligations or agreements, in each case as
specified in the related Prospectus Supplement. To
the extent provided in the related Prospectus
Supplement, the Depositor will be obligated
(subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for a
Series of Certificates will be obligated to
purchase (subject to the satisfaction of certain
conditions described in the applicable Agreement),
additional Mortgage Assets (the "Subsequent
Mortgage Assets") from time to time (as frequently
as daily) within three months after the issuance of
the Certificates having an aggregate principal
balance approximately equal to the amount on
deposit in the Pre-Funding Account (the "Pre-Funded
Amount") on such Closing Date.
A. Single Family Loans..... Unless otherwise specified in the related
Prospectus Supplement, Mortgage Loans will be
secured by first, second or more junior liens on
fee
1
<PAGE> 110
simple or leasehold interests in one- to
four-family properties. If so specified, the
Mortgage Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security
interests in shares issued by private, nonprofit,
cooperative housing corporations ("Cooperatives")
and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives'
buildings. If so specified in the related
Prospectus Supplement, the Mortgage Assets of the
related Trust Fund may include mortgage
participation certificates evidencing interests in
Mortgage Loans. Such Mortgage Loans may be
conventional loans (i.e., loans that are not
insured or guaranteed by any governmental agency),
insured by the Federal Housing Authority ("FHA") or
partially guaranteed by the Veterans'
Administration ("VA") as specified in the related
Prospectus Supplement. If specified in the related
Prospectus Supplement, the Mortgage Loans may be
comprised of home equity loans ("Home Equity
Loans"). Such Home Equity Loans will be secured by
first or second or more junior liens on fee simple
or leasehold interests in one- to four-family
properties. See "Mortgage Loan
Program -- Underwriting Standards." The payment
terms of the Mortgage Loans to be included in a
Trust Fund will be described in the related
Prospectus Supplement and may include any of the
following features or combinations thereof or other
features described in the related Prospectus
Supplement: (a) Interest may be payable at a fixed
rate, a rate adjustable from time to time in
relation to an index (which will be specified in
the related Prospectus Supplement), a rate that is
fixed for a period of time or under certain
circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an
adjustable rate to a fixed rate or to a different
adjustable rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the
principal of a loan for such periods and under such
circumstances as may be specified in the related
Prospectus Supplement. Mortgage Loans may provide
for the payment of interest at a rate lower than
the specified Mortgage Rate for a period of time or
for the life of the loan, and the amount of any
difference may be contributed from funds supplied
by a third party. (b) Principal may be payable on a
level debt service basis to fully amortize the loan
over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly
longer than the original term to maturity or on an
interest rate that is different from the interest
rate on the Mortgage Loan or may not be amortized
during all or a portion of the original term.
Payment of all or a substantial portion of the
principal may be due on maturity ("balloon
payments"). Principal may include interest that has
been deferred and added to the principal balance of
the Mortgage Loan. (c) Monthly payments of
principal and interest may be fixed for the life of
the loan, may increase over a specified period of
time or may change from period to period. Mortgage
Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly
payments. (d) The Mortgage Loans generally may be
prepaid at any time without payment of any
prepayment fee. If so specified in the related
Prospectus Supplement, prepayments of principal may
be subject to a prepayment fee, which may be fixed
for the life of any such Mortgage Loan or may
2
<PAGE> 111
decline over time, and may be prohibited for the
life of any such Mortgage Loan or for certain
periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the
applicable lockout period and may require the
payment of a prepayment fee in connection with any
such subsequent prepayment. Other Mortgage Loans
may permit prepayments without payment of a fee
unless the prepayment occurs during specified time
periods. (e) The Mortgage Loans may include
"due-on-sale" clauses which permit the mortgagee to
demand payment of the entire Mortgage Loan in
connection with the sale or certain transfers of
the related Mortgaged Property. Other Mortgage
Loans may be assumable by persons meeting the then
applicable underwriting standards of the Seller.
(f) Certain Mortgage Loans may be originated or
acquired in connection with employee relocation
programs. The real property constituting security
for repayment of a Mortgage Loan may be located in
any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory
of the United States. (g) Unless otherwise
specified in the related Prospectus Supplement, all
of the Mortgage Loans will be covered by standard
hazard insurance policies insuring against losses
due to fire and various other causes. The Mortgage
Loans will be covered by primary mortgage insurance
policies to the extent provided in the related
Prospectus Supplement. All Mortgage Loans will have
been purchased by the Depositor, either directly or
through an affiliate, from one or more Sellers.
B. Agency Securities....... The Agency Securities evidenced by a Series of
Certificates will consist of (i) mortgage
participation certificates issued and guaranteed as
to timely payment of interest and, unless otherwise
specified in the related Prospectus Supplement,
ultimate payment of principal by the Federal Home
Loan Mortgage Corporation ("FHLMC Certificates"),
(ii) Guaranteed Mortgage Pass-Through Certificates
issued and guaranteed as to timely payment of
principal and interest by the Federal National
Mortgage Association ("FNMA Certificates"), (iii)
fully modified pass-through mortgage-backed
certificates guaranteed as to timely payment of
principal and interest by the Government National
Mortgage Association ("GNMA Certificates"), (iv)
stripped mortgage-backed securities representing an
undivided interest in all or a part of either the
principal distributions (but not the interest
distributions) or the interest distributions (but
not the principal distributions) or in some
specified portion of the principal and interest
distributions (but not all of such distributions)
on certain FHLMC, FNMA or GNMA Certificates and,
unless otherwise specified in the related
Prospectus Supplement, guaranteed to the same
extent as the underlying securities, (v) another
type of pass-through certificate issued or
guaranteed by GNMA, FNMA or FHLMC and described in
the related Prospectus Supplement, or (vi) a
combination of such Agency Securities. All GNMA
Certificates will be backed by the full faith and
credit of the United States. No FHLMC or FNMA
Certificates will be backed, directly or
indirectly, by the full faith and credit of the
United States. The Agency Securities may consist of
pass-through securities issued under FHLMC's Cash
or Guarantor Program, the GNMA I Program, the GNMA
II Program or another program specified in the
related Prospectus Supplement. The
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payment characteristics of the Mortgage Loans
underlying the Agency Securities will be described
in the related Prospectus Supplement.
C. Private Mortgage-Backed
Securities.............. Private Mortgage-Backed Securities may include (a)
mortgage pass-through certificates representing
beneficial interests in a Mortgage Pool or (b)
collateralized mortgage obligations secured by
Mortgage Loans. Private Mortgage-Backed Securities
may include stripped mortgage-backed securities
representing an undivided interest in all or a part
of either the principal distributions (but not the
interest distributions) or the interest
distributions (but not the principal distributions)
or in some specified portion of the principal and
interest distributions (but not all of such
distributions) on certain Mortgage Loans. Although
individual Mortgage Loans underlying a Private
Mortgage-Backed Security may be insured or
guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the
Private Mortgage-Backed Securities themselves will
not be so insured or guaranteed. Private Mortgage-
Backed Securities will have been previously offered
and sold pursuant to an effective registration
statement under the Securities Act of 1933, as
amended, or were exempt from registration
thereunder. Unless otherwise specified in the
related Prospectus Supplement relating to a Series
of Certificates, payments on the Private
Mortgage-Backed Securities will be distributed
directly to the Trustee as registered owner of such
Private Mortgage-Backed Securities. See "The Trust
Fund -- Private Mortgage-Backed Securities" herein.
Description of the
Certificates............... Each Certificate will represent the interest
specified in the related Prospectus Supplement in a
Trust Fund created by the Depositor pursuant to an
Agreement among the Depositor, the Master Servicer
and the Trustee for the related Series. The
Certificates of any Series may be issued in one or
more classes as specified in the related Prospectus
Supplement. A Series of Certificates may include
one or more classes of senior Certificates
(collectively, the "Senior Certificates") and one
or more classes of subordinate Certificates
(collectively, the "Subordinated Certificates").
Certain Series or classes of Certificates may be
covered by insurance policies or other forms of
credit enhancement, in each case as described
herein and in the related Prospectus Supplement.
One or more classes of Certificates of each Series
(i) may be entitled to receive distributions
allocable only to principal, only to interest or to
any combination thereof; (ii) may be entitled to
receive distributions only of prepayments of
principal throughout the lives of the Certificates
or during specified periods; (iii) may be
subordinated in the right to receive distributions
of scheduled payments of principal, prepayments of
principal, interest or any combination thereof to
one or more other classes of Certificates of such
Series throughout the lives of the Certificates or
during specified periods; (iv) may be entitled to
receive such distributions only after the
occurrence of events specified in the related
Prospectus Supplement; (v) may be entitled to
receive distributions in accordance with a schedule
or formula or on the basis of collections from
designated portions of the assets in the related
Trust Fund; (vi) as to Certificates entitled to
distributions allocable to interest, may be
entitled to receive interest at a fixed rate or a
rate that is subject to change from time to time;
and (vii) as to Certificates entitled to
distributions allocable to interest, may be
entitled to distributions allocable to interest
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only after the occurrence of events specified in
the related Prospectus Supplement and may accrue
interest until such events occur, in each case as
specified in the related Prospectus Supplement. The
timing, amounts, sequential order and priority of
such distributions may vary among classes, over
time, or otherwise as specified in the related
Prospectus Supplement.
Distributions on the
Certificates............. Distributions on the Certificates entitled thereto
will be made monthly, quarterly, semi-annually or
at such other intervals and on the dates specified
in the related Prospectus Supplement (each, a
"Distribution Date") out of the payments received
in respect of the assets of the related Trust Fund
or other assets pledged for the benefit of the
Certificates as specified in the related Prospectus
Supplement. The amount allocable to payments of
principal and interest on any Distribution Date
will be determined as specified in the related
Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, all
distributions will be made pro rata to
Certificateholders of the class entitled thereto.
Unless otherwise specified in the related
Prospectus Supplement, the aggregate original
Certificate Balance of the Certificates will equal
the aggregate distributions allocable to principal
that such Certificates will be entitled to receive.
If specified in the related Prospectus Supplement,
the Certificates will have an aggregate original
Certificate Balance equal to the aggregate unpaid
principal balance of the Mortgage Assets as of the
first day of the month of creation of the Trust
Fund and will bear interest in the aggregate at a
rate equal to the interest rate borne by the
underlying Mortgage Loans (the "Mortgage Rate"),
Agency Securities or Private Mortgage-Backed
Securities, net of the aggregate servicing fees and
any other amounts specified in the related
Prospectus Supplement (the "Pass-Through Rate").
The rate at which interest will be passed through
to holders of each class of Certificates entitled
thereto may be a fixed rate or a rate that is
subject to change from time to time from the time
and for the periods, in each case, as specified in
the related Prospectus Supplement. Any such rate
may be calculated on a loan-by-loan, weighted
average or other basis, in each case as described
in the related Prospectus Supplement.
Credit Enhancement......... The assets in a Trust Fund or the Certificates of
one or more classes in the related Series may have
the benefit of one or more types of credit
enhancement described herein and in the related
Prospectus Supplement. The protection against
losses afforded by any such credit support may be
limited. The type, characteristics and amount of
credit enhancement will be determined based on the
characteristics of the Mortgage Loans underlying or
comprising the Mortgage Assets and other factors
and will be established on the basis of
requirements of each Rating Agency rating the
Certificates of such Series. One or more forms of
credit enhancement may be provided by an affiliate
or affiliates of the Depositor. See "Credit
Enhancement" herein. Credit enhancement for a
Series may include one or more of the following
types or such other credit enhancement specified in
the related Prospectus Supplement:
A. Subordination........... A Series of Certificates may consist of one or more
classes of Senior Certificates and one or more
classes of Subordinated Certificates. The rights of
the holders of the Subordinated Certificates of a
Series to
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receive distributions with respect to the assets in
the related Trust Fund will be subordinated to such
rights of the holders of the Senior Certificates of
the same Series to the extent described in the
related Prospectus Supplement. This subordination
is intended to enhance the likelihood of regular
receipt by holders of Senior Certificates of the
full amount of their scheduled monthly payments of
principal and interest. The protection afforded to
the holders of Senior Certificates of a Series by
means of the subordination feature will be
accomplished by (i) the preferential right of such
holders to receive, prior to any distribution being
made in respect of the related Subordinated
Certificates, the amounts of principal and interest
due them on each Distribution Date out of the funds
available for distribution on such date in the
related Collection Account and, to the extent
described in the related Prospectus Supplement, by
the right of such holders to receive future
distributions on the assets in the related Trust
Fund that would otherwise have been payable to the
holders of Subordinated Certificates; (ii) reducing
the ownership interest of the related Subordinated
Certificates; (iii) a combination of clauses (i)
and (ii) above; or (iv) as otherwise described in
the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, subordination
may apply only in the event of certain types of
losses not covered by other forms of credit
support, such as hazard losses not covered by
standard hazard insurance policies or losses due to
the bankruptcy or fraud of the borrower. The
related Prospectus Supplement will set forth
information concerning, among other things, the
amount of subordination of a class or classes of
Subordinated Certificates in a Series, the
circumstances in which such subordination will be
applicable, and the manner, if any, in which the
amount of subordination will decrease over time.
B. Reserve Fund............ One or more reserve funds (each, a "Reserve Fund")
may be established and maintained for each Series.
The related Prospectus Supplement will specify
whether or not any such Reserve Fund will be
included in the corpus of the Trust Fund for such
Series and will also specify the manner of funding
the related Reserve Fund and the conditions under
which the amounts in any such Reserve Fund will be
used to make distributions to holders of
Certificates of a particular class or released from
the related Trust Fund.
C. Mortgage Pool Insurance
Policy................ A mortgage pool insurance policy or policies
("Mortgage Pool Insurance Policy") may be obtained
and maintained for a Series, which shall be limited
in scope, covering defaults on the related Mortgage
Loans in an initial amount equal to a specified
percentage of the aggregate principal balance of
all Mortgage Loans included in the Mortgage Pool as
of the first day of the month of issuance of the
related Series of Certificates or such other date
as is specified in the related Prospectus
Supplement (the "Cut-off Date").
D. Special Hazard Insurance
Policy................ A special hazard insurance policy or policies
("Special Hazard Insurance Policy") may be obtained
and maintained for a Series, covering certain
physical risks that are not otherwise insured
against by standard hazard insurance policies. Each
Special Hazard Insurance Policy will be limited in
scope and will cover losses pursuant to the
provisions of each
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such Special Hazard Insurance Policy as described
in the related Prospectus Supplement.
E. Bankruptcy Bond......... A bankruptcy bond or bonds ("Bankruptcy Bonds") may
be obtained covering certain losses resulting from
action that may be taken by a bankruptcy court in
connection with a Mortgage Loan. The level of
coverage and the limitations in scope of each
Bankruptcy Bond will be specified in the related
Prospectus Supplement.
F. FHA Insurance and VA
Guarantee............. All or a portion of the Mortgage Loans in a
Mortgage Pool may be insured by FHA insurance ("FHA
Insurance") and may be partially guaranteed by the
VA ("VA Insurance").
G. Cross Support........... If specified in the related Prospectus Supplement,
the beneficial ownership of separate groups of
assets included in a Trust Fund may be evidenced by
separate classes of the related Series of
Certificates. In such case, credit support may be
provided by a cross-support feature which requires
that distributions be made with respect to
Certificates evidencing beneficial ownership of one
or more asset groups prior to distributions to
Subordinated Certificates evidencing a beneficial
ownership interest in other asset groups within the
same Trust Fund.
H. Limited Guarantee....... If specified in the related Prospectus Supplement,
credit enhancement may be provided in the form of a
limited financial guarantee ("Limited Guarantee")
issued by a guarantor named therein.
I. Letter of Credit........ Alternative credit support with respect to a Series
of Certificates may be provided by the issuance of
a letter of credit ("Letter of Credit") by the bank
or financial institution specified in the related
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 related
Prospectus Supplement.
J. Surety Bonds............ If specified in the related Prospectus Supplement,
credit support with respect to one or more classes
of Certificates of a Series may be provided by the
issuance of a surety bond ("Surety Bond") issued by
a financial guarantee insurance company specified
in the related Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage
provided by a Surety Bond will be set forth in the
related Prospectus Supplement.
K. Overcollateralization... If specified in the related Prospectus Supplement,
credit support may consist of overcollateralization
whereby the aggregate principal amount of the
Mortgage Assets, including any Subsequent Mortgage
Assets, exceeds the aggregate Certificate Balance
of the Certificates. Such overcollateralization may
exist on the Closing Date or develop thereafter as
a result of the application of certain interest
collections, in excess of amounts necessary to pay
the Pass-Through Rate on the Certificates, received
in connection with the Mortgage Assets, including
any Subsequent Mortgage Assets. The existence of
any overcollateralization and the manner, if any,
by which it increases or decreases, will be set
forth in the related Prospectus Supplement.
Advances................... Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer and, if
applicable, each mortgage servicing institution
that services a Mortgage Loan in a Mortgage Pool on
behalf of the
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Master Servicer (a "Sub-Servicer") will be
obligated to advance amounts (each, an "Advance")
corresponding to delinquent principal and interest
payments (or, in the case of Home Equity Loans,
interest payments only) on such Mortgage Loan
(including, in the case of Cooperative Loans,
unpaid maintenance fees or other charges under the
related proprietary lease) until the first day of
the month following the date on which the related
Mortgaged Property is sold at a foreclosure sale or
the related Mortgage Loan is otherwise liquidated,
or until such other time as specified in the
related Prospectus Supplement. Any obligation to
make Advances may be subject to limitations as
specified in the related Prospectus Supplement.
Advances will be reimbursable to the extent
described herein and in the related Prospectus
Supplement.
Optional Termination....... The Servicer, the Depositor or, if specified in the
related Prospectus Supplement, the holder of the
residual interest in a REMIC may have the option to
effect early retirement of a Series of Certificates
through the purchase of the Mortgage Assets and
other assets in the related Trust Fund under the
circumstances and in the manner described in "The
Pooling and Servicing Agreement -- Termination;
Optional Termination" herein and in the related
Prospectus Supplement. In addition, if the related
Prospectus Supplement provides that the property of
a Trust Fund will include a Pre-Funding Account (as
such term is defined in the related Prospectus
Supplement, the "Pre-Funding Account"), a portion
of a Series of Certificates will be subject to
early retirement on or immediately following the
end of the Funding Period (as such term is defined
in the related Prospectus Supplement, the "Funding
Period") in an amount and manner specified in the
related Prospectus Supplement.
Legal Investment........... The Prospectus Supplement for each series of
Certificates will specify which, if any, of the
Classes of Certificates offered thereby will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of
Certificates that qualify as "mortgage related
securities" will be legal investments for certain
types of institutional investors to the extent
provided in SMMEA, subject, in any case, to any
other regulations that may govern investments by
such institutional investors. Institutions whose
investment activities are subject to review by
federal or state authorities should consult with
their counsel or the applicable authorities to
determine whether an investment in a particular
class of Certificates (whether or not such class
constitutes a "mortgage related security") complies
with applicable guidelines, policy statements or
restrictions. See "Legal Investment."
Certain Federal Income Tax
Consequences............. The federal income tax consequences to
Certificateholders will vary depending on whether
one or more elections are made to treat the Trust
Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") under
the provisions of the Internal Revenue Code of
1986, as amended (the "Code"). The Prospectus
Supplement for each Series of Certificates will
specify whether such an election will be made. See
"Certain Federal Income Tax Consequences."
ERISA Considerations....... A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the Code should carefully
review
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with its legal advisors whether the purchase or
holding of Certificates could give rise to a
transaction prohibited or not otherwise permissible
under ERISA or the Code. See "ERISA
Considerations." Certain classes of Certificates
may not be transferred unless the Trustee and the
Depositor are furnished with a letter of
representations or an opinion of counsel to the
effect that such transfer will not result in a
violation of the prohibited transaction provisions
of ERISA and the Code and will not subject the
Trustee, the Depositor or the Master Servicer to
additional obligations. See "Description of the
Certificates -- General" and "ERISA
Considerations."
Rating..................... It is a condition to the issuance of the
Certificates of any Series offered hereby that they
be rated in one of the four highest rating
categories by at least one nationally recognized
statistical rating organization (a "Rating
Agency").
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RISK FACTORS
Limited Liquidity. Although the Prospectus Supplement for a Series of
Certificates may indicate that the underwriter intends to make a market in such
Certificates, it is under no obligation to do so. There can be no assurance that
a secondary market will develop or, if a secondary market does develop, that it
will provide holders of such Certificates with liquidity of investment or that
it will continue for the lives of such Certificates. The Certificates will not
be listed on any securities exchange.
General Economic Conditions. General economic conditions have an impact on
the ability of borrowers to repay mortgage loans. Loss of earnings, illness and
other similar factors may lead to an increase in delinquencies and bankruptcy
filings by borrowers. In the event of personal bankruptcy of a borrower under a
Mortgage Loan (a "Mortgagor"), it is possible that the holders of the related
Certificates could experience a loss with respect to such Mortgagor's Mortgage
Loan. In conjunction with a Mortgagor's bankruptcy, a bankruptcy court may
suspend or reduce the payments of principal and interest to be paid with respect
to such Mortgage Loan, thus delaying or reducing the amount received by the
holders of the related Certificates with respect to such Mortgage Loan.
Moreover, if a bankruptcy court prevents the transfer of the related Mortgaged
Property to the related Trust Fund, any remaining balance on such Mortgage Loan
may not be recoverable. See "Mortgage Loan Program" herein and "The Seller and
the Servicer -- Delinquency, Loan Loss and Foreclosure Information" in the
related Prospectus Supplement for further information regarding the rates of
delinquency and net losses experienced on the mortgage loans included in FUNB's
servicing portfolio.
Local Real Estate Markets. An overall decline in the residential real
estate markets in the states in which the Mortgaged Properties are located could
adversely affect the values of the Mortgaged Properties such that the aggregate
outstanding balance of the Mortgage Loans equals or exceeds the value of the
Mortgaged Properties. The Depositor can neither predict such declines nor
quantify the impact of such declines in property values nor predict how long and
in which states such declines may occur. During a period of such declines, the
rates of delinquencies, foreclosures and losses on the Mortgage Loans would be
expected to be higher than those experienced in the mortgage lending industry in
general.
Yield and Prepayment Considerations. The yield on the Certificates of each
Series will depend on the rate of principal payment (including prepayments,
liquidations due to defaults and repurchases) on the Mortgage Loans and the
price paid by Certificateholders. Such yield may be adversely affected by a
higher or lower than anticipated rate of prepayments on the related Mortgage
Loans. In addition, unless otherwise specified in the related Prospectus
Supplement, the yield to investors may be adversely affected by shortfalls which
may result from the timing of the receipt of partial prepayments or liquidations
as well as shortfalls not covered by the Master Servicing Fee related to a
particular Distribution Date and which shortfalls result from the timing of the
receipt of full prepayments. The yield on Certificates entitling the holders
thereof primarily or exclusively to payments of interest on the Mortgage Loans
will be extremely sensitive to the rate of prepayments on the related Mortgage
Loans. In addition, the yield on certain other types of classes of Certificates
may be relatively more sensitive to the rate of prepayment of the related
Mortgage Loans than other classes of Certificates. Prepayments are influenced by
a number of factors, including prevailing mortgage market interest rates, local
and national economic conditions and homeowner mobility. See "Yield and
Prepayment Considerations."
Limited Obligations. Except for any related insurance policies and any
reserve fund or credit enhancement described in the applicable Prospectus
Supplement, the Mortgage Assets included in the related Trust Fund 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 the Depositor, the
Seller, the Master Servicer, the Trustee or any of their affiliates, except for
the Depositor's and the Seller's limited obligations with respect to certain
breaches of their respective representations and warranties. The Certificates of
any Series will not be guaranteed or insured by any governmental agency or
instrumentality, the Depositor, the Master Servicer, the Trustee, any of their
affiliates or any other person. Consequently, in the event that payments on the
Mortgage Assets are insufficient or otherwise unavailable to make all payments
required on the Certificates, there will be no recourse to the Depositor, the
Master Servicer, 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
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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 letter
of credit; a pool insurance policy; a special hazard insurance policy; a
mortgagor bankruptcy bond; a reserve fund; cross support; FHA Insurance and VA
Guarantee; a surety bond; and any combination thereof. See "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, if each
applicable rating agency confirms that the then current rating thereof will not
be adversely affected. See "Credit Enhancement."
Realization Upon Nonperforming Loans; Delays and Expenses Associated with
Legal Actions. An action to foreclose a Mortgage Loan is regulated by statutes
and rules and is subject to a court's equitable powers. A foreclosure action is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, an action to obtain a deficiency judgment also is regulated by
statutes and rules, and the amount of a deficiency judgment may be limited by
law. In the event of a default by a borrower, these restrictions, among others,
may impede the ability of the Master Servicer to foreclose on or to sell the
Mortgaged Property or to obtain a deficiency judgment in connection therewith.
If the protection afforded the Certificateholders of a Series by the credit
enhancement, if any, for such Series is exhausted, such restrictions may delay
distributions to such Certificateholders and may ultimately limit the amounts
distributed with respect to such defaulted Mortgage Loans and result in a loss
to such Certificateholders on their investments. See "Certain Legal Aspects of
the Mortgage Loans."
Junior Liens. Mortgages securing Home Equity Loans are often junior liens
subordinate to the rights of the mortgagee under the related senior mortgage or
mortgages. The proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding balance of such junior
mortgage only to the extent that the claims of such senior mortgagees have been
satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the property securing a junior mortgage
unless it forecloses subject to the senior mortgages, in which case it must
either pay the entire amount due on the senior mortgages to the senior
mortgagees at or prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgages in the event the mortgagor is in default
thereunder. The Trust Fund will not have any source of funds to satisfy the
senior mortgages to make payments due to the senior mortgagees.
Subordinated Certificates. A Series of Certificates may consist of one or
more classes of Senior Certificates and one or more classes of Subordinated
Certificates. The rights of the holders of Subordinated Certificates to receive
distributions from the related Trust Fund will be subordinated to the rights of
the holders of Senior Certificates of the same Series to receive such
distributions. The effect of such subordination generally is that holders of
Subordinated Certificates may experience losses on the underlying Mortgage
Assets before or to a greater extent than holders of Senior Certificates. The
Prospectus Supplement for each Series will specify the rights of holders of
Subordinated Certificates in relation to the holders of Senior Certificates as
well as the extent and circumstances of any such subordination. See "Credit
Enhancement -- Subordination."
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, and require certain disclosures to borrowers.
In addition, many states have other laws, such as consumer protection laws,
unfair and deceptive practices acts and debt collection practices acts which may
apply to the origination or collection of the Mortgage Loans. Depending on the
provisions of the applicable law, violations of these laws may limit the ability
of the Master Servicer to collect all or part of the principal of, or interest
on, the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the related Trust Fund to
damages and administrative enforcement. See "Certain Legal Aspects of the
Mortgage Loans."
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THE TRUST FUND*
The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Certificateholders. Each Trust Fund will consist of certain
mortgage-related assets (the "Mortgage Assets") consisting of (A) a mortgage
pool (a "Mortgage Pool") comprised of Mortgage Loans, (B) Agency Securities or
(C) Private Mortgage-Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Mortgage Assets
and certain other accounts, obligations or agreements, in each case as specified
in the related Prospectus Supplement.
The Certificates will be entitled to payment from the assets of the related
Trust Fund or Funds or other assets pledged for the benefit of the
Certificateholders as specified in the related Prospectus Supplement and will
not be entitled to payments in respect of the assets of any other trust fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Assets of any Trust Fund will consist of
Mortgage Loans, Agency Securities or Private Mortgage-Backed Securities but not
a combination thereof.
The Mortgage Assets may be acquired by the Depositor, either directly or
through affiliates, in the open market or in privately negotiated transactions,
from originators or sellers that may be affiliates of the Depositor (the
"Sellers") and conveyed by the Depositor to the related Trust Fund. The Sellers
may have originated the Mortgage Assets or acquired the Mortgage Assets from the
originators or other entities. See "Mortgage Loan Program -- Underwriting
Standards."
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and final specific information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance thereof and to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Certificates (the
"Detailed Description"). A schedule of the Mortgage Assets relating to such
Series will be attached to the Agreement delivered to the Trustee upon delivery
of the Certificates.
THE MORTGAGE LOANS -- GENERAL
For purposes hereof, the real property that secures repayment of the
Mortgage Loans are collectively referred to as "Mortgaged Properties." The
Mortgaged Properties may be located in any one of the fifty states, the District
of Columbia, Guam, Puerto Rico or any other territory of the United States.
Mortgage Loans with certain Loan-to-Value Ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Mortgage Insurance Policy"). The existence,
extent and duration of any such coverage will be described in the applicable
Prospectus Supplement. No Primary Mortgage Insurance Policy will be required for
any home equity loan.
The Mortgage Loans in a Mortgage Pool will have monthly payment dates as
set forth in the related Prospectus Supplement. The payment terms of the
Mortgage Loans to be included in a Trust Fund will be described in the related
Prospectus Supplement and may include any of the following features or
combination thereof or other features described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a loan for such periods
- ---------------
* Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates relating to a
single trust fund (the "Trust Fund") consisting primarily of the Mortgage
Loans in such Mortgage Pool. Similarly, the term "Pass-Through Rate" will
refer to the Pass- Through Rate borne by the Certificates of one specific
Series and the term "Trust Fund" will refer to one specific Trust Fund.
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and under such circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at a
rate lower than the specified interest rate borne by such Mortgage Loan for
a period of time or for the life of the loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all or a
portion of the original term. Payment of all or a substantial portion of
the principal may be due on maturity ("balloon payments"). Principal may
include interest that has been deferred and added to the principal balance
of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) The Mortgage Loans generally may be prepaid at any time without
the payment of any prepayment fee. If so specified in the related
Prospectus Supplement, some prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of any such Mortgage Loan
or may decline over time, and may be prohibited for the life of any such
Mortgage Loan or for certain periods ("lockout periods"). Certain Mortgage
Loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with
any such subsequent prepayment. Other Mortgage Loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified time
periods.
(e) The loans may include "due-on-sale" clauses which permit the
mortgagee to demand payment of the entire mortgage loan in connection with
the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the then applicable
underwriting standards of the Seller.
A Trust Fund may contain certain Mortgage Loans, which include provisions
whereby a third party partially subsidizes the borrower's monthly payments
during the early years of the Mortgage Loan ("Buydown Loans"), the difference to
be made up from a fund (a "Buydown Fund") contributed by such third party at the
time of origination of the Mortgage Loan. A Buydown Fund will be in an amount
equal either to the discounted value or full aggregate amount of future payment
subsidies. The underlying assumption of buydown plans is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and of inflation, so that the borrower will be able to meet the
full mortgage payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan concerning limitations on the
interest rate paid by the borrower initially, on annual increases in the
interest rate and on the length of the buydown period.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (e.g., separate
residential properties, individual units in condominiums in buildings owned by
cooperative housing corporations, vacation and second homes, or other similar
real property), (iii) the original terms to maturity of the Mortgage Loans, (iv)
the largest principal balance and the smallest principal balance of any of the
Mortgage Loans, (v) the earliest origination date and latest maturity date of
any of the Mortgage Loans, (vi) the aggregate principal balance of Mortgage
Loans having Loan-to-Value Ratios or Combined Loan-to-Value Ratios at
origination exceeding 80%, (vii) the maximum and minimum per annum rates at
which the related Mortgage Notes accrue interest (the "Mortgage Rate"), and
(viii) the geographical distribution of the Mortgage Loans.
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The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
fraction, expressed as a percentage, the numerator of which is the original
principal balance of the related Mortgage Loan and the denominator of which is
the Collateral Value of the related Mortgaged Property. Unless otherwise
specified in the related Prospectus Supplement, the "Collateral Value" of a
Mortgaged Property is the lesser of (a) the appraised value determined in an
appraisal obtained by the originator at origination of such Mortgage Loan and
(b) the sales price for such property.
The "Combined Loan-to-Value Ratio" of any Home Equity Loan is the ratio
(expressed as a percentage) of (i) the sum of (a) the original principal balance
of such Mortgage Loan at the date of origination (which for purposes of the
related Prospectus Supplement includes certain financed fees and insurance
premiums) plus (b) the outstanding balance of the senior liens, if any, divided
by (ii) the lesser of (a) the value of the related Mortgaged Property, based
upon the appraisal, if any, or drive-by evaluation made at the time of
origination of the Mortgage Loan and (b) the purchase price of the Mortgaged
Property if the Mortgage Loan proceeds were used to purchase the Mortgaged
Property. For Mortgage Loans having low original principal balances, the
Combined Loan-to-Value Ratios of the Mortgage Loans will reflect certain
judgments of the Seller's underwriters with respect to the value of the
Mortgaged Property made at the time the Mortgage Loans were originated or
acquired. See "Mortgage Loan Program -- Underwriting Standards."
The Depositor will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. Unless
otherwise specified in the related Prospectus Supplement, the only obligations
of the Depositor with respect to a Series of Certificates will be to obtain
certain representations and warranties from the Sellers and to assign to the
Trustee for such Series of Certificates the Depositor's rights with respect to
such representations and warranties. See "The Pooling and Servicing
Agreement -- Assignment of Mortgage Assets."
The Master Servicer named in the related Prospectus Supplement will service
the Mortgage Loans, either directly or through other mortgage servicing
institutions (each, a "Sub-Servicer"), pursuant to a Pooling and Servicing
Agreement (each, an "Agreement"). The Master Servicer and any Sub-Servicers will
each receive a fee for such services. See "Mortgage Loan Program" and "The
Pooling and Servicing Agreement." With respect to Mortgage Loans serviced by the
Master Servicer through a Sub-Servicer, the Master Servicer will remain liable
for its servicing obligations under the related Agreement as if the Master
Servicer alone were servicing such Mortgage Loans. The obligations of the Master
Servicer with respect to the Mortgage Loans will consist principally of its
contractual servicing obligations under the related Agreement (including its
obligation to enforce the obligations of the Sub-Servicers or Sellers, or both,
as more fully described herein under "Mortgage Loan Program -- Representations
by Sellers; Repurchases" and "The Pooling and Servicing Agreement -- Assignment
of Mortgage Assets") and its obligation to make certain cash advances in the
event of delinquencies in payments on or with respect to the Mortgage Loans in
the amounts described herein under "Description of the
Certificates -- Advances." The obligations of the Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in the
related Prospectus Supplement.
Single Family and Cooperative Loans. Unless otherwise specified in the
related Prospectus Supplement, Mortgage Loans will consist of mortgage loans,
deeds of trust or participations or other beneficial interests therein, secured
by first, second or more junior liens on single family (i.e., one-to
four-family) residential properties. If so specified, the Mortgage Loans may
include cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. If so specified in the related Prospectus Supplement,
the Mortgage Assets of the related Trust Fund may include mortgage participation
certificates evidencing interests in Mortgage Loans. Such loans may be
conventional loans (i.e., loans that are not insured or guaranteed by any
governmental agency) or loans insured by the FHA or partially guaranteed by the
VA, as specified in the related Prospectus Supplement.
The Mortgaged Properties relating to single family Mortgage Loans will
consist of detached or semi-detached one-family dwelling units, two- to
four-family dwelling units, townhouses, rowhouses, individ-
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ual condominium units, individual units in planned unit developments, and
certain other dwelling units. Such Mortgaged Properties may include vacation and
second homes, investment properties and leasehold interests. In the case of
leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the Mortgage Loan by at least five years, unless otherwise specified
in the related Prospectus Supplement. Certain Mortgage Loans may be originated
or acquired in connection with corporate programs, including employee relocation
programs. In limited instances, a borrower who uses the dwelling unit as a
primary residence may also make some business use of the property.
Home Equity Loans. As described more fully in the related Prospectus
Supplement, the Mortgage Loans constituting a Trust Fund may comprise a pool of
home equity loans ("Home Equity Loans"). Home Equity Loans are mortgage loans
made for purposes that include: purchase money transactions, refinancings (both
cash-out and no-cash-out), home improvements and construction-to-permanent
financing. Unless otherwise specified in the related Prospectus Supplement, Home
Equity Loans will generally be secured by a lien on the related Mortgaged
Property of a first or second priority. Unless otherwise specified in the
related Prospectus Supplement, Home Equity Loans are generally made to
Mortgagors with credit grades (as determined by the Seller from time to time) A2
and below. The Mortgaged Properties securing the Home Equity Loans may
constitute single-family dwellings, mobile and manufactured housing and, in
limited cases, other types of residential property as described in the related
Prospectus Supplement.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States with the United States Department of
Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by the Federal
Housing Authority ("FHA") under the Housing Act, or Title V of the Housing Act
of 1949 ("FHA Loans"), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States
Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an unlimited amount which
is at any time sufficient to enable GNMA to perform its obligations under its
guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may
be issued under either the GNMA I program or the GNMA II program) will be a
"fully modified pass-through" mortgage-backed certificate issued and serviced by
a mortgage banking company or other financial concern ("GNMA Issuer") approved
by GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans.
The mortgage loans underlying the GNMA Certificates will consist of FHA Loans
and/or VA Loans. Each such mortgage loan is secured by a one- to four-family
residential property. GNMA will approve the issuance of each such GNMA
Certificate in accordance with a guaranty agreement (a "Guaranty Agreement")
between GNMA and the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA
Issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each such GNMA Certificate, even if the payments
received by the GNMA Issuer on the FHA Loans or VA Loans underlying each such
GNMA Certificate are less than the amounts due on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 40 years (but may have original maturities of
substantially less than 40 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such
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GNMA Certificate, less the applicable servicing and guarantee fee which together
equal the difference between the interest on the FHA Loan or VA Loan and the
pass-through rate on the GNMA Certificate. In addition, each payment will
include proportionate pass-through payments of any prepayments of principal on
the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate are due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates related to a Series of Certificates may be held in
book-entry form.
As described above, the GNMA Certificates included in a Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
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Federal Home Loan Mortgage Corporation. FHLMC is a shareholder-owned
corporation that was created pursuant to Title III of the Emergency Home Finance
Act of 1970, as amended (the "FHLMC Act"). FHLMC was established primarily for
the purpose of increasing the availability of mortgage credit for the financing
of urgently needed housing. It seeks to provide an enhanced degree of liquidity
for residential mortgage investments primarily by assisting in the development
of secondary markets for conventional mortgages. The principal activity of FHLMC
currently consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Mortgage loans underlying the FHLMC Certificates held by a Trust Fund will
consist of mortgage loans with original terms to maturity of between 10 and 30
years. Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate Group. Under the Guarantor
Program, any such FHLMC Certificate Group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the related
Prospectus Supplement for a Series of Certificates, guarantee the timely payment
of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the
timely payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guaranty of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans that it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, or entitled to,
the full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to Holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
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Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
purchased results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
Group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate Group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
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Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or each other servicer
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than its annual pass-through rate and under a special
servicing option (pursuant to which FNMA assumes the entire risk for foreclosure
losses), the annual interest rates on the mortgage loans underlying a FNMA
Certificate will generally be between 55 basis points and 255 basis points
greater than the annual FNMA Certificate pass-through rate. If specified in the
related Prospectus Supplement, FNMA Certificates may be backed by adjustable
rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, or entitled
to, the full faith and credit of the United States. Although the Secretary of
the Treasury of the United States has discretionary authority to lend FNMA up to
$2.25 billion outstanding at any time, neither the United States nor any agency
thereof is obligated to finance FNMA's operations or to assist FNMA in any other
manner. If FNMA were unable to satisfy its obligations, distributions to holders
of FNMA Certificates would consist solely of payments and other recoveries on
the underlying mortgage loans and, accordingly, monthly distributions to holders
of FNMA Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
As described above, the FNMA Certificates included in a Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA or GNMA
Certificates. The underlying securities will be held under a trust agreement by
FHLMC, FNMA or GNMA, each as trustee, or by another trustee named in the related
Prospectus Supplement. FHLMC, FNMA or GNMA will guaranty each stripped Agency
Security to the same extent as such entity guarantees the underlying securities
backing such stripped Agency Security, unless otherwise specified in the related
Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA or FHLMC. The characteristics of any such
mortgage pass-through certificates will be described in such Prospectus
Supplement. If so specified, a combination of different types of Agency
Securities may be held in a Trust Fund.
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PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates or participation certificates evidencing an undivided
interest in a Mortgage Pool or (b) collateralized mortgage obligations secured
by Mortgage Loans. Private Mortgage-Backed Securities may include stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain Mortgage Loans. Private Mortgage-Backed
Securities will have been publicly issued pursuant to a pooling and servicing
agreement, an indenture or similar agreement (a "PMBS Agreement"). Unless
otherwise specified in the related Prospectus Supplement, the seller/servicer of
the underlying Mortgage Loans will have entered into the PMBS Agreement with the
trustee under such PMBS Agreement (the "PMBS Trustee"). The PMBS Trustee or its
agent, or a custodian, will possess the Mortgage Loans underlying such Private
Mortgage-Backed Securities. Mortgage Loans underlying a Private Mortgage-Backed
Security will be serviced by a servicer (the "PMBS Servicer") directly or by one
or more subservicers who may be subject to the supervision of the PMBS Servicer.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the related Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Depositor. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Issuer will not have guaranteed any of the
assets conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although the Mortgage
Loans underlying the Private Mortgage-Backed Securities may be guaranteed by an
agency or instrumentality of the United States, the Private Mortgage-Backed
Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The Mortgage Loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment, fully
amortizing loans or graduated payment mortgage loans, Buydown Loans, adjustable
rate mortgage loans, or loans having balloon or other special payment features.
Such Mortgage Loans may be secured by single family property or by an assignment
of the proprietary lease or occupancy agreement relating to a specific dwelling
within a Cooperative and the related shares issued by such Cooperative.
Additional Information. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify, to the
extent known to the Depositor, (i) the aggregate approximate principal amount
and type of the Private Mortgage-Backed Securities to be included in the Trust
Fund, (ii) certain characteristics of the Mortgage Loans which comprise the
underlying assets for the Private Mortgage-Backed Securities including (A) the
payment features of such Mortgage Loans, (B) the approximate aggregate principal
balance of underlying Mortgage Loans insured or guaranteed by a governmental
entity, (C) the servicing fee or range of servicing fees with respect to the
Mortgage Loans and (D) the minimum and maximum stated maturities of the
underlying Mortgage Loans at origination, (iii) the maximum original
term-to-stated maturity of the Private Mortgage-Backed Securities, (iv) the
weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or
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certificate rate of the Private Mortgage-Backed Securities, (vi) the weighted
average pass-through or certificate rate of the Private Mortgage-Backed
Securities, (vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS
Issuer) and the PMBS Trustee for such Private Mortgage-Backed Securities, (viii)
certain characteristics of credit support, if any, such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties relating to
the Mortgage Loans underlying the Private Mortgage-Backed Securities or to such
Private Mortgage-Backed Securities themselves, (ix) the term on which the
underlying Mortgage Loans for such Private Mortgage-Backed Securities may, or
are required to, be purchased prior to their stated maturity or the stated
maturity of the Private Mortgage-Backed Securities and (x) the terms on which
Mortgage Loans may be substituted for those originally underlying the Private
Mortgage-Backed Securities.
SUBSTITUTION OF MORTGAGE ASSETS
Substitution of Mortgage Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Mortgage Asset or
in the event the documentation with respect to any Mortgage Asset is determined
by the Trustee or a custodian appointed by the Trustee to be incomplete. The
period during which such substitution will be permitted generally will be
indicated in the related Prospectus Supplement. The related Prospectus
Supplement will describe any other conditions upon which Mortgage Assets may be
substituted for Mortgage Assets initially included in the Trust Fund.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
substantially all of the net proceeds from the sale of each Series of
Certificates will be used by the Depositor for the purchase of the Mortgage
Assets represented by the Certificates of such Series or to reimburse amounts
previously used to effect such a purchase, the costs of carrying the related
Mortgage Assets until the sale of the Certificates and other expenses connected
with pooling the related Mortgage Assets and issuing the Certificates. The
Depositor expects to sell Certificates in Series from time to time, but the
timing and amount of offerings of Certificates will depend on a number of
factors, including, among others, the volume of Mortgage Assets acquired by the
Depositor, prevailing interest rates, availability of funds and general market
conditions.
THE DEPOSITOR
First Union Residential Securitization Transactions, Inc. (the "Depositor")
was incorporated in the State of North Carolina on February 27, 1996, as a
wholly-owned, limited purpose subsidiary of First Union National Bank, a
national banking association (a subsidiary of First Union Corporation, a North
Carolina corporation). The Depositor maintains its principal executive office at
301 South College Street, Charlotte, North Carolina 28202-0600. Its telephone
number is (704) 383-3624.
As described herein under "Mortgage Loan Program -- Representations by
Sellers; Repurchases," the only obligations, if any, of the Depositor with
respect to a Series of Certificates may be pursuant to certain limited
representations and warranties and limited undertakings to repurchase or
substitute Mortgage Loans under certain circumstances. The Depositor will have
no ongoing servicing obligations or responsibilities with respect to any
Mortgage Pool. The Depositor does not have, nor is it expected in the future to
have, any significant assets.
As specified in the related Prospectus Supplement, the Master Servicer with
respect to any Series of Certificates evidencing interests in Mortgage Loans may
be an affiliate of the Depositor. As described under "The Trust Fund -- The
Mortgage Loans -- General," "-- Agency Securities" and "-- Private Mortgage-
Backed Securities," the Depositor anticipates that it will acquire Mortgage
Loans, Agency Securities and Private Mortgage-Backed Securities in the open
market or in privately negotiated transactions, which may be through or from an
affiliate.
Neither the Depositor nor First Union Corporation nor any of its
affiliates, including First Union Capital Markets and First Union National Bank,
will insure or guarantee the Certificates of any Series.
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MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor, either
directly or through affiliates, from one or more Sellers, which may be
affiliates of the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans so acquired by the Depositor will have
been originated in accordance with the underwriting criteria specified below
under "-- Underwriting Standards." See the Prospectus Supplement for each Series
of Certificates for a more detailed description of the mortgage loan program of
the Sellers.
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will represent and warrant that all Mortgage Loans originated or acquired
by it and sold to the Depositor will have been underwritten in accordance with
standards consistent with those utilized by mortgage lenders generally during
the period of origination for similar types of loans. As to any Mortgage Loan
insured by the FHA or partially guaranteed by the VA, the Seller will represent
that it has complied with underwriting policies of the FHA or the VA, as the
case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the Mortgaged Property as collateral. In general, a prospective borrower
applying for a Mortgage Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history. In addition, an
employment verification may be requested from an independent source (typically
the borrower's employer) or, in lieu thereof, verbal verification is obtained if
the applicant has supplied a copy of a current pay stub along with personal tax
returns. In the case of Home Equity Loans, a pay stub is required of the
borrower and either independent employment verification, tax returns or verbal
confirmation of employment is obtained. Self-employed applicants typically
submit the last two years' employment history and business tax returns. Upon
receipt of the application package, a Seller usually conducts its own review of
the application package and may, in some instances, obtain additional
information concerning the prospective borrower prior to approving the loan.
Along with obtaining a credit report, such Seller may solicit a written
verification of the applicant's existing first mortgage balance, if any, and
payment history from the first mortgage lender, if appropriate. If such lender
does not respond in writing, verbal verification is attempted and the applicant
generally is required to submit the prior year's mortgage statements which
generally reflect a monthly payment history. In the case of those Home Equity
Loans which are subordinate to a first lien mortgage loan, the Seller also
obtains one of the following: (i) a credit report covering the preceding twelve
months, (ii) written or verbal verification of the applicant's first mortgage
balance, if any, (iii) written confirmation from a first mortgagee, if any, of
the prospective borrower's most recent twelve-month payment history, (iv)
canceled mortgage payment checks for the preceding twelve months, (v) a
combination of items from clauses (i) through (iv) above that establish a
payment history on the first mortgage for the prior twelve months, or (vi) if
the first mortgage is privately held, twelve cancelled payment checks and a copy
of the executed first mortgage note.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing (except in the case
of low balance Home Equity Loans). The appraiser is required to inspect the
property and verify that it is in good repair and that construction, if new, has
been completed. The appraisal is based on the market value of comparable homes,
the estimated rental income (if considered applicable by the appraiser) and the
cost of replacing the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan, and on any senior mortgage
loan, in the case of a proposed Home Equity Loan (generally determined on the
basis of the monthly payments due in the year of origination), and other
expenses related to the Mortgaged Property (such as property taxes and hazard
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insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. In connection with the origination of a
Mortgage Loan, the Seller evaluates each obligor's credit quality and assigns a
credit grade of A, B, C or D to each such borrower. Certain credit grades may
have sub-grades. The obligors of Home Equity Loans have generally been assigned
credit grades of A2 or lower. Mortgage Loans other than Home Equity Loans
generally have a credit grade of A. The underwriting standards applied by
Sellers, particularly with respect to the level of loan documentation and the
mortgagor's income and credit history, may be varied in appropriate cases where
factors such as low Loan-to-Value Ratios or other favorable credit exist.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans are secured by a mortgage on property located in any of the 50
states or the District of Columbia. Mortgage Loans may be secured by leases on
real property under guidelines that a Seller determines in its discretion are
acceptable to institutional mortgage investors. Generally, a loan will be
secured by a lease only if the use of leasehold estates as security for mortgage
loans is common and 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 five years beyond the maturity date of the related Mortgage Loan.
Unless otherwise provided in the applicable Prospectus Supplement, all
Mortgage Loans will 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"), or
an attorney's title opinion.
If so specified in the applicable Prospectus Supplement, Mortgage Loans may
be 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. Unless otherwise
specified in the applicable Prospectus Supplement, Subsidy Payments will be
placed in a custodial account ("Subsidy Account") by the 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.
If so specified in the applicable Prospectus Supplement, the Trust Fund may
contain Mortgage Loans subject to temporary Buydown 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 related Prospectus Supplement, placed in a
Buydown Fund by the Master Servicer.
If so specified in the applicable Prospectus Supplement, the Trust Fund may
include Mortgage Loans which are amortized over 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"). Unless
otherwise specified in the applicable Prospectus Supplement, 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.
Certain of the types of Mortgage Loans that may be included in a Trust Fund
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the mortgagor or obligor. These
types of Mortgage Loans are underwritten on the basis of a judgment that
mortgagors or obligors will have the ability to make monthly payments required
initially. In some instances, however, a mortgagor's or obligor's income may not
be sufficient to permit continued loan payments as such payments increase. These
types of Mortgage Loans may also be underwritten primarily upon the basis of
Loan-to-Value Ratios or other favorable credit factors.
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QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. Each Seller must be a
seller/servicer approved by either FNMA or FHLMC. Each Seller must be a
mortgagee approved by the FHA or an institution the deposit accounts in which
are insured by the Federal Deposit Insurance Corporation (the "FDIC").
REPRESENTATIONS BY SELLERS; REPURCHASES
Each Seller will have made representations and warranties in respect of the
Mortgage Loans sold by such Seller and evidenced by a Series of Certificates.
Such representations and warranties unless otherwise provided in the related
Prospectus Supplement generally include, among other things, that (i)
immediately prior to the transfer and assignment of the Mortgage Loans, the
seller had good title to, and was the sole owner of, each Mortgage Loan and
there had been no other sale or assignment thereof, (ii) as of the date of such
transfer, the Mortgage Loans are subject to no offsets, defenses or
counterclaims, (iii) each Mortgage Loan at the time it was made complied in all
material respects with applicable state and federal laws, including usury, equal
credit opportunity and disclosure laws, (iv) a lender's policy of title
insurance or an attorney's title opinion was issued on the date of the
origination of each Mortgage Loan and each such policy is valid and remains in
full force and effect, (v) as of the date of such transfer, each Mortgage
subject to the Agreement is a valid lien on the related Mortgaged Property
(subject only to (a) permitted senior liens on such Mortgaged Property and (b)
the exceptions to title set forth in the related title insurance policy or
attorney's opinion, which exceptions are generally acceptable to mortgage
lending companies, and such other exceptions to which similar properties are
commonly subject and which do not individually, or in the aggregate, materially
and adversely affect the benefits of the security intended to be provided by
such Mortgage), and to the best knowledge of the Seller, such property is free
of material damage and is in good repair, (vi) as of the date of such transfer,
no Mortgage Loan is more than 30 days delinquent in payment and there are no
delinquent tax or assessment liens against the related Mortgaged Property, and
(vii) with respect to each Mortgage Loan, if the Mortgaged Property is located
in an area identified by the Federal Emergency Management Agency as having
special flood hazards and subject in certain circumstances to the availability
of flood insurance under the National Flood Insurance Act of 1968, as amended,
such Mortgaged Property is covered by flood insurance.
If so specified in the related Prospectus Supplement, the representations
and warranties of a Seller in respect of a Mortgage Loan will be made not as of
the Cut-off Date but as of the date on which such Seller sold the Mortgage Loan
to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Certificates evidencing an interest in such
Mortgage Loan. Since the representations and warranties of a Seller do not
address events that may occur following the sale of a Mortgage Loan by such
Seller, its repurchase obligation described below will not arise if the relevant
event that would otherwise have given rise to such an obligation with respect to
a Mortgage Loan occurs after the date of sale of such Mortgage Loan by such
Seller to the Depositor or its affiliates. If the Master Servicer is also a
Seller of Mortgage Loans with respect to a particular Series, such
representations will be in addition to the representations and warranties made
by the Master Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the Seller,
will promptly notify the relevant Seller of any breach of any representation or
warranty made by it in respect of a Mortgage Loan which materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days after notice from the Master Servicer or the
Trustee, as the case may be, then such Seller will be obligated to repurchase
such Mortgage Loan from the Trust Fund at a price (the "Purchase Price") equal
to 100% of the Principal Balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month in which the Purchase
Price is to be distributed at the Mortgage Rate (less any
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unreimbursed Advances or amount payable as related servicing compensation if the
Seller is the Master Servicer with respect to such Mortgage Loan). If a REMIC
election is to be made with respect to a Trust Fund, unless otherwise provided
in the related Prospectus Supplement, holders of Subordinated Certificates or a
holder of the related residual certificate will be obligated to pay any
prohibited transaction tax which may arise in connection with any such
repurchase. If the Master Servicer advances any such payment, it will be
entitled to reimbursement from the assets of the related Trust Fund or from any
holder of the related residual certificate, unless otherwise specified in the
related Prospectus Supplement. See "Description of the Certificates -- General."
Except in those cases in which the Master Servicer is the Seller, the Master
Servicer will be required under the applicable Agreement to enforce this
obligation for the benefit of the Trustee and the holders of the Certificates,
following the practices it would employ in its good faith business judgment were
it the owner of such Mortgage Loan. This repurchase obligation will constitute
the sole remedy available to holders of Certificates or the Trustee for a breach
of representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master Servicer
is the Seller) will be obligated to purchase a Mortgage Loan if a Seller
defaults on its obligation to do so, and no assurance can be given that Sellers
will carry out their respective repurchase obligations with respect to Mortgage
Loans. See "The Trust Fund -- Substitution of Mortgage Assets."
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated
as of the related Cut-off Date, among the Depositor, the Master Servicer and the
Trustee for the benefit of the holders of the Certificates of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
Forms of Agreements are exhibits to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions that
may appear in each Agreement. The Prospectus Supplement for a Series of
Certificates will describe any provision of the Agreement relating to such
Series that materially differs from the description thereof contained in this
Prospectus. 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
Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of record of a Certificate of such Series addressed to First Union Residential
Securitization Transactions, Inc., 301 South College Street, Charlotte, North
Carolina 28288-0600.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each Series will be issued in either fully registered or book-entry form, in
the authorized denominations specified in the related Prospectus Supplement,
will evidence specified beneficial ownership interests in the related Trust Fund
created pursuant to each Agreement and will not be entitled to payments in
respect of the assets included in any other Trust Fund established by the
Depositor. The Certificates will not represent obligations of the Depositor or
any affiliate of the Depositor. The Mortgage Loans will not be insured or
guaranteed by any governmental entity or other person, unless otherwise
specified in the related Prospectus Supplement. Each Trust Fund will consist of,
to the extent provided in the Agreement, (i) the Mortgage Assets, that from time
to time are subject to the related Agreement (exclusive of any amounts specified
in the related Prospectus Supplement ("Retained Interest")); (ii) such assets as
from time to time are required to be deposited in the related Collection
Account, as defined below under "The Pooling and Servicing Agreement -- Payments
on Mortgage Loans; Deposits to Collection Account"; (iii) property which secured
a Mortgage Loan and which is acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure; and (iv) any Primary Mortgage
Insurance Policies, FHA Insurance and VA Guarantees, and any other insurance
policies or other forms of credit enhancement required to be maintained pursuant
to the Agreement. If so specified in the related Prospectus Supplement, a Trust
Fund may also include one or more of the following: reinvestment income on
payments received on the Mortgage Assets, a reserve fund, a mortgage pool
insurance policy, a special hazard
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insurance policy, a bankruptcy bond, one or more letters of credit, a surety
bond, guaranties or similar instruments or other agreements.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that are senior or subordinate in
right to payment to one or more other classes of Certificates of such Series.
Certain Series or classes of Certificates may be covered by insurance policies,
surety bonds or other forms of credit enhancement, in each case as described
herein and in the related Prospectus Supplement. One or more classes of
Certificates of a Series may be entitled to receive principal distributions,
with disproportionate, nominal or no interest distributions or to interest
distributions, with disproportionate, nominal or no principal distributions or
any combination thereof. Distributions on one or more classes of a Series of
Certificates may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related Trust Fund, or on a different basis, in each case as specified in the
related Prospectus Supplement. The timing, amounts, sequential order and
priority of payment of such distributions may vary among classes or over time as
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Distribution Date (i.e., monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the Prospectus Supplement) in
proportion to the percentages specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Certificates are
registered at the close of business on the dates specified in the related
Prospectus Supplement (each, a "Record Date"). Distributions will be made by
check or money order mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Certificates (the
"Certificate Register") or, if specified in the related Prospectus Supplement,
in the case of Certificates that are of a certain minimum denomination, upon
written request by the Certificateholder, by wire transfer or by such other
means as are described therein; provided, however, that the final distribution
in retirement of the Certificates will be made only upon presentation and
surrender of the Certificates at the office or agency of the Trustee or other
person specified in the notice to Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code of a class of Certificates entitled only to a specified
percentage of payments of either interest or principal or a notional amount of
either interest or principal on the related Mortgage Loans or a class of
Certificates entitled to receive payments of interest and principal on the
Mortgage Loans only after payments to other classes or after the occurrence of
certain specified events may result in "prohibited transactions" within the
meaning of ERISA and the Code. See "ERISA Considerations." Unless otherwise
specified in the related Prospectus Supplement, transfer of Certificates of such
a class will not be registered unless the transferee (i) represents that it is
not, and is not purchasing on behalf of, any such plan, account or arrangement
or (ii) provides an opinion of counsel satisfactory to the Trustee and the
Depositor that the purchase of Certificates of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Trustee, the Master Servicer or the Depositor to any obligation
or liability in addition to those undertaken in the Agreement.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as one or more "real estate mortgage investment
conduits" (each, a "REMIC") as defined in the Code. The
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related Prospectus Supplement will specify whether a REMIC election is to be
made. Alternatively, the Agreement for a Series may provide that a REMIC
election may be made at the discretion of the Depositor or the Seller and may be
made only if certain conditions are satisfied. As to any such Series, the terms
and provisions applicable to the making of a REMIC election, as well as any
material federal income tax consequences to Certificateholders not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the sole class of "residual interests" in the related
REMIC, as defined in the Code. All other classes of Certificates in such a
Series will constitute "regular interests" in the related REMIC, as defined in
the Code. As to each Series with respect to which a REMIC election is to be
made, holders of Subordinated Certificates or a holder of the related residual
certificate will be obligated to take all actions required in order to comply
with applicable laws and regulations and will be obligated to pay any prohibited
transaction taxes. The Master Servicer, unless otherwise specified in the
related Prospectus Supplement, will be entitled to reimbursement for any such
payment from the assets of the Trust Fund or from any holder of the related
residual certificate.
Unless otherwise specified in the related Prospectus Supplement, upon the
conversion of such Mortgage Loan from an adjustable interest rate to a fixed
interest rate, the Seller or its successor will be obligated to purchase such
related Mortgage Loan from the related Trust Fund.
DISTRIBUTIONS ON CERTIFICATES
General. In general, the method of determining the amount of distributions
on a particular Series of Certificates will depend on the type of credit
support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series. Distributions allocable to principal of and
interest on the Certificates will be made by the Trustee out of, and only to the
extent of, funds in the related Collection Account, including any funds
transferred from any Reserve Fund. As between Certificates of different classes
and as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled payments
of principal) and interest, distributions made on any Distribution Date will be
applied as specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, distributions to any class of
Certificates will be made pro rata to all Certificateholders of that class.
Available Distribution Amount. Unless otherwise specified in the related
Prospectus Supplement, all distributions on the Certificates of each Series on
each Distribution Date will be made from the Available Distribution Amount
described below, in accordance with the terms described in the related
Prospectus Supplement and specified in the Agreement. Unless otherwise provided
in the related Prospectus Supplement, the "Available Distribution Amount" for
each Distribution Date will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal (including Principal Prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Mortgage Loans in the related Trust Fund (including
Liquidation Proceeds and Insurance Proceeds and amounts drawn under letters
of credit or other credit enhancement instruments as permitted thereunder
and as specified in the related Agreement) received by the Servicer after
the Cut-off Date and on or prior to the day of the month of the related
Distribution Date specified in the related Prospectus Supplement (the
"Determination Date") except:
(a) all payments that were due on or before the Cut-off Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Mortgage Loan
purchased by the Depositor, any Sub-Servicer or any Seller pursuant to
the Agreement that were received after the prepayment period specified
in the related Prospectus Supplement and all related payments of
interest representing interest for any period after such prepayment
period;
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(c) all scheduled payments of principal and interest due on a date
or dates subsequent to the first day of the month of distribution;
(d) amounts received on particular Mortgage Loans as late payments
of principal or interest or other amounts required to be paid by
Mortgagors, but only to the extent of any unreimbursed advance in
respect thereof made by the Master Servicer (including the related
Sub-Servicers);
(e) amounts representing reimbursement, to the extent permitted by
the Agreement and as described under "-- Advances" below, for advances
made by the Master Servicer or Sub-Servicers that were deposited into
the Collection Account, and amounts representing reimbursement for
certain other losses and expenses incurred by the Master Servicer or the
Depositor and described below;
(f) that portion of each collection of interest on a particular
Mortgage Loan in such Trust Fund that represents credit enhancement fees
or servicing compensation payable to the Master Servicer or any
Sub-Servicer or Retained Interest that is to be retained from such
collection or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Mortgage Loans purchased
pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer or
Sub-Servicer as described under "-- Advances" below and deposited by it in
the Collection Account; and
(iii) if applicable, amounts withdrawn from a Reserve Fund.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Certificate Balance
(or, in the case of Certificates entitled only to distributions allocable to
interest, the aggregate notional amount) of each class of Certificates entitled
to interest at the Pass-Through Rate (which may be a fixed rate or rate
adjustable as specified in such Prospectus Supplement) from the date, and for
the periods, specified in such Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Certificates entitled to interest (other than a class of Certificates
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 related Prospectus Supplement until the
aggregate Certificate Balance of the Certificates of such class has been
distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate notional amount of such
Certificates is reduced to zero or for the period of time designated in the
related Prospectus Supplement. The original Certificate Balance of each
Certificate will equal the aggregate distributions allocable to principal to
which such Certificate is entitled. Unless otherwise specified in the related
Prospectus Supplement, distributions allocable to interest on each Certificate
that is not entitled to distributions allocable to principal will 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 used solely for convenience in expressing the
calculation of interest and for certain other purposes.
With respect to any class of Accrual Certificates, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Certificate Balance of
such class of Certificates on that Distribution Date. Unless otherwise specified
in the related Prospectus Supplement, distributions of interest on each class of
Accrual Certificates will commence only after the occurrence of the events
specified in such Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, prior to such time, the beneficial ownership
interest of such class of Accrual Certificates in the Trust Fund, as reflected
in the aggregate Certificate Balance of such class of Accrual Certificates, will
increase on each Distribution Date by the amount of interest that accrued on
such class of Accrual Certificates 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 Certificate Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the related
Prospectus Supplement, the aggregate "Certificate Balance" of any class of
Certificates entitled to distributions of principal will be the
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aggregate original Certificate Balance of such class of Certificates specified
in such Prospectus Supplement, reduced by all distributions reported to the
holders of such Certificates as allocable to principal and (i) in the case of
Accrual Certificates, if so specified in the related Prospectus Supplement,
increased by all interest accrued but not then distributable on such Accrual
Certificates and (ii) in the case of adjustable rate Certificates, if so
specified in the related Prospectus Supplement, subject to the effect of
negative amortization. The related 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. A class of interest-only Certificates will not be entitled to
distributions of principal and will have a notional principal balance on which
interest will accrue.
If so provided in the related 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 month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the periods
specified in such Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Certificateholders will have the effect
of accelerating the amortization of such Senior Certificates while increasing
the interests evidenced by the Subordinated Certificates in the Trust Fund.
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. See "Credit
Enhancement -- Subordination."
Unscheduled Distributions. To the extent specified in the related
Prospectus Supplement relating to a Series of Certificates which have less
frequent than monthly Distribution Dates, the Certificates will be subject to
receipt of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such unscheduled
distributions on the day and in the amount specified in the related Prospectus
Supplement if, due to substantial payments of principal (including Principal
Prepayments) on the Mortgage Assets, the Trustee or the Master Servicer
determines that the funds available or anticipated to be available from the
Collection Account and, if applicable, any Reserve Fund, may be insufficient to
make required distributions on the Certificates on such Distribution Date.
Unless otherwise specified in the related Prospectus Supplement, the amount of
any such unscheduled distribution that is allocable to principal will not exceed
the amount that would otherwise have been required to be distributed as
principal on the Certificates on the next Distribution Date. Unless otherwise
specified in the related Prospectus Supplement, all unscheduled distributions
will include interest at the applicable Pass-Through Rate (if any) on the amount
of the unscheduled distribution allocable to principal for the period and to the
date specified in such Prospectus Supplement. See "Yield and Prepayment
Considerations."
Unless otherwise specified in the related Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis.
Notice of any unscheduled distribution will be given by the Trustee prior
to the date of such distribution.
ADVANCES
Generally, the Master Servicer will be required to advance on or before
each Distribution Date (from its own funds, funds advanced by Sub-Servicers or
funds held in the Collection Account for future distributions to the holders of
such Certificates), an amount equal to the aggregate of payments of principal
and interest (or, in the case of Home Equity Loans, payments of interest only)
that were delinquent on the related Determination Date, subject to the Master
Servicer's determination that such advances will be recoverable out of late
payments by Mortgagors, Liquidation Proceeds, Insurance Proceeds or otherwise,
and net of applicable servicing compensation. In the case of Cooperative Loans,
the Master Servicer also will be required to advance any unpaid maintenance fees
and other charges under the related proprietary leases as specified in the
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related Prospectus Supplement. The Prospectus Supplement for a Series of
Certificates will specify the nature and timing of amounts to be advanced to the
holders of such Certificates and the manner in which Advances may be recovered
by the Master Servicer. Funds so advanced are reimbursable to the Master
Servicer to the extent permitted by the related Agreement. The Master Servicer's
obligation to make Advances will not guarantee or insure against losses to
holders of the Certificates.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in an applicable Prospectus Supplement, the Master
Servicer or the Trustee will furnish to each Certificateholder of record of the
related Series a statement setting forth, to the extent applicable to such
Series of Certificates, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, prepayment penalties
included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the outstanding Certificate Balance or notional amount of each
class of the related Series after giving effect to the distribution of
principal on such Distribution Date;
(v) the related amount of the servicing compensation retained or
withdrawn from the Collection Account by the Master Servicer;
(vi) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) and (B) in
foreclosure as of the close of business on the last day of the calendar
month preceding such Distribution Date;
(vii) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(viii) if applicable, the amount remaining in any Reserve Fund at the
close of business on the Distribution Date;
(ix) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date; and
(x) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Certificateholders for any Series of Certificates may include additional or
other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other customary information as may be deemed necessary or desirable
for Certificateholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, a class of
Certificates may be book-entry Certificates (the "Book-Entry Certificates").
Persons acquiring beneficial ownership interests in such Certificates
("Certificate Owners") will hold their Certificates through the Depository Trust
Company ("DTC") in the United States, or Cedel Bank, societe anonyme ("CEDEL")
or the Euroclear System
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("Euroclear") in Europe if they are participants of such systems, or indirectly
through organizations which are participants in such systems (each, a
"Participant"). The Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate principal balance of such class of
Certificates and will initially be registered in the name of Cede & Co.
("Cede"), the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in CEDEL's
and Euroclear's names on the books of their respective depositaries, which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank N.A. will act as depositary
for CEDEL, and Morgan Guaranty Trust Company of New York ("Morgan") will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively, the "European Depositaries"). Except as described
below, no person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such Certificate
(a "Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of such Certificates
will be Cede, as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners are
only permitted to exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners of a class of Book-Entry Certificates will receive all
distributions of principal of, and interest on, such Certificates from the
Trustee through DTC and DTC participants. While such Certificates are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among participants on
whose behalf it acts with respect to such class of Certificates and is required
to receive and transmit distributions of principal of, and interest on, such
Certificates. Participants and indirect participants with whom Certificate
Owners have accounts with respect to such Certificates are similarly required to
make book-entry transfers and receive and transmit such distributions on behalf
of their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in such Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of such Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer such
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of a class of Book-Entry Certificates will be
executed through DTC, and the accounts of the respective Participants at DTC
will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "Certain Federal Income Tax Consequences --
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Non-U.S. Persons" and "-- Information Reporting and Backup Withholding" herein
and "Global Clearance, Settlement and Tax Documentation Procedures -- Certain
U.S. Federal Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time).
The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium, office of
Morgan (the "Euroclear Operator"), under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not the Cooperative. The Cooperative establishes policy for Euroclear
on behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through CEDEL or Euroclear will be credited to cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Certain Federal Income Tax
Consequences -- Non-U.S. Persons" and " -- Information Reporting and Backup
Withholding" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
With respect to each class of Book-Entry Certificates, DTC will advise the
Trustee that, unless and until Definitive Certificates are issued, DTC will take
any action permitted to be taken by the holders of such Book-Entry Certificates
under the related Agreement only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates are credited,
to the extent that such actions are taken on behalf of Financial Intermediaries
whose holdings include such Book-Entry Certificates. CEDEL or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a Certificateholder under such Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Certificates of a class of Book-Entry
Certificates which conflict with actions taken with respect to other
Certificates of such class.
Definitive Certificates will be issued to beneficial owners of Book-Entry
Certificates, or their nominees, rather than to DTC, only if (a) DTC or the
Depositor advises the related Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to such Book-Entry Certificates and the Depositor or
such Trustee is unable to locate a qualified
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successor, (b) the Depositor, at its sole option, with the consent of such
Trustee, elects to terminate a book-entry system through DTC, or (c) after the
occurrence of an Event of Default (as defined in the related Prospectus
Supplement), beneficial owners having Percentage Interests aggregating not less
than 50% of the aggregate current principal amount of such Book-Entry
Certificates advise the Trustee and DTC through the Financial Intermediaries and
the DTC Participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee for such a Series will be required to notify
all beneficial owners of the occurrence of such event and the availability
through DTC of Definitive Certificates. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Certificates and
instructions for re-registration, the Trustee will issue Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders of such Series under the related
Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Depositor, 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 any class of Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related Prospectus Supplement,
the subordination of one or more classes of the Certificates of such Series, the
establishment of one or more reserve funds, the use of a cross-support feature,
use of a mortgage pool insurance policy, bankruptcy bond, special hazard
insurance policy, surety bond or letters of credit described herein and in the
related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the related Prospectus Supplement, any credit enhancement
will not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, Certificateholders will bear
their allocable share of deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, protection afforded
to holders of one or more classes of Certificates of a Series (the "Subordinated
Certificates") by means of the subordination feature will be accomplished by the
preferential right of holders of one or more other classes of such Series (the
"Senior Certificates") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise would
have been payable to holders of Subordinated Certificates under the
circumstances and to the extent specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Loans and losses on defaulted Mortgage Loans
will be borne first by the various classes of Subordinated Certificates and
thereafter by the various classes of Senior Certificates, in each case under the
circumstances and subject to the limitations specified in such related
Prospectus Supplement. The aggregate distributions in respect of delinquent
payments on the Mortgage Loans over the lives of the Certificates or at any
time, the aggregate losses in respect of defaulted Mortgage Loans which must be
borne by the Subordinated Certificates by virtue of subordination and the amount
of the distributions otherwise distributable to the Subordinated
Certificateholders that will be distributable to Senior Certificateholders on
any Distribution Date may be limited as
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specified in the related Prospectus Supplement. If aggregate distributions in
respect of delinquent payments on the Mortgage Loans or aggregate losses in
respect of such Mortgage Loans were to exceed an amount specified in the related
Prospectus Supplement, holders of Senior Certificates would experience losses on
the Certificates.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may instead be
deposited into one or more Reserve Funds established with the Trustee. If so
specified in the related Prospectus Supplement, such deposits may be made on
each Distribution Date, for specified periods or until the balance in the
Reserve Funds has reached a specified amount and, following payments from the
Reserve Fund to holders of Senior Certificates or otherwise, thereafter to the
extent necessary to restore the balance in the Reserve Fund to required levels,
in each case as specified in the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, amounts on deposit in the Reserve Fund may
be released to the holders of the class of Certificates specified in such
Prospectus Supplement at the times and under the circumstances specified in such
Prospectus Supplement.
If specified in the related Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Certificates, payments to holders of Senior
Certificates on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the related Prospectus Supplement.
MORTGAGE POOL INSURANCE POLICIES
If specified in the related Prospectus Supplement relating to a Mortgage
Pool, a separate mortgage pool insurance policy ("Mortgage Pool Insurance
Policy") will be obtained for the Mortgage Pool and issued by the insurer (the
"Pool Insurer") named in such Prospectus Supplement. Each Mortgage Pool
Insurance Policy will, subject to the limitations described below, cover loss by
reason of default in payment on Mortgage Loans in the Mortgage Pool in an amount
equal to a percentage specified in such Prospectus Supplement of the aggregate
principal balance of such Mortgage Loans on the Cut-off Date which are not
covered as to their entire outstanding principal balances by Primary Mortgage
Insurance Policies. As more fully described below, the Servicer will present
claims thereunder to the Pool Insurer on behalf of itself, the Trustee and the
holders of the Certificates. The Mortgage Pool Insurance Policies, however, are
not blanket policies against loss, since claims thereunder may be made only
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Pool Insurance Policies will not
cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool Insurance Policy will provide that no claims may be validly
presented unless (i) any required Primary Mortgage Insurance Policy is in effect
for the defaulted Mortgage Loan and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Mortgaged Property has been kept
in force and real estate taxes and other protection and preservation expenses
have been paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
property securing the defaulted Mortgage Loan at a price equal to the principal
balance thereof plus accrued and unpaid interest at the Mortgage Rate to the
date of purchase and certain expenses incurred by the Master Servicer on behalf
of the Trustee and Certificateholders or (b) to pay the amount by which the sum
of the principal balance of the defaulted
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Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under the related Primary
Mortgage Insurance Policy. If any property securing a defaulted Mortgage Loan is
damaged and proceeds, if any, from the related hazard insurance policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under the Mortgage
Pool Insurance Policy, the Master Servicer will not be required to expend its
own funds to restore the damaged property unless it determines that (i) such
restoration will increase the proceeds to Certificateholders on liquidation of
the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) such expenses will be recoverable by it through proceeds of the sale of
the property or proceeds of the related Mortgage Pool Insurance Policy or any
related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, no
Mortgage Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described above and, in such
event, might give rise to an obligation on the part of such Seller to purchase
the defaulted Mortgage Loan if the breach cannot be cured by such Seller. No
Mortgage Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Mortgage Loan occurring
when the servicer of such Mortgage Loan, at the time of default or thereafter,
was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Mortgage Pool Insurance Policy will be
reduced over the life of the related Certificates by the aggregate dollar amount
of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of the claim,
unless otherwise specified in the related Prospectus Supplement. Accordingly, if
aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by the Certificateholders.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage or as
otherwise specified in the related Prospectus Supplement) not insured against
under the standard form of hazard insurance policy for the respective states in
which the Mortgaged Properties are located or under a flood insurance policy if
the Mortgaged Property is located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "The Pooling and Servicing Agreement -- Hazard
Insurance." Each Special Hazard Insurance Policy will not cover losses
occasioned by fraud or conversion by the Trustee or Master Servicer, war,
insurrection, civil war, certain governmental action, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear or
chemical reaction, flood (if the Mortgaged Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will be
specified in the related Prospectus Supplement. Each Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan have been kept in
force and other protection and preservation expenses have been paid.
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Subject to the foregoing limitations, and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will provide
that where there has been damage to property securing a foreclosed Mortgage Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if any,
maintained by the Mortgagor or the Master Servicer, the Special Hazard Insurer
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the Special Hazard Insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Master
Servicer with respect to such property. If the unpaid principal balance of a
Mortgage Loan plus accrued interest and certain expenses is paid by the Special
Hazard Insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property will
further reduce coverage by such amount. So long as a Mortgage Pool Insurance
Policy remains in effect, the payment by the Special Hazard Insurer of the cost
of repair or of the unpaid principal balance of the related Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds paid to Certificateholders, but will affect the relative amounts of
coverage remaining under the related Special Hazard Insurance Policy and
Mortgage Pool Insurance Policy.
To the extent and in the manner specified in an applicable Prospectus
Supplement, the Master Servicer may deposit cash, an irrevocable letter of
credit or any other instrument acceptable to each nationally recognized rating
agency rating the Certificates of the related Series in a special trust account
to provide protection in lieu of or in addition to that provided by a Special
Hazard Insurance Policy. The amount of any Special Hazard Insurance Policy or of
the deposit to the special trust account relating to such Certificates in lieu
thereof may be reduced so long as any such reduction will not result in a
downgrading of the rating of such Certificates by any such rating agency.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a bankruptcy bond
("Bankruptcy Bond") for proceedings under the federal Bankruptcy Code will be
issued by an insurer named in such Prospectus Supplement. Each Bankruptcy Bond
will cover, to the extent specified in the related Prospectus Supplement,
certain losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal and interest on a Mortgage Loan or a reduction by such
court of the principal amount of a Mortgage Loan and will cover certain unpaid
interest on the amount of such a principal reduction from the date of the filing
of a bankruptcy petition. The required amount of coverage under each Bankruptcy
Bond will be set forth in the related Prospectus Supplement. Coverage under a
Bankruptcy Bond may be cancelled or reduced if such cancellation or reduction
would not adversely affect the then current rating or ratings of the related
Certificates. See "Certain Legal Aspects of the Mortgage
Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders."
To the extent specified in an applicable Prospectus Supplement, the Seller
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the deposit to the special trust account relating to such
Certificates in lieu thereof may be reduced so long as any such reduction will
not result in a downgrading of the rating of such Certificates by any such
rating agency.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of one
or more Reserve Funds for such Series. The related Prospectus Supplement will
specify whether or not such Reserve Funds will be included in the Trust Fund for
such Series.
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The Reserve Fund for a Series will be funded (i) by the deposit therein of
cash, U.S. Treasury securities, 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
related Prospectus Supplement, (ii) by the deposit therein from time to time of
certain amounts, as specified in the related Prospectus Supplement to which the
Subordinated Certificateholders, if any, would otherwise be entitled or (iii) in
such other manner as may be specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in Permitted
Investments which, unless otherwise specified in the related Prospectus
Supplement, will include obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks and certain repurchase
agreements of United States government securities with eligible commercial
banks. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Unless otherwise specified in the related Prospectus
Supplement, any instrument deposited therein will name the Trustee, in its
capacity as trustee for the holders of the Certificates, as beneficiary and will
be issued by an entity acceptable to each rating agency that rates the
Certificates. Additional information with respect to such instruments deposited
in the Reserve Funds will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Certificates. In such case, credit
support may be provided by a cross support feature which requires that
distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The related
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross support feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related Trust Funds. If applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit support relates and the manner of
determining the amount of the coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
LIMITED GUARANTEE
If 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. If specified in the related
Prospectus Supplement, a Limited Guarantee may be provided by an affiliate or
affiliates of the Depositor.
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 related
Prospectus Supplement.
SURETY BONDS
If specified in the Prospectus Supplement relating to a Series of
Certificates, credit support with respect to one or more Classes of Certificates
of a Series may be provided by the issuance of a Surety Bond issued by a
financial guarantee insurance company specified in the applicable Prospectus
Supplement. The coverage,
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amount and frequency of any reduction in coverage provided by a Surety Bond will
be set forth in the related Prospectus Supplement.
OVERCOLLATERALIZATION
If specified in the related Prospectus Supplement, credit support may
consist of overcollateralization whereby the aggregate principal amount of the
Mortgage Assets, including any Subsequent Mortgage Assets, exceeds the aggregate
Certificate Balance of the Certificates. Such overcollateralization may exist on
the Closing Date or develop thereafter as a result of the application of certain
interest collections, in excess of amounts necessary to pay the Pass-Through
Rate on the Certificates, received in connection with the Mortgage Assets,
including any Subsequent Mortgage Assets. The existence of any
overcollateralization and the manner, if any, by which it increases or
decreases, will be set forth in the related Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates will
be affected primarily by the amount and timing of principal payments received on
or in respect of the Mortgage Assets included in the related Trust Fund. The
original terms to maturity of the Mortgage Loans in a given Mortgage Pool will
vary depending upon the type of Mortgage Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Mortgage Loans in the related Mortgage Pool. Unless otherwise specified in
the related Prospectus Supplement, Mortgage Loans may be prepaid without penalty
in full or in part at any time. The prepayment experience on the Mortgage Loans
in a Mortgage Pool will affect the life of the related Series of Certificates.
A number of factors, including, but not limited to, homeowner mobility,
economic conditions, the presence and enforceability of due-on-sale clauses,
mortgage market interest rates and the availability of mortgage funds, may
affect prepayment experience of Mortgage Loans.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Mortgage Loans will contain due-on-sale provisions permitting the
mortgagee to accelerate the maturity of the loan upon sale or certain transfers
by the mortgagor of the underlying Mortgaged Property. Mortgage Loans insured by
the FHA, and Mortgage Loans partially guaranteed by the VA, are assumable with
the consent of the FHA and the VA, respectively. Thus, the rate of prepayments
on such Mortgage Loans may be lower than that of conventional Mortgage Loans
bearing comparable interest rates. Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, the Master Servicer
will not take any enforcement action that would impair or threaten to impair any
recovery under any related insurance policy. See "The Pooling and Servicing
Agreement -- Collection Procedures" and "Certain Legal Aspects of the Mortgage
Loans" for a description of certain provisions of each Agreement and certain
legal developments that may affect the prepayment experience on the Mortgage
Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage Loan so prepaid only for the
number of days in the month actually elapsed up to the date of the prepayment
rather than for a full month. If so specified in the related Prospectus
Supplement, the effect of prepayments in full will be to reduce the amount of
interest passed through in the following month to
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holders of Certificates because interest on the principal amount of any Mortgage
Loan so prepaid will be paid only to the date of prepayment. Partial prepayments
in a given month may be applied to the outstanding principal balances of the
Mortgage Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce the
amount of interest passed through in such month. Unless otherwise specified in
the related Prospectus Supplement, both full and partial prepayments will not be
passed through until the month following receipt.
The effective yield to Certificateholders will be slightly lower than the
yield otherwise produced by the applicable Pass-Through Rate and purchase price
because while interest will accrue on each Mortgage Loan from the first day of
the month (unless otherwise provided in the related Prospectus Supplement), the
distribution of such interest will not be made earlier than the Distribution
Date in the month following the month of accrual.
Under certain circumstances, the Master Servicer or the holder(s) of the
residual interest(s) in a REMIC may have the option to purchase the assets of a
Trust Fund thereby effecting earlier retirement of the related Series of
Certificates. See "The Pooling and Servicing Agreement -- Termination; Optional
Termination."
If so specified in the related Prospectus Supplement, upon notification
from a Mortgagor of such Mortgagor's intent to convert from an adjustable
interest rate to a fixed interest rate, and prior to the conversion of such
Mortgage Loan, the Seller will be obligated to purchase such related Mortgage
Loan. Any such purchase of a Mortgage Loan would have the effect of a prepayment
in full of the Mortgage Loan.
From time to time, a Seller or its affiliates may solicit the refinancing
of loans (including the Mortgage Loans) by offering a new loan to the borrower.
Any such refinancing of a Mortgage Loan would have the effect of a prepayment in
full of the Mortgage Loan.
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Assets at any time or
over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Certificates.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. Unless otherwise specified in the
related Prospectus Supplement, at the time of issuance of the Certificates of a
Series, the Depositor will cause the Mortgage Loans comprising the related Trust
Fund to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Mortgage
Loans after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the related
Prospectus Supplement. The Trustee will, concurrently with such assignment,
deliver the Certificates to the Depositor in exchange for the Mortgage Loans.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit to
the related Agreement. Such schedule will include information as to the
outstanding principal balance of each Mortgage Loan after application of
payments due on the Cut-off Date, as well as information regarding the Mortgage
Rate, the current scheduled monthly payment of principal and interest, the
maturity of the loan, the Loan-to-Value Ratio (or, in the case of Home Equity
Loans, the Combined Loan-to-Value Ratio) at origination and certain other
information. If specified in the related Prospectus Supplement, the
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Depositor will deliver or cause to be delivered to the Trustee loans at a
predetermined price for inclusion in the Trust Fund within three months after
the issuance of the Certificates. The related Prospectus Supplement for the
Trust Fund will specify whether, and the terms, conditions and manner under
which Subsequent Mortgage Assets will be sold to the Trust Fund within such
three month period.
In addition, the Depositor will deliver or cause to be delivered to the
Trustee (or to the custodian hereinafter referred to) as to each Mortgage Loan,
among other things, (i) the mortgage note (the "Mortgage Note") endorsed without
recourse in blank or to the order of the Trustee, (ii) the mortgage, deed of
trust or similar instrument (a "Mortgage") with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office,
in which case the Depositor will unless otherwise specified in the related
Prospectus Supplement, deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered to
such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form, and (iv) such other security
documents as may be specified in the related Prospectus Supplement or the
related Agreement. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will promptly cause the assignments of the related
loans to be recorded in the appropriate public office for real property records,
except in states in which, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in such loans
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the originator of such loans.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
cooperative note endorsed without recourse in blank or to the order of the
Trustee, the original security agreement, the proprietary lease or occupancy
agreement, the recognition agreement, an executed financing agreement and the
relevant stock certificate, related blank stock powers and any other document
specified in the related Prospectus Supplement. The Depositor will cause to be
filed in the appropriate office an assignment and a financing statement
evidencing the Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer will
notify the related Seller. If the Seller cannot cure the omission or defect
within the time period specified in the related Prospectus Supplement after
receipt of such notice, the Seller will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price or, if so specified in the
related Prospectus Supplement, replace such Mortgage Loan with another mortgage
loan that meets certain requirements set forth therein. There can be no
assurance that a Seller will fulfill this purchase obligation. Although the
Master Servicer may be obligated to enforce such obligation to the extent
described above under "Mortgage Loan Program -- Representations by Sellers;
Repurchases," neither the Master Servicer nor the Depositor will be obligated to
purchase such Mortgage Loan if the Seller defaults on its purchase obligation,
unless such breach also constitutes a breach of the representations or
warranties of the Seller or the Depositor, as the case may be. Unless otherwise
specified in the related Prospectus Supplement, this purchase obligation
constitutes the sole remedy available to the Certificateholders or the Trustee
for omission of, or a material defect in, a constituent document.
A custodian may maintain possession of, and, if applicable, review the
documents relating to, the Mortgage Loans as agent of the Trustee pursuant
either to the terms of an Agreement or a separate custodial agreement.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, unless the related Prospectus Supplement
otherwise provides, no purchase of a Mortgage Loan will be made if such purchase
would result in a prohibited transaction tax under the Code.
Assignment of Agency Securities. The Depositor will cause the Agency
Securities to be registered in the name of the Trustee or its nominee, and the
Trustee concurrently will execute, countersign and deliver the
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Certificates. Each Agency Security will be identified in a schedule appearing as
an exhibit to the Agreement, which will specify as to each Agency Security the
original principal amount and outstanding principal balance as of the Cut-off
Date, the annual pass-through rate (if any) and the maturity date.
Assignment of Private Mortgage-Backed Securities. The Depositor will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See "The Trust
Fund -- Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date and certain other pertinent information for each Private
Mortgage-Backed Security conveyed to the Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Mortgage Assets in the
Trust Fund (the "Collection Account"), which unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution the short-term debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of which) are rated in the highest short-term
rating category by the nationally recognized statistical rating organization(s)
that rated one or more classes of the related Series of Certificates (each, a
"Rating Agency"), (ii) an account or accounts the deposits in which are fully
insured by either the BIF or SAIF, (iii) an account or accounts the deposits in
which are insured by the BIF or SAIF (to the limits established by the FDIC),
and the uninsured deposits in which are otherwise secured such that, as
evidenced by an opinion of counsel, the Certificateholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the depository
institution with which the Collection Account is maintained, (iv) a trust
account or accounts maintained with the trust department of a federal or a state
chartered depository institution or trust company, acting in a fiduciary
capacity or (v) an account or accounts otherwise acceptable to each Rating
Agency. The Collection Account may be maintained at FUNB so long as it maintains
a long-term unsecured rating of at least A by Standard & Poor's Ratings Services
and A2 by Moody's Investor's Service, Inc., and a short-term rating of at least
A-1 by Standard & Poor's Ratings Services and P-1 by Moody's Investor's Service,
Inc. Investments in which amounts in the Collection Account may be invested are
limited to United States government securities and other high-quality
investments ("Eligible Investments"). A Collection Account may be maintained as
an interest bearing account or the funds held therein may be invested pending
each succeeding Distribution Date in Eligible Investments. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or its
designee will be entitled to receive any such interest or other income earned on
funds in the Collection Account as additional compensation and will be obligated
to deposit in the Collection Account the amount of any loss immediately as
realized. The Collection Account may be maintained with the Master Servicer or
with a depository institution that is an affiliate of the Master Servicer,
provided it meets the standards set forth above.
The Master Servicer will deposit or cause to be deposited in the Collection
Account for each Trust Fund on a daily basis, to the extent applicable and
unless otherwise specified in the related Prospectus Supplement and provided in
the Agreement, the following payments and collections received or advances made
by or on behalf of it subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date and exclusive of any amounts representing Retained
Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement,
prepayment penalties, on the Mortgage Loans;
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(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) (a) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured Expenses") incurred,
and unreimbursed advances made, if any, by the Servicer or any
Sub-Servicer) of the hazard insurance policies and any Primary Mortgage
Insurance Policies, to the extent such proceeds are not applied to the
restoration of the property or released to the Mortgagor in accordance with
the Master Servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and (b) "Net Liquidation Proceeds" consisting of all other cash
amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans, by foreclosure or otherwise ("Liquidation
Proceeds") net of unreimbursed expenses incurred in connection with
liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
advances made, if any, by the Master Servicer or any Sub-Servicer, and (c)
any net proceeds received on a monthly basis with respect to any properties
acquired on behalf of the Certificateholders by foreclosure or deed in lieu
of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased by any Seller as described under "Mortgage Loan
Program -- Representations by Sellers; Repurchases" or " -- Assignment of
Mortgage Assets" above and all proceeds of any Mortgage Loan repurchased as
described under " -- Termination; Optional Termination" below;
(v) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described under " -- Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Collection Account and, to the extent
specified in the related Prospectus Supplement, any payments required to be
made by the Master Servicer in connection with prepayment interest
shortfalls; and
(vii) all other amounts required to be deposited in the Collection
Account pursuant to the Agreement.
The Master Servicer (or the Depositor, as applicable) may from time to time
direct the institution which maintains the Collection Account, unless otherwise
specified in the related Prospectus Supplement, to withdraw funds from the
Collection Account for the following purposes:
(i) to pay to the Master Servicer the servicing fees described in the
related Prospectus Supplement, the Master Servicing Fee and, as additional
servicing compensation, earnings on or investment income with respect to
funds in the amounts in the Collection Account credited thereto;
(ii) to reimburse the Master Servicer for Advances;
(iii) to reimburse the Master Servicer for any Advances previously
made which the Master Servicer has determined to be nonrecoverable;
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid Master Servicing Fees
and unreimbursed out-of-pocket costs and expenses incurred by the Master
Servicer in the performance of its servicing obligations, such right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which such advances were made;
(vi) to pay to the Master Servicer, with respect to each Mortgage Loan
or property acquired in respect thereof that has been purchased by the
Master Servicer pursuant to the Agreement, all amounts received thereon and
not taken into account in determining the related Principal Balance of such
repurchased Mortgage Loan;
(vii) to reimburse the Master Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Agreement;
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(viii) to withdraw any amount deposited in the Collection Account and
not required to be deposited therein; and
(ix) to clear and terminate the Collection Account upon termination of
the Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the Business Day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Collection
Account the amount of Available Distribution Amount, to the extent on deposit,
for deposit in an account maintained by the Trustee for the related Series of
Certificates.
PRE-FUNDING ACCOUNT
If so specified in the Prospectus Supplement, the related Agreement may
provide for the transfer by the Depositor of additional Mortgage Assets (the
"Subsequent Mortgage Assets") to the related Trust Fund after the Closing Date
for the related Certificates. Such Subsequent Mortgage Assets will be required
to conform to the requirements set forth in the related Agreement providing for
such transfer. As specified in the related Prospectus Supplement, such transfer
may be funded by the establishment of a Pre-Funding Account (a "Pre-Funding
Account"). If a Pre-Funding Account is established, all or a portion of the
proceeds of the sale of one or more classes of Certificates of the related
Series will be deposited in such account (the "Pre-Funded Amount") to be
released as additional Mortgage Assets are transferred to the Trust Fund. The
related Agreement will establish a period of time (which will be no longer than
three months following the related Closing Date) within which such transfers
must be made (the "Funding Period"). Unless otherwise specified in the related
Prospectus Supplement, amounts set aside to fund such transfers (whether in a
Pre-Funding Account or otherwise) and not so applied within the Funding Period
will be deemed to be principal prepayments and applied in the manner set forth
in the Prospectus Supplement.
COLLECTION PROCEDURES
The Servicer, directly or through one or more Sub-Servicers, will make
reasonable efforts to collect all payments called for under the Mortgage Loans
and will, consistent with each Agreement and any Mortgage Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection procedures
as are customary with respect to mortgage loans that are comparable to the
Mortgage Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Mortgage Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or
alternative arrangements, if applicable, arrange with a Mortgagor a schedule for
the liquidation of delinquencies in a manner that is determined by the Master
Servicer to be customary with respect to comparable mortgage loans. Such
schedules for liquidation of delinquencies for Mortgage Loans other than Home
Equity Loans generally do not exceed 180 days. To the extent the Master Servicer
is obligated to make or to cause to be made Advances, such obligation will
remain during the period of any such arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a Mortgage Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent it
has knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Mortgage Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law; provided, however, the Master Servicer will not
take any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. If these conditions are not met or if the
Master Servicer reasonably believes it is unable under applicable law to enforce
such due-on-sale clause, or if such Mortgage Loan is insured by the FHA or
partially guaranteed by the VA, the Master Servicer will enter into or cause to
be entered into an assumption agreement or a substitution agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Mortgage Loan.
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Any fee collected by or on behalf of the Master Servicer for entering into
an assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of the Mortgage
Loans -- Due-on-Sale Clauses." In connection with any such assumption, the terms
of the related Mortgage Loan may not be changed.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each Mortgage
Loan to maintain a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary for the type of Mortgaged Property in the state in which such
Mortgaged Property is located. Such coverage will be in an amount not less than
the replacement value of the improvements securing such Mortgage Loan or the
principal balance owing on such Mortgage Loan, whichever is less. All amounts
collected by the Master Servicer under any hazard policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released to
the mortgagor or obligor in accordance with the Master Servicer's normal
servicing procedures) will be deposited in the related Collection Account. In
the event that the Master Servicer maintains a blanket policy insuring against
hazard losses on all the Mortgage Loans comprising part of a Trust Fund, it will
conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required to deposit from its
own funds into the related Collection Account the amounts which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Mortgage Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans may have been
underwritten by different insurers under different state laws in accordance with
different applicable forms and therefore may not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all inclusive. If
the Mortgaged Property securing a Mortgage Loan is located in a federally
designated special flood area, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance, to the extent such insurance is
available.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since the amount of hazard insurance the
Master Servicer may cause to be maintained on the improvements securing the
Mortgage Loans declines as the principal balances owing thereon decrease, and
since improved real estate generally has appreciated in value over time in the
past, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special hazard
insurance policy will be obtained to insure against certain of the uninsured
risks described above. See "Credit Enhancement -- Special Hazard Insurance
Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
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maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by other
credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain or
cause to be maintained, as the case may be, in full force and effect, to the
extent specified in the related Prospectus Supplement, a Primary Mortgage
Insurance Policy with regard to each Mortgage Loan for which such coverage is
required. Primary Mortgage Insurance Policies are not required for Home Equity
Loans. The Master Servicer will not cancel or refuse to renew any such Primary
Mortgage Insurance Policy in effect at the time of the initial issuance of a
Series of Certificates that is required to be kept in force under the applicable
Agreement unless the replacement Primary Mortgage Insurance Policy for such
cancelled or nonrenewed policy is maintained with an insurer whose claims-paying
ability is sufficient to maintain the current rating of the classes of
Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Mortgage Insurance Policy (the "Primary Insurer"), (iv) claim
payments previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Mortgage Insurance Policies
will not insure against, and exclude from coverage, a loss sustained by reason
of a default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Mortgage Loan; (ii) failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (iv) the related Servicer not
being approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Mortgage Loan, the insured will be required to (i)
advance or discharge (a) all hazard insurance policy premiums and (b) as
necessary and approved in advance by the Primary Insurer, (1) real estate
property taxes, (2) all expenses required to maintain the related Mortgaged
Property in at least as good a condition as existed at the effective date of
such Primary Mortgage Insurance Policy, ordinary wear and tear excepted, (3)
Mortgaged Property sales expenses, (4) any outstanding liens (as defined in such
Primary Mortgage Insurance Policy) on the Mortgaged Property and (5) foreclosure
costs, including court costs and reasonable attorneys' fees; (ii) in the event
of any physical loss or damage to the Mortgaged Property, have the Mortgaged
Property restored and repaired to at least as good a condition as existed at the
effective date of such Primary Mortgage Insurance Policy, ordinary wear and tear
excepted; and (iii) tender to the Primary Insurer good and merchantable title to
and possession of the Mortgaged Property.
The Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the insurer under each Primary
Mortgage Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Mortgage Insurance Policy and, when the
Mortgaged Property has not been restored, the hazard insurance policy, are to be
deposited in the Collection Account, subject to withdrawal as heretofore
described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property to a condition
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sufficient to permit recovery under the related Primary Mortgage Insurance
Policy, if any, the Master Servicer is not required to expend its own funds to
restore the damaged Mortgaged Property unless it determines (i) that such
restoration will increase the proceeds to Certificateholders on liquidation of
the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Mortgage Insurance Policy, the Master Servicer will be obligated to follow or
cause to be followed such normal practices and procedures as it deems necessary
or advisable to realize upon the defaulted Mortgage Loan. If the proceeds of any
liquidation of the Mortgaged Property securing the defaulted Mortgage Loan are
less than the principal balance of such Mortgage Loan plus interest accrued
thereon that is payable to Certificateholders, the Trust Fund will realize a
loss in the amount of such difference plus the aggregate of any unpaid servicing
compensation and expenses incurred by the Master Servicer in connection with
such proceedings and which are reimbursable under the Agreement. In the unlikely
event that any such proceedings result in a total recovery which is, after
reimbursement to the Master Servicer of its expenses and any unpaid servicing
compensation, in excess of the principal balance of such Mortgage Loan plus
interest accrued thereon that is payable to Certificateholders, the Master
Servicer will be entitled to withdraw or retain from the Collection Account,
unless otherwise specified in the related Prospectus Supplement, amounts
representing the balance of such excess, exclusive of any amount required by law
to be forwarded to the related Mortgagor, as additional servicing compensation.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Collection Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Collection Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. Since Insurance Proceeds cannot exceed deficiency claims
and certain expenses incurred by the Master Servicer, no such payment or
recovery will result in a recovery to the Trust Fund which exceeds the principal
balance of the defaulted Mortgage Loan together with accrued interest thereon.
See "Credit Enhancement."
Junior Mortgages. The Mortgage Loans underlying the Certificates of a
Series will be secured by mortgages or deeds of trust which may be second or
more junior mortgages to other mortgages held by other lenders or institutional
investors. The rights of the Trust Fund (and therefore the holders of the
related Certificates), as mortgagee under a junior mortgage, are subordinate to
those of the mortgagee under the senior mortgage, including the prior rights of
the senior mortgagee to receive hazard insurance and condemnation proceeds and
to cause the property securing the mortgage loan to be sold upon default of the
mortgagor. If the property is sold, the junior mortgagee's lien will be
extinguished unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in
some states, may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the
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condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of a junior mortgage.
FHA Insurance; VA Guarantees. Mortgage Loans designated in the related
Prospectus Supplement as insured by the FHA will be insured by the FHA as
authorized under the United States Housing Act of 1937, as amended. Such
Mortgage Loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one- to four-family housing
units and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Mortgage Loans insured by the FHA generally require a minimum down
payment of approximately 5% of the original principal amount of the loan. No
FHA-insured Mortgage Loans relating to a Series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Mortgage Loans insured by the FHA are collected
by lenders approved by the Department of Housing and Urban Development ("HUD")
or by the Master Servicer or any Sub-Servicers and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide that
insurance benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted Mortgage Loan to HUD. With respect to a defaulted FHA-insured
Mortgage Loan, the Master Servicer or any Sub-Servicer is limited in its ability
to initiate foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the mortgagor. Such
plans may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made up on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Master Servicer or any Sub-Servicer in partial or full
satisfaction of amounts due under the Mortgage Loan (which payments are to be
repaid by the mortgagor to HUD) or by accepting assignment of the loan from the
Master Servicer or any Sub-Servicer. With certain exceptions, at least three
full monthly installments must be due and unpaid under the Mortgage Loan, and
HUD must have rejected any request for relief from the mortgagor before the
Master Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Mortgage Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation to make any payment due under the Mortgage
and, upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
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Mortgage Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one-to four-family
dwelling unit at interest rates permitted by the VA. The program has no mortgage
loan limits, requires no down payment from the purchaser and permits the
guarantee of mortgage loans of up to 30 years' duration.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As of
January 1, 1996, the maximum guarantee that may be issued by the VA under a VA
guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,750. The liability on the
guarantee is reduced or increased pro rata with any reduction or increase in the
amount of indebtedness, but in no event will the amount payable on the guarantee
exceed the amount of the original guarantee. The VA may, at its option and
without regard to the guarantee, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Mortgage Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Mortgage Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances) of the outstanding
principal balance of each Mortgage Loan, and such compensation will be retained
by it from collections of interest on such Mortgage Loan in the related Trust
Fund (the "Master Servicing Fee"). Unless otherwise specified in the related
Prospectus Supplement, as compensation for its servicing duties, the Master
Servicer will be entitled to a monthly servicing fee as described in the related
Prospectus Supplement. In addition, the Master Servicer or a Sub-Servicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from Mortgagors, and any benefit which may accrue as a result
of the investment of funds in the applicable Collection Account (unless
otherwise specified in the related Prospectus Supplement). The Master Servicer
will be responsible for the payment of any fees owing to any Sub-Servicer.
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the Certificate Registrar and any Paying
Agent, and payment of expenses incurred in enforcing the obligations of
Sub-Servicers and Sellers. The Master Servicer will be entitled to reimbursement
of certain of these expenses. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursements for certain
expenses incurred by it in connection with Liquidated Mortgage Loans and in
connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Liquidation Proceeds (including Insurance Proceeds).
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EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, the Master Servicer will cause a firm of independent public accountants to
furnish a statement to the Trustee to the effect that, on the basis of the
examination by such firm conducted substantially in compliance with the audit
program applicable to the Master Servicer, the servicing by or on behalf of the
Master Servicer of mortgage loans, private mortgage-backed securities or agency
securities, under pooling and servicing agreements substantially similar to each
other (including the related Agreement) was conducted in compliance with such
agreements except for any significant exceptions or errors in records that, in
the opinion of the firm, such audit program requires it to report.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by an officer or
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement in all material respects
throughout the preceding year or specifying any known failure to do so.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Certificateholders of the related
Series without charge upon written request to the Master Servicer or the Trustee
at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. An entity serving as Master Servicer or Sub-Servicer may
have normal business relationships with the Depositor or the Depositor's
affiliates.
Each Agreement will provide that, subject to the Master Servicer's right to
assign its rights and delegate its duties as described below, the Master
Servicer may not resign from its obligations and duties under the Agreement
unless 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 presently carried on by it, except in connection with a
permitted transfer of servicing. No such resignation will become effective until
the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer, the
Depositor nor any director, officer, employee, or agent of the Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of any such breach of the terms and conditions of the Agreement. Each
Agreement will further provide that the Master Servicer, the Depositor and any
director, officer, employee or agent of the Master Servicer or the Depositor
will be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Agreement) and any loss, liability or expense incurred by reason of any
breach of the terms and conditions of the Agreement. In addition, each Agreement
will provide that neither the Master Servicer nor the Depositor will be under
any obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. The Master Servicer or
the Depositor may, however, in its discretion undertake any such action which it
may deem necessary or desirable with respect to the Agreement and the rights and
duties of the parties thereto and the interests of the Certificateholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust Fund and the Master Servicer or the Depositor, as the case may be, will be
entitled to be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
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Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement. In
addition, the Master Servicer may assign its rights, and delegate its duties,
pursuant to the terms of the Agreement.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under each Agreement will generally consist of (i) any failure by the
Master Servicer to distribute or cause to be distributed to Certificateholders
of any class any required payment (other than an Advance) which continues
unremedied for five business days after the giving of written notice of such
failure to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Certificates of such
class evidencing not less than 25% of the related Trust Fund (based on the
outstanding principal balances of the Certificates); (ii) any failure by the
Master Servicer to make an Advance as required under the Agreement, unless cured
as specified therein; (iii) any failure by the Master Servicer duly to observe
or perform in any material respect any of its other covenants or agreements in
the Agreement which continues unremedied for sixty days after the giving of
written notice of such failure to the Servicer by the Trustee or the Depositor,
or to the Master Servicer, the Depositor and the Trustee by the holders of
Certificates evidencing not less than 25% of the related Trust Fund (based on
the outstanding principal balances of the Certificates); and (iv) certain events
of insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Mortgage Assets and the other assets of the Trust
Fund in the event that payments in respect thereto are insufficient to make
payments required in the Agreement. The assets of the Trust Fund will be sold
only under the circumstances and in the manner specified in the related
Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied, the
Trustee may, and at the direction of holders of Certificates having not less
than 25% of the related Trust Fund (based on the outstanding principal balances
of the Certificates) and under such other circumstances as may be specified in
such Agreement, the Trustee shall, terminate all of the rights and obligations
of the Master Servicer under the Agreement relating to such Trust Fund and in
and to the Mortgage Loans, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a Mortgage Loan servicing institution with a net worth of at least
$10,000,000 to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
Master Servicer under the Agreement.
No Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates of any Class of such Series evidencing not less than 25% of the
related Trust Fund (based on the outstanding principal balances of the
Certificates) have made written request upon the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity, and the Trustee for 60 days has neglected or refused to
institute any such proceeding.
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AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the Trustee,
without the consent of any of the Certificateholders, (i) to cure any ambiguity
or mistake; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein or with the related
Prospectus Supplement or Prospectus or to correct any error or mistake; (iii) to
obtain, maintain or improve the rating of any class of Certificates (it being
understood that after obtaining any rating required at the initial issuance of
the related Series, none of the Depositor, Master Servicer or Trustee is
obligated to obtain, maintain or improve the rating of any class of Certificates
of such Series); or (iv) to make any other revisions with respect to matters or
questions arising under the Agreement which are not materially inconsistent with
the provisions thereof, provided that, in the case of clause (iv), such action
will not adversely affect in any material respect the interests of any
Certificateholder. An amendment will be deemed not to adversely affect in any
material respect the interests of the Certificateholders if the person
requesting such amendment obtains a letter from each rating agency requested to
rate the class or classes of Certificates of such Series stating that such
amendment will not result in the downgrading or withdrawal of the respective
ratings then assigned to such Certificates. In addition, to the extent provided
in the related Agreement, an Agreement may be amended without the consent of any
of the Certificateholders, to change the manner in which the Collection Account
is maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Certificates of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any of
its provisions to such extent as may be necessary to maintain the qualification
of the related Trust Fund as a REMIC, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement may also be amended by the Depositor, the Master Servicer and the
Trustee with consent of Holders of Certificates of such Series evidencing not
less than 51% of the aggregate Percentage Interests of each class affected
thereby for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the holders of the related Certificates; provided, however, no
such amendment may (i) reduce in any manner the amount of or delay the timing
of, payments received on Mortgage Loans which are required to be distributed on
any Certificate without the consent of the holder of such Certificate, or (ii)
reduce the aforesaid percentage of Certificates of any class of holders which
are required to consent to any such amendment without the consent of the holders
of all Certificates of such class covered by such Agreement then outstanding. If
a REMIC election is made with respect to a Trust Fund, the Trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that such amendment will not
cause such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in the
Collection Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment or other
liquidation of the last of the Mortgage Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer,
the Depositor or, if REMIC treatment has been elected and if specified in the
related Prospectus Supplement, by the holder of the residual interest in the
REMIC (see "Certain Federal Income Tax Consequences" below), from the related
Trust Fund of all of the remaining Mortgage Assets and all property acquired in
respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any such
purchase of Mortgage Assets and property acquired in respect of Mortgage Assets
evidenced by a Series of Certificates will be made at the option of the Master
Servicer, the Depositor or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of
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such right will effect early retirement of the Certificates of that Series, but
the right of the Master Servicer, the Depositor or, if applicable, such holder
of the REMIC residual interest, to so purchase is subject to the principal
balance of the related Mortgage Assets being less than the percentage specified
in the related Prospectus Supplement of the aggregate principal balance of the
Mortgage Assets at the Cut-off Date for the Series. The foregoing is subject to
the provision that if a REMIC election is made with respect to a Trust Fund, any
repurchase pursuant to clause (ii) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of
the Code.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
GENERAL
The Mortgage Loans will be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-property
owner called the grantor/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 obligation. A security deed and a deed to secure debt
are special types of deeds which indicate on their face that they are granted to
secure an underlying debt. By executing a security deed or deed to secure debt,
the grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's authority
under a mortgage and the grantee's authority under a security deed or deed to
secure debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
HOME OWNERSHIP AND EQUITY PROTECTION ACT OF 1994
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Mortgage Loans and in addition could subject the Trust Fund to
damages and administrative enforcement. The Mortgage Loans may be subject to the
Home Ownership and Equity Protection Act of 1994 ("Act") which amended the
Truth-in-Lending Act as it applies to mortgages subject to the Act. The Act
requires certain additional disclosures, specifies the timing of such
disclosures and limits or prohibits inclusion of certain provisions in mortgages
subject to the Act. The Act also provides that any purchaser or assignee of a
mortgage covered by the Act is subject to all of the claims and defenses which
the borrower could assert against the original lender. The maximum damages that
may be recovered under the
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Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the mortgage loan. If the Trust
Fund includes Mortgage Loans subject to the Act, it will be subject to all of
the claims and defenses which the borrower could assert against a Seller. Any
violation of the Act which would result in such liability would be a breach of
such Seller's representations and warranties, and such Seller would be obligated
to cure, repurchase or, if permitted by the Agreement, substitute for the
Mortgage Loan in question.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of Mortgage Loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Rates or APRs,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts.
COOPERATIVES
Certain of the Mortgage Loans may be Cooperative Loans. The Cooperative
owns all the real property that comprises the project, including the land,
separate dwelling units and all common areas. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of a Trust Fund
including Cooperative Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
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With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. This approval is usually based on the
purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring such approval could limit the number of potential
purchasers for those shares and otherwise limit the Trust Fund's ability to sell
and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
FORECLOSURE/REPOSSESSION
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction 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, such as California, the
trustee must record a notice of default and send a copy to the borrower-trustor,
to any person who has recorded a request for a copy of any notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest of record in the real property,
including any junior lienholder. 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, including California, published for a specified period of
time in one or more newspapers. In addition, these notice provisions 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 California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
In some states, including California, 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 attorney's fees, which may be
recoverable by a lender.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings sometimes are not contested by any of
the parties. When the mortgagee's right to 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 generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any
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other person having a junior encumbrance on the real estate, may, during a
statutorily prescribed reinstatement period, cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the deed of trust is not reinstated, a notice of
sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the absence of
equity in the property, the difficulty of determining the exact status of title
to the property, the possible deterioration of the property during the
foreclosure proceedings and a requirement that the purchaser pay to bid for the
property. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding under
the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden 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 will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing adequately to maintain the property or
the borrower executing a second security instrument affecting the property. Some
courts have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for fair notice require that
borrowers under deeds of trust receive notice longer than that prescribed by
statute. 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
does not involve sufficient state action to afford constitutional protection to
the borrower.
Home Equity Loans. Since the Mortgages securing Home Equity Loans are
often junior liens subordinate to the rights of the mortgagee under the related
senior mortgage or mortgages, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such junior mortgage only to the extent that the claims of such senior
mortgagees have been satisfied in full, including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the property securing a
junior mortgage unless it forecloses subject to the senior mortgages, in which
case it must either pay the entire amount due on the senior mortgages to the
senior mortgagees at or prior to the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder. The Trust Fund will not have any source of funds to
satisfy the senior mortgages to make payments due to the senior mortgagees.
Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
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
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performance of covenants required thereunder. Typically, the lender and the
Cooperative enter into a recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
on its obligations under the proprietary lease or occupancy agreement. A default
by the tenant-stockholder under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative 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.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
RIGHTS OF REDEMPTION
In some states after sale pursuant to a deed of trust 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
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of 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 diminish 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 retain the property and pay the expenses of
ownership until the redemption period has run.
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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, including California, 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 borrower equal in most cases to the difference between the
amount due to the lender and the purchase price offered or paid for the property
at the time of the foreclosure sale. As a result of these prohibitions, it is
anticipated that in most instances the Servicer will utilize the non-judicial
foreclosure remedy and will not seek deficiency judgments against defaulting
Mortgagors. 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.
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.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Mortgaged
Property is not the debtor's principal residence and the court determines that
the value of the Mortgaged Property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of the
Mortgaged Property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Mortgage
Loans underlying a Series of Certificates and possible reductions in the
aggregate amount of such payments.
The Mortgage Loans are also subject to federal laws, including:
(i) the federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) the Home Ownership and Equity Protection Act of 1994.
These and other federal and state consumer protection laws impose
substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of Mortgage Loans. Violations of certain
provisions of these laws may limit the ability of the Master Servicer to collect
all or part of the principal of or interest on the Mortgage Loans, may subject
the Master Servicer to damages and administrative enforcement and in addition
could be raised by borrowers as a recoupment or setoff in a collection or
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foreclosure action. The federal tax laws provide priority to certain tax liens
over the lien of a mortgage or secured party.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where EPA has incurred clean-up costs. However, a CERCLA lien
is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
lender may be held liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances at a Mortgaged Property,
regardless of whether or not the environmental damage or threat was caused by a
prior owner or operator. CERCLA imposes liability on any and all "responsible
parties" (which includes, inter alia, the property owner and operator) for the
cost of clean-up of releases of hazardous substances. However, CERCLA excludes
from the definition of "owner or operator" secured creditors who hold indicia of
ownership for the purpose of protecting their security interest, but "without
participating in the management of the facility." That exclusion was
substantially narrowed by a May 1990 decision of the United States Court of
Appeals for the Eleventh Circuit in United States v. Fleet Factors Corp., which
held 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 management
in order to be liable; rather, liability could attach to the lender if its
involvement with the management of the facility is broad enough to support the
inference that the lender could affect hazardous waste management practices if
it so chose. 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. In response to Fleet Factors, EPA promulgated regulations
designed to clarify the range of activities a lender may engage in without
losing the benefit of the statutory exclusion. Under the regulations, which took
effect in April 1992, a lender is permitted to monitor the borrower's
environmental practices in order to determine if the facility is in compliance
with applicable law, and to require the borrower to take measures necessary to
achieve or maintain compliance or conduct necessary clean-ups. The lender may
not, however, exercise control over or assume responsibility for the borrower's
environmental practices. Such actions would be considered "participation in the
management of the facility." Also, if the lender takes title to or possession of
the property, it might be deemed to have obviated the security interest
exclusion and to be liable for clean-up costs pursuant to CERCLA. The EPA
regulations allow lenders to take certain actions with respect to foreclosure,
without losing the benefit of the statutory exclusion. Essentially, the
regulations allow the lender to take actions consistent with protecting its
security interest, but not actions which demonstrate an intent to exercise
long-term ownership interest in the property. While the EPA regulations offer
some protection to lenders, it must be noted that such protection may not be
available under applicable state law. Furthermore, the regulations are binding
only on EPA with respect to EPA's enforcement powers and cost recovery rights.
It has not yet been determined whether the federal courts will apply the
regulations in cost recovery actions brought against lenders by other
responsible parties, although the regulations may well be considered persuasive
by the courts. (Two judicial challenges have been brought against the EPA
regulations in the United States Court of Appeals for the District of Columbia
Circuit. The challenges both allege that the regulations are inconsistent with
the statutory requirements of CERCLA and, therefore, should be invalidated. The
challenges were filed on July 28, 1992, and are still pending.) If a lender is
or becomes liable, it can bring an action for contribution against any other
"responsible parties," including a previous owner or operator, who
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created the environmental hazard, but those persons or entities may be bankrupt
or otherwise judgment proof. The costs associated with environmental clean-up
may be substantial. It is conceivable that such remedial costs arising from the
circumstances set forth above would become a liability of the Trust Fund and
occasion a loss to Certificateholders.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On October 30, 1996, however, the President signed into law legislation
intended to clarify the scope of the secured-creditor exemption under both
CERCLA and RCRA. This legislation more explicitly defined the kinds of
"participation in management" that would trigger liability under CERCLA and
specified certain activities that would not constitute "participation in
management" or otherwise result in a forfeiture of the secured-creditor
exemption prior to foreclosure or during a workout period. The legislation also
clarifies the extent of protection against liability under CERCLA in the event
of foreclosure. The legislation also authorizes certain regulatory
clarifications of the scope of the secured-creditor exemption for purposes of
the Recourse Conservation and Recovery Act similar to the statutory protections
under CERCLA. 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.
Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Mortgage Loans were originated, no environmental assessment or a
very limited environmental assessment of the Mortgaged Properties was conducted.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan may be accelerated by the mortgagee. In recent
years, court decisions and legislative actions placed substantial restriction on
the right of lenders to enforce such clauses in many states. For instance, the
California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence, the
Garn-St Germain Act sets forth nine specific instances in which a mortgagee
covered by the Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the related
Mortgaged Property to an uncreditworthy person, which could increase the
likelihood of default or may result in a mortgage bearing an interest rate below
the current market rate being assumed by a new home buyer, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of Mortgage Loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed-rate Mortgage Loans having higher Mortgage Rates or APRs,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts.
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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 Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master 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 FEDERAL INCOME TAX CONSEQUENCES
The following summary represents the advice of Kilpatrick Stockton LLP
counsel to the Depositor, as to the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
summary is based on the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the regulations promulgated thereunder, including, where
applicable, proposed regulations and, in particular, regulations promulgated
under the REMIC provisions of the Code (the "REMIC Regulations"), judicial and
administrative rulings and decisions now in effect, all of which are subject to
change, possibly with retroactive effect. The summary does not purport to
address all aspects of federal income taxation that may affect particular
investors in view of their individual circumstances, including investors that
may be subject to special treatment under the federal income tax laws, such as
banks and insurance companies. In addition, the discussion is addressed
primarily to investors who will hold Certificates as "capital assets" within the
meaning of Section 1221 of the Code. The tax consequences to an investor from an
investment in Certificates will depend in part on the status or individual tax
circumstances of the investor. Accordingly, prospective investors are urged to
consult their tax advisors regarding the particular federal, state, local and
other tax consequences to them of the purchase, ownership and disposition of
Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust Fund relating to a
particular Series of Certificates as one or more REMICs under the Code. The
Prospectus Supplement for each Series of Certificates will specify whether a
REMIC election will be made.
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NON-REMIC CERTIFICATES; TAX STATUS AS A GRANTOR TRUST
If a REMIC election is not made for a Trust Fund which relates to a
particular Series of Certificates, Kilpatrick Stockton LLP will deliver its
opinion that the Trust Fund will not be classified as an association taxable as
a corporation, but will be classified as a grantor trust under subpart E, Part I
of subchapter J of the Code, and that owners of Certificates issued by a
particular Trust Fund will be subject to federal income taxation as owners of
their pro rata share of the Trust Fund's assets. Unless otherwise specified, for
purposes of the discussion below relating to non-REMIC Certificates, the term
"Mortgage Loan" includes Mortgage Loans and mortgages underlying Agency
Securities and other Mortgage Assets owned by a Trust Fund.
SINGLE CLASS OF SENIOR CERTIFICATES
Characterization. A Trust Fund may be created with one class of Senior
Certificates and one class of Subordinated Certificates. In such case, each
Senior Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust Fund represented by
that Senior Certificate and will be considered the equitable owner of a pro rata
undivided interest in each of the assets in the pool. Any amounts received by a
Senior Certificateholder in lieu of amounts due with respect to any Mortgage
Loan because of a default or delinquency in payment will be treated for federal
income tax purposes as having the same character as the payments they replace.
Each holder of a Senior Certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Assets in the Trust Fund represented by that Senior Certificate,
including interest, original issue discount, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the Master Servicer in accordance with such Senior Certificateholder's method
of accounting. Under Code Section 162 or 212, each Senior Certificateholder will
be entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the Master Servicer, provided that such amounts are reasonable
compensation for services rendered to the Trust Fund. A Senior Certificateholder
that is an individual, estate or trust will be entitled to deduct its share of
expenses only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. A Senior
Certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
Master Servicer. A Senior Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions as
they become due or are paid to the Master Servicer, whichever is earlier. If the
Servicing Fees paid to the Master Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess could be considered as a
retained ownership interest by the Master Servicer (or any person to whom the
Master Servicer assigned for value all or a portion of the Servicing Fees) in a
portion of the interest payments on the Mortgage Loans. The Mortgage Loans may
then be subject to the "coupon stripping" rules of the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates, Kilpatrick Stockton LLP will render its opinion that:
(i) a Senior Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Loans will be considered to
represent "loans . . . secured by an interest in real property which is . .
. residential property" within the meaning of Code Section
7701(a)(19)(C)(v); to the extent that the Mortgage Loans represented by
that Senior Certificate are of a type described in such Code section;
(ii) a Senior Certificate owned by a financial institution described
in Code Section 593(a) representing principal and interest payments on
Mortgage Loans will be considered to represent "qualifying real property
loans" within the meaning of Code Section 593(d) and the Treasury
regulations under Code Section 593; to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such Code
section;
(iii) a Senior Certificate owned by a real estate investment trust
representing an interest in Mortgage Loans will be considered to represent
"real estate assets" within the meaning of Code
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Section 856(c)(5)(A), and interest income on the Mortgage Loans will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B); to the extent that the
Mortgage Loans represented by that Senior Certificate are of a type
described in such Code section; and
(iv) a Senior Certificate owned by a REMIC will be an "obligation . .
. which is principally secured by an interest in real property" within the
meaning of Code Section 860G(a)(3).
Buydown Mortgage Loans. The assets constituting certain Trust Funds may
include Buydown Mortgage Loans. The characterization of any investment in
Buydown Mortgage Loans will depend upon the precise terms of the related Buydown
Agreement, but to the extent that such Buydown Mortgage Loans are secured in
part by a bank account or other personal property, they may not be treated in
their entirety as assets described in the foregoing sections of the Code. There
are no directly applicable precedents with respect to the federal income tax
treatment or the characterization of investments in Buydown Mortgage Loans.
Accordingly, holders of Senior Certificates should consult their own tax
advisors with respect to characterization of investments in Senior Certificates
representing an interest in a Trust Fund that includes Buydown Mortgage Loans.
Premium. The price paid for a Senior Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Loan based on
each Mortgage Loan's relative fair market value, so that such holder's undivided
interest in each Mortgage Loan will have its own tax basis. A Senior
Certificateholder that acquires an interest in Mortgage Loans at a premium may
elect to amortize such premium under a constant interest method, provided that
such Mortgage Loan was originated after September 27, 1985. Premium allocable to
a Mortgage Loan originated on or before September 27, 1985, should be allocated
among the principal payments on the Mortgage Loan and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on such Senior Certificate. The basis
for such Senior Certificate will be reduced to the extent that amortizable
premium is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used
in computing amortization of premium allowable under Code Section 171. If a
premium is not subject to amortization using a reasonable prepayment assumption,
the holder of a Senior Certificate acquired at a premium should recognize a
loss, if a Mortgage Loan prepays in full, equal to the difference between the
portion of the prepaid principal amount of the Mortgage Loan that is allocable
to the Certificate and the portion of the adjusted basis of the Certificate that
is allocable to the Mortgage Loan. If a reasonable prepayment assumption is used
to amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
Original Issue Discount. The Internal Revenue Service (the "IRS") has
stated in published rulings that, in circumstances similar to those described
herein, the special rules of the Code relating to "original issue discount"
(currently Code Sections 1271 through 1273 and 1275) will be applicable to a
Senior Certificateholder's interest in those Mortgage Loans meeting the
conditions necessary for these sections to apply. 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. Such original issue discount could
arise by the financing of points or other charges by the originator of the
mortgages in an amount greater than a statutory de minimis exception to the
extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. Original issue
discount generally must be reported as ordinary gross income as it accrues under
a constant interest method. See "Offered Certificates Representing Interests in
Loans Other Than ARMs -- Accrual of Original Issue Discount" below.
Market Discount. A Senior Certificateholder that acquires an undivided
interest in Mortgage Loans may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a Mortgage
Loan is considered to have been purchased at a "market discount." Generally, any
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market discount would be equal to the excess of the portion of the principal
amount of such Mortgage Loan allocable to such holder's undivided interest over
such holder's tax basis in such interest. Pursuant to certain de minimis rules
applicable to the computation of market discount, market discount with respect
to a Senior Certificate will be considered to be zero if the amount allocable to
the Senior Certificate is less than 0.25% of the Senior Certificate's stated
redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. The Treasury
Department has not yet issued any such regulations; however, the relevant
legislative history provides the best guidance applicable to this situation.
Under certain analogous rules set forth in the Code and pursuant to the
legislative history, the holder of such a market discount bond may elect to
accrue market discount either on the basis of a constant interest rate or
according to one of the following methods. If a Senior Certificate is issued
with original issue discount, the amount of market discount that accrues during
any accrual period would be equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the accrual
period. For Senior Certificates issued without original issue discount, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the accrual period. For purposes of
calculating market discount under any of the above methods in the case of
instruments (such as the Senior Certificates) which provide for payments which
may be accelerated by reason of prepayments of other obligations securing such
instruments, the same prepayment assumption applicable to calculating the
accrual of original issue discount will apply. Because the regulations described
above have not yet been issued, it is not possible to predict what effect those
regulations might have on the tax treatment of a Senior Certificate purchased at
a discount or premium in the secondary market.
A holder who acquires a Senior Certificate at a market discount also may be
required to defer, until the maturity date of such Senior Certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of the
amount of interest that the holder paid or accrued during the taxable year on
any indebtedness incurred or maintained to purchase or carry the Senior
Certificate in excess of the aggregate amount of interest (including original
issue discount) includable in such holder's gross income for the taxable year
with respect to such Senior Certificate. The amount of such net interest expense
deferred in a taxable year may not exceed the amount of market discount accrued
on the Senior Certificate for the days during the taxable year on which the
holder held the Senior Certificate and, in general, would be deductible when
such market discount is includable in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Senior Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply if the Senior
Certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by such Senior
Certificateholder in that taxable year or thereafter.
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MULTIPLE CLASSES OF SENIOR CERTIFICATES
Stripped Bonds and Stripped Coupons. Pursuant to Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
For purposes of Code Sections 1271 through 1288, Code Section 1286 treats a
stripped bond or a stripped coupon as an obligation issued on the date that such
stripped interest is created. If a Trust Fund is created with two classes of
Senior Certificates, one class of Senior Certificates will represent the right
to principal and interest, or principal only, on all or a portion of the Loans
(the "Stripped Bond Certificates"), while the second class of Offered
Certificates will represent the right to some or all of the interest on all or a
portion of such Loans (the "Stripped Coupon Certificates").
Certain IRS guidance suggests that a servicing fee in excess of reasonable
servicing ("excess servicing") will be characterized under the stripped bond
rules. In such case, this guidance would appear to require that reasonable
servicing be calculated on a Mortgage Loan by Mortgage Loan basis which could
result in some Mortgage Loans being treated as having more than 100 basis points
of interest (i.e., 1% interest on the Mortgage Loan principal balance) stripped
off. However, if the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. See -- Non-REMIC Certificates; Tax Status as a Grantor Trust,"
and " -- Single Class of Senior Certificates -- Market Discount" herein.
Under the Treasury Regulations issued December 28, 1992, a Stripped Bond
Certificate is generally treated as a single debt instrument issued on the day
it is purchased for purposes of calculating any original issue discount.
Generally, if the discount on a Stripped Bond Certificate is larger than a de
minimis amount (as calculated for purposes of the original issue discount rules)
a purchaser of such a certificate will be required to accrue the discount under
the original issue discount rules of the Code. See "-- Non-REMIC Certificates"
and " -- Single Class of Senior Certificates -- Original Issue Discount" herein.
However, a purchaser of a Stripped Bond Certificate will be required to account
for any discount on the certificate as market discount rather than original
issue discount if either (i) the amount of original issue discount with respect
to the certificate was treated as zero under the original issue discount de
minimis rule when the certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing) is
stripped off of the Trust Fund's Mortgage Loans. The stripped bond rules
constitute a method of accounting and, pursuant to Revenue Procedure 91-49
issued on August 8, 1991, purchasers of Stripped Bond Certificates using a
method of accounting inconsistent with that set forth under these procedures are
required to change their method of accounting to conform with such rules by
requesting the consent of the IRS to the change in their accounting method on a
statement attached to their first timely tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that original issue
discount computations be made on a Loan by Loan basis. Certain IRS guidance
would appear to suggest that a Stripped Coupon Certificate be treated as a
single installment obligation subject to the original issue discount rules of
the Code. Under this characterization, all payments on a Stripped Coupon
Certificate would be included in the certificate's stated redemption price at
maturity for purposes of calculating income on such certificate under the
original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Loans will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Senior Certificate, it appears that no loss may be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Loans, or if no prepayment
assumption is used, then when a Mortgage Loan is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Loan.
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Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections, as noted below,
provide beneficial treatment to certain taxpayers that invest in mortgage loans
of the type that would typically make up a Trust Fund. With respect to these
Code sections, there is no specific legal authority specifying whether the
character of Senior Certificates issued in connection with the issuance of a
multiple class of Senior Certificates will necessarily be treated the same as
that of the underlying Mortgage Loans for purposes of these provisions. For
example, while Code Section 1286 treats a stripped obligation as a separate
obligation for purposes of the Code provisions addressing original issue
discount, as described above, there is some uncertainty whether such
characterization would necessarily apply with regard to other Code sections.
Nevertheless, unless otherwise specified in the related Prospectus Supplement,
as to each class of Senior Certificates, Kilpatrick Stockton LLP will render its
opinion that, although the issue is not free from doubt, based on policy
considerations, each class of Senior Certificates should be considered to
represent "qualifying real property loans" within the meaning of Code Section
593(d), "real estate assets" within the meaning of Code Section 856(c)(5)(A) and
"loans . . . secured by, an interest in real property which is . . . residential
real property" within the meaning of Code Section 7701(a)(19)(C)(v), and
interest income attributable to Senior 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
underlying Mortgage Loans and interest on such Mortgage Loans qualify for such
treatment. In addition, such opinion will opine that Senior Certificates will be
"obligation[s] (including any participation or certificate of beneficial
ownership therein) which [are] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3).
OFFERED CERTIFICATES REPRESENTING INTERESTS IN LOANS OTHER THAN ARMS
Original issue discount on a Senior Certificate representing an interest in
a Mortgage Loan must be included in the owner's 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 amount of original issue discount
required to be included in an owner's income in any taxable year with respect to
a Senior Certificate representing an interest in Mortgage Loans other than ARMs
likely will be computed as described below under " -- Accrual of Original Issue
Discount." The following discussion is based in part on Treasury regulations
under Code Sections 1271 through 1273 and 1275 (the "OID Regulations") and in
part on the provisions of the Tax Reform Act of 1986 (the "1986 Act").
In general, under the Code, original issue discount is equal to the excess
of a debt instrument's stated redemption price at maturity over its issue price.
The issue price of a debt instrument as to any purchaser is generally equal to
the price paid by such purchaser for the debt instrument. The stated redemption
price at maturity of a debt instrument is the sum of all payments to be made on
such debt instrument other than payments that are treated as qualified stated
interest payments. The accrual of original issue discount on a Senior
Certificate representing an interest in Mortgage Loans, as described below under
"Accrual of Original Issue Discount," will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Senior Certificate to compute any original issue discount, as calculated based
on a reasonable assumed prepayment rate for the Mortgage Loans underlying the
Senior Certificate (the "Prepayment Assumption"), and taking into account events
that occur during the calculation period. The Prepayment Assumption is required
to be determined in the manner prescribed by regulations, which regulations have
not yet been issued. The legislative history of the 1986 Act (the "Legislative
History") provides, however, that the regulations will require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the offering price of such Certificate. No representation is made that such
Certificate will prepay at the Prepayment Assumption or at any other rate.
Although the existing authority literally only apply to debt instruments
collateralized by mortgages that are subject to prepayment rather than direct
ownership interests, such as the Senior Certificates, in mortgages, because no
other legal authority provides guidance with regard to the proper method for
accruing original issue discount on obligations that are subject to prepayment,
until Treasury regulations or other legal authority instructs
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otherwise, the Master Servicer intends to calculate, and report original issue
discount under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Senior
Certificate must include in gross income the sum of the "daily portions," as
defined below, of the original issue discount on such Senior Certificate for
each day on which it owns a Senior Certificate, including the date of purchase
but excluding the date of disposition. In the case of an original owner, the
daily portions of original issue discount with respect to each component
generally will be determined as follows under the existing authority. A
calculation will be made by the Master Servicer or such other entity specified
in the related Prospectus Supplement of the portion of original issue discount
that accrues during each successive monthly accrual period (or shorter period
from the date of original issue) that ends on the day in the calendar year
corresponding to each of the Distribution Dates on the Senior Certificate (or
the day prior to each such date). This will be done, in the case of each full
month accrual period, by adding (i) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to maturity
of the respective component, under the Prepayment Assumption) of all remaining
payments to be received under the Prepayment Assumption on the respective
component, and (ii) any payments received during such accrual period, and
subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The "adjusted issue price" of
a Senior Certificate at the beginning of the first accrual period is its issue
price; the "adjusted issue price" of a Senior Certificate at the beginning of a
subsequent accrual period is the "adjusted issue price" at the beginning of the
immediately preceding accrual period plus the amount of original issue discount
allocable to that accrual period reduced by the amount of any payment made at
the end of or during that accrual period. The original issue discount accruing
during such accrual period 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
monthly accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
SENIOR CERTIFICATES REPRESENTING INTERESTS IN ARM LOANS
The OID Regulations do not address the treatment of instruments, such as
the Senior Certificates, which represent interests in Mortgage Loans with
Mortgage Rates which adjust periodically ("ARM Loans"). Additionally, the IRS
has not issued guidance under the Code's coupon stripping rules with respect to
such instruments. In the absence of any authority the Master Servicer will
report original issue discount on Senior Certificates attributable to ARM Loans
("Stripped ARM Obligations") to holders in a manner it believes is consistent
with the rules described above under the heading "-- Senior Certificates
Representing Interests in Loans Other Than ARM Loans" and with the OID
Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Senior Certificateholder when such amount accrues. Furthermore, the addition of
Deferred Interest to the Senior Certificate's principal balance will result in
additional income (including possibly original issue discount income) to the
Senior Certificateholder over the remaining life of such Senior Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includable
with respect to such Certificates. Possible Application of Contingent Payment
Rules to Certain Non-REMIC Certificates
The regulations under Section 1275 of the Code include rules for
obligations that provide for one or more contingent payments. Rights to
interest-only payments on a mortgage loan might be considered to be contingent
within the meaning of the OID Regulations if such interest would not be paid
upon the borrower exercising a right to prepay the related mortgage loan. In the
case of an investor having a right to shares of the interest and principal
payments on a mortgage loan where the share of interest is not substantially
greater than the share of principal, the possibility of prepayment should not be
considered to characterize otherwise noncontingent interest payments as
contingent payments; the absence of interest payments following a prepayment
would be the normal consequence of the return of such investor's capital in the
form of a principal
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payment. On the other hand, a right to interest on such a mortgage loan is more
likely to be regarded as contingent if held by an investor that does not also
hold a right to the related principal; such an investor would not recover its
capital through receipt of a principal payment at the time of the prepayment of
the mortgage loan.
Applying these principles to the Senior Certificates, because the Mortgage
Loans are subject to prepayment at any time, payments on a Class of Senior
Certificates representing a right to interest on the Mortgage Loans could be
considered to be contingent within the meaning of the OID Regulations, at least
if the right is to interest only or if such Senior Certificate was issued at a
premium. The likelihood that such payments will be considered contingent
increases the greater the amount of such premium.
The IRS recently issued regulations (the "Final Contingent Debt
Regulations") governing the calculation of OID on instruments having contingent
interest payments. The Final Contingent Debt Regulations, which apply to debt
instruments issued on or after August 13, 1996, specifically do not apply
(similar to the proposed contingent debt regulations) for purposes of
calculating OID on debt instruments subject to principal acceleration under Code
Section 1272(a)(6), such as the Senior Certificates likely represent.
In the event that payments on a Senior Certificate in respect of interest
on the Mortgage Loans were considered contingent, the holder would generally
report income or loss as described above under "-- Multiple Classes of Senior
Certificates -- Stripped Bonds and Stripped Coupons," except that the yield that
would be used in calculating interest income would not be the actual yield but
would instead equal the "applicable Federal rate" (the "AFR," generally, an
average of current yields of Treasury securities computed and published monthly
by the IRS), in effect at the time of purchase of such Senior Certificate by
such holder. In addition, once such holder's adjusted basis in such Senior
Certificate has been reduced (by prior distributions or losses) to an amount
equal to the aggregate amount of the remaining noncontingent payments of the
Mortgage Loans that are allocable to such Senior Certificate (or to zero if such
Senior Certificate does not share in principal payments), then such holder would
recognize income in each subsequent month equal to the full amount of interest
on the Mortgage Loans that accrues in that month and is allocable to such Senior
Certificate. It is uncertain whether, under the contingent payment rules, any
other adjustments would be made to take account of prepayments of the Mortgage
Loans.
SALE OR EXCHANGE OF A SENIOR CERTIFICATE
Sale or exchange of a Senior Certificate prior to its maturity will result
in gain or loss equal to the difference, if any, between the amount received,
and the owner's adjusted basis in the Senior Certificate. Such adjusted basis
generally will equal the seller's purchase price for the Senior Certificate,
increased by the original issue discount included in the seller's gross income
with respect to the Senior Certificate, and reduced by principal payments on the
Senior Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Senior Certificate is a "capital
asset" within the meaning of Code Section 1221, and will be long-term or
short-term depending on whether the Senior Certificate has been owned for the
long-term capital gain holding period (currently more than one year).
Senior Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Senior Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
NON-U.S. PERSONS
Generally, to the extent that a Senior 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 (i) an owner that is not a U.S. Person (as defined below), or
(ii) a Senior Certificateholder holding on behalf of an owner that is not a U.S.
Person, will be subject to federal income tax, collected by withholding, at a
rate of 30% or such lower rate as may be provided for interest by an applicable
tax treaty. Accrued original issue discount recognized by the owner on the sale
or exchange of such a Senior Certificate also will be subject to federal income
tax at the same rate. Generally, such payments would not be subject to
withholding to the extent that a Senior Certificate evidences ownership in
Mortgage Loans issued
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after July 18, 1984, if (i) such Senior Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the issuer (which for purposes of this discussion may be
defined as the Trust Fund (the "Issuer")); (ii) such Senior Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such Senior Certificateholder complies with
certain identification requirements (including delivery of a statement, signed
by the Senior Certificateholder under penalties of perjury, certifying that such
Senior Certificateholder is not a U.S. Person and providing the name and address
of such Senior Certificateholder).
A "U.S. Person" means a citizen or resident of the United States, a
corporation or a partnership organized in or under the laws of the United
States, or any political subdivision thereof or an estate or trust, the income
of which is includable in gross income for federal income tax purposes
regardless of source.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each Certificateholder at any time
during such year, such information as may be deemed necessary or desirable to
assist Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to owners or other financial
intermediaries of holders that hold such Certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
REMIC CERTIFICATES
A Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however, "-- Residual Certificates" and " -- Prohibited Transactions and
Other Taxes"), if a Trust Fund with respect to which a REMIC election is made
fails to comply with one or more of the ongoing requirements of the Code for
REMIC status during any taxable year, including the implementation of
restrictions on the purchase and transfer of the residual interest in a REMIC as
described below under "Residual Certificates," the Code provides that a Trust
Fund will not be treated as a REMIC for such year and thereafter. In that event,
such entity may be taxable as a separate corporation, and the related REMIC
Certificates may not be accorded the status or given the tax treatment described
below. While the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of status as a
REMIC, no such regulations have been issued. Any such relief, moreover, may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC's income for the period in which the requirements for such
status are not satisfied. With respect to each such Trust Fund that elects REMIC
status, Kilpatrick Stockton LLP will deliver its opinion generally to the effect
that, under then existing law and assuming compliance with all provisions of the
related Agreement, such Trust Fund will qualify as a REMIC and the related
Certificates will be considered to be regular interests ("Regular Certificates")
or residual interests ("Residual Certificates") in the REMIC. The related
Prospectus Supplement for each Series of Certificates will indicate whether the
Trust Fund will make a REMIC election and whether a class of Certificates will
be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) Certificates held by a thrift institution taxed as a
"mutual savings bank" or "domestic building and loan association" will represent
interests in "qualifying real property loans" within the meaning of Code Section
593(d)(1); (ii) Certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets described in Code Section
7701(a)(19)(C); (iii) Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(5)(A);
and (iv) interest on Certificates held by a real estate investment trust will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B). If less than 95% of the REMIC's
assets are assets qualifying under any of the foregoing Code sections, the
Certificates will be qualifying assets only to the extent that the REMIC's
assets are qualifying assets. In addition, payments on
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Mortgage Loans held pending distribution on the REMIC Certificates will be
considered to be qualifying real property loans for purposes of Code Section
593(d)(1) and real estate assets for purposes of Code Section 856(c).
In some instances the Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Mortgage Loans contained in "Non-REMIC Certificates" and "Single Class
of Senior Certificates" above. REMIC Certificates held by a real estate
investment trust will not constitute "Government Securities" within the meaning
of Code Section 856(c)(5)(A), and REMIC Certificates held by a regulated
investment company will not constitute "Government Securities" within the
meaning of Code Section 851(b)(4)(A)(ii). REMIC Certificates held by certain
financial institutions will constitute "evidences of indebtedness" within the
meaning of Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) which are
"single family residences" under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home which has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and which is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for federal
income tax purposes. Upon the issuance of any such Series of Certificates,
Kilpatrick Stockton LLP, counsel to the Depositor, will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Agreement, the Master REMIC as well as any Subsidiary REMIC will each
qualify as a REMIC and the REMIC Certificates issued by the Master REMIC and the
Subsidiary REMICs, respectively, will be considered to evidence ownership of
Regular Certificates or Residual Certificates in the related REMIC within the
meaning of the REMIC provisions.
Only REMIC Certificates issued by the Master REMIC will be offered
hereunder. The Subsidiary REMIC and the Master REMIC will be treated as one
REMIC solely for purposes of determining whether the REMIC Certificates will be
(i) "qualifying real property loans" under Section 593(d) of the Code; (ii)
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code;
(iii) "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code; and (iv) whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code.
REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of Regular Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
Regular Certificates under an accrual method.
Original Issue Discount. The Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Generally,
such original issue discount, if any, will equal the difference between the
"stated redemption price at maturity" of a Regular Certificate and its "issue
price." Holders of any class of Certificates issued with original issue discount
will be required to include such original issue discount in gross income for
federal income tax purposes as it accrues, in accordance with a constant
interest method based on the compounding of interest, in advance of receipt of
the cash attributable to such income. The following discussion is based in part
on the OID Regulations and the 1986 Act. The holder of a Regular Certificate
should be aware, however, that the OID Regulations do not currently address
certain issues relevant to prepayable securities, such as the Regular
Certificates.
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Rules governing original issue discount are set forth in Code Sections 1271
through 1273 and 1275. These rules require that the amount and rate of accrual
of original issue discount be calculated based on a Prepayment Assumption and
prescribe a method for adjusting the amount and rate of accrual of such discount
where the actual prepayment rate differs from the Prepayment Assumption. Under
the Code, the Prepayment Assumption is required to be determined in the manner
prescribed by regulations which have not yet been issued. The Legislative
History provides, however, that Congress intended the regulations to require
that the Prepayment Assumption be the prepayment assumption that is used in
determining the initial offering price of such Regular Certificates. The
Prospectus Supplement for each Series of Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of original issue discount. No representation is made that the
Regular Certificates will prepay at the Prepayment Assumption or at any other
rate.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of original issue discount equal to
the excess, if any, of its "stated redemption price at maturity" over its "issue
price." The issue price of a Regular Certificate will generally be the first
price at which a substantial amount of Regular Certificates of that class are
first sold to the public (excluding bond houses, brokers, underwriters or
wholesalers). The issue price of a Regular Certificate also will include the
amount paid by an initial Regular Certificateholder, if any, for accrued
interest that relates to a period prior to the issue date of the Regular
Certificate. The stated redemption price at maturity of a Regular Certificate
will equal all payments to be made on the Certificate other than payments which
constitute "qualified stated interest." Under the OID Regulations, qualified
stated interest generally means interest payable at a single fixed rate or
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. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Regular Certificates,
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Regular Certificates includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first Distribution Date on a Regular Certificate is either longer or shorter
than the interval between subsequent Distribution Dates, all or part of the
interest foregone, in the case of the longer interval, and all of the additional
interest, in the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule described
below. The OID Regulations suggest that all interest on a long first period
Regular Certificate that is issued with non-de minimis OID may be treated as
OID. Regular Certificateholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a Regular
Certificate.
Under the 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. Although currently unclear, it appears that the schedule of such
distributions should be determined in accordance with the Prepayment Assumption.
The Prepayment Assumption with respect to a Series of Regular Certificates will
be set forth in the related Prospectus Supplement. Holders generally must report
de minimis OID pro rata as principal payments are received, and such income will
be capital gain if the Regular Certificate is held as a capital asset. However,
accrual method holders may elect to accrue all de minimis OID as well as market
discount under a constant interest method.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the original issue discount that
accrues on a Regular Certificate for each day the Regular Certificateholder
holds the Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a Regular Certificate, a
calculation will be made of the portion of the
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original issue discount that accrues during each successive period (an "accrual
period") that ends on the day in the calendar year corresponding to a
Distribution Date (or if Distribution Dates are on the first day or first
business day of the immediately preceding month, interest may be treated as
payable on the last day of the immediately preceding month) and begins on the
day after the end of the immediately preceding accrual period (or on the issue
date in the case of the first accrual period). This will be done, in the case of
each full accrual period, by (i) adding (a) the present value at the end of the
accrual period (determined by using as a discount factor the original yield to
maturity of the Regular Certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the Regular Certificate
under the Prepayment Assumption, and (b) any payments included in the stated
redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the "adjusted issue price" of the Regular
Certificates at the beginning of such accrual period. The "adjusted issue price"
of a Regular Certificate at the beginning of the first accrual period is its
issue price; the "adjusted issue price" of a Regular Certificate at the
beginning of a subsequent accrual period is the "adjusted issue price" at the
beginning of the immediately preceding accrual period plus the amount of
original issue discount allocable to that accrual period and reduced by the
amount of any payment other than a payment of stated periodic interest made at
the end of or during that accrual period. The original issue discount accrued
during an accrual period 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 accrual period. The calculation of original issue discount under the method
described above will cause the accrual of original issue discount to either
increase or decrease (but never below zero) in a given accrual period to reflect
the fact that prepayments are occurring faster or slower than under the
Prepayment Assumption. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount may be
determined according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a Regular Certificate issued with original issue
discount who purchases the Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of original issue discount on that Regular
Certificate. In computing the daily portions of original issue discount for such
a purchaser (as well as an initial purchaser that purchases at a price higher
than the adjusted issue price but less than the stated redemption price at
maturity), however, the daily portion is reduced by the amount that would be the
daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the excess of (a) the
purchaser's adjusted basis in the Regular Certificate immediately after the
purchase thereof over (b) the adjusted issue price of the Regular Certificate,
and the denominator of which is the excess of (c) all amounts remaining to be
paid on the Regular Certificate, other than qualified stated interest, over (d)
the adjusted issue price of the Regular Certificate.
Acquisition Premium. A purchaser of a Regular Certificate at a price
greater than its adjusted issue price but less than its 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."
Variable Rate Regular Certificate. Regular Certificates may provide for
interest based on a variable rate. Under the OID Regulations, interest is
treated as payable at a variable rate and not as contingent interest if,
generally, (i) the issue price does not exceed the original principal balance,
and (ii) the interest compounds or is payable at least annually at current
values of (a) one or more "qualified floating rates," (b) a single fixed rate
and one or more qualified floating rates, (c) a single "objective rate," or (d)
a single fixed rate and a single objective rate that is a "qualified inverse
floating rate." A floating rate is a qualified floating rate if variations in
the rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds, where such rate is subject to a multiple of not
less than zero nor more than 1.35. Such rate may also be increased or decreased
by a fixed spread or subject to a fixed cap or floor, or a cap or floor that is
not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate includes a rate determined using a
single fixed formula and that is based on one or more qualified floating rates
or the yield or changes in the price of actively traded personal property.
Certain proposed OID Regulations
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would expand the definition of objective rate to include any rate (other than a
qualified floating rate) that is determined using a single fixed formula and
that is based on objective financial or economic information, provided that such
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 that does not have a variable rate under the
foregoing rules; for example, a class that bears different rates at different
times during the period it is outstanding such that it is considered
significantly "front-loaded" or "back-loaded" within the meaning of the OID
Regulations. It is possible that such a class may be considered to bear
"contingent interest" within the meaning of the OID Regulations and the proposed
OID Regulations. The proposed OID Regulations, as they relate to the treatment
of contingent interest, are by their terms not applicable to Regular
Certificates. However, if final regulations dealing with contingent interest
with respect to Regular Certificates apply the same principles as the proposed
OID Regulations, such regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Regular Certificates as ordinary income.
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 Depositor 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 otherwise specified in the
applicable Prospectus Supplement, the Depositor 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 includable 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.
Unless otherwise specified in the applicable Prospectus Supplement, the
Depositor 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. 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 may also be subject
to the market discount provisions of Code Sections 1276 through 1278. Under
these provisions and the OID Regulations, "market discount" equals the excess,
if any, of (i) the Regular Certificate's stated principal amount or, in the case
of a Regular Certificate with original issue discount, the adjusted issue price
(determined for this purpose as if the purchaser had purchased such Regular
Certificate from an original holder) over (ii) the price for such Regular
Certificate paid by the purchaser. A Certificateholder that purchases a REMIC
Regular Certificate at a market discount will recognize income upon receipt of
each distribution representing stated redemption
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price. In particular, under Section 1276 of the Code such a holder generally
will be required to allocate each such principal distribution first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder using the accrual method of
accounting to elect to accrue all interest, discount (including de minimis
market or original issue discount) and premium in income as interest, based on a
constant yield method. If such an election were made with respect to a REMIC
Regular Certificate with market discount, the Certificateholder is deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate that
is acquired at a premium is deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "-- Regular
Certificates -- Premium." The election to accrue interest, discount and premium
on a constant yield method with respect to a Certificate is irrevocable.
Market discount with respect to a Regular Certificate will be considered to
be zero if the amount allocable to the Regular Certificate is less than 0.25% of
the Regular Certificate's stated redemption price at maturity multiplied by the
Regular Certificate's weighted average maturity remaining after the date of
purchase. If market discount on a Regular Certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated to the
remaining principal payments on the Regular Certificate, and gain equal to such
allocated amount will be recognized when the corresponding principal payment is
made. Treasury regulations implementing the market discount rules have not yet
been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond shall be
treated as ordinary income to the extent that it does not exceed the accrued
market discount at the time of such payment. The amount of accrued market
discount for purposes of determining the tax treatment of subsequent principal
payments or dispositions of the market discount bond is to be reduced by the
amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the Holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. For Regular
Certificates issued with original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the period.
For Regular Certificates issued without original issue discount, the amount of
market discount that accrues during a period is equal to the product of (a) the
total remaining market discount and (b) a fraction, the numerator of which is
the amount of stated interest paid during the accrual period and the denominator
of which is the total amount of stated interest remaining to be paid at the
beginning of the period. For purposes of calculating market discount under any
of the above methods in the case of instruments (such as the Regular
Certificates) which provide for payments which may be accelerated by reason of
prepayments of other obligations securing such instruments, the same Prepayment
Assumption applicable to calculating the accrual of original issue discount will
apply.
A holder of a Regular Certificate that acquires such Regular Certificate at
a market discount also may be required to defer, until the maturity date of such
Regular Certificate or its earlier disposition in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or accrued
during the taxable year on indebtedness incurred or maintained to purchase or
carry the Regular Certificate in excess of the aggregate amount of interest
(including original issue discount) includable in such holder's gross income
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for the taxable year with respect to such Regular Certificate. The amount of
such net interest expense deferred in a taxable year may not exceed the amount
of market discount accrued on the Regular Certificate for the days during the
taxable year on which the holder held the Regular Certificate and, in general,
would be deductible when such market discount is includable in income. The
amount of any remaining deferred deduction is to be taken into account in the
taxable year in which the Regular Certificate matures or is disposed of in a
taxable transaction. In the case of a disposition in which gain or loss is not
recognized in whole or in part, any remaining deferred deduction will be allowed
to the extent of gain recognized on the disposition. This deferral rule does not
apply if the Regular Certificateholder elects to include such market discount in
income currently as it accrues on all market discount obligations acquired by
such Regular Certificateholder in that taxable year or thereafter.
Premium. A purchaser of a Regular Certificate that purchases the Regular
Certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium, and may elect to amortize
such premium under a constant yield method. It is not clear whether the
Prepayment Assumption would be taken into account in determining the life of the
Regular Certificate for this purpose. However, the Legislative History states
that the same rules that apply to accrual of market discount (which rules
require use of a Prepayment Assumption in accruing market discount with respect
to Regular Certificates without regard to whether such Certificates have
original issue discount) will also apply in amortizing bond premium under Code
Section 171. The Code provides that amortizable bond premium will be allocated
among the interest payments on such Regular Certificates and will be applied as
an offset against such interest payment.
Deferred Interest. Certain classes of Regular Certificates may provide for
the accrual of interest when one or more ARM Loans are adding interest to their
principal balance by reason of negative amortization ("Deferred Interest"). Any
Deferred Interest that accrues with respect to a class of Regular Certificates
will constitute income to the holders of such Certificates prior to the time
distributions of cash with respect to such Deferred Interest are made. It is
unclear, under the OID Regulations, whether any of the interest on such
Certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on the Certificates must be included in the
stated redemption price at maturity of the Certificate and accounted for as
original issue discount (which could accelerate such inclusion). Interest on
Regular Certificates must in any event be accounted for under an accrual method
by the holders of such Certificates and, therefore, applying the latter analysis
may result only in a slight difference in the timing of the inclusion in income
of interest on such Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more Classes of Subordinate Certificates, and in the event there
are defaults or delinquencies on the Mortgage Loans, amounts that would
otherwise be distributed on the Subordinate Certificates may instead be
distributed on the Senior Certificates. Holders of Subordinate Certificates
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinate Certificates attributable to defaults and
delinquencies on the Mortgage Loans, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a holder of a Subordinate Certificate in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinate Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Loans. However, the law is unclear with
respect to the timing and character of such losses or reductions in income, and,
accordingly, Holders of Subordinate Certificates should consult their own tax
advisors on this point.
Sale, Exchange or Redemption. Upon the sale, exchange or redemption of a
Regular Certificate, the holder will recognize gain or loss equal to the
difference between the amount realized on such disposition, and the holder's
adjusted basis in the Regular Certificate. Such adjusted basis generally will
equal the cost of the Regular Certificate to the holder, increased by any
original issue discount and market discount included in the holder's gross
income with respect to the Regular Certificate, and reduced (but not below zero)
by payments included in the stated redemption price at maturity previously
received by the holder and by any amortized premium. Except as provided in the
following paragraph and as provided under "--Market Discount" above,
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any such gain or loss will be capital gain or loss, provided that the Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a Regular Certificate that might
otherwise be capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess, if any, of (i) the amount that would have
been includable in such holder's income with respect to the Regular Certificate
had income accrued thereon at a rate equal to 110% of the AFR as defined in Code
Section 1274(d) determined as of the date of purchase of such Regular
Certificate, over (ii) the amount actually includable in such holder's income.
Regular Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale or
exchange of a Regular Certificate by a bank or a thrift institution to which
such section applies will be ordinary income or loss.
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Non-Interest Expenses of the REMIC. Under the REMIC regulations, if the
REMIC is considered to be a "single-class REMIC," a portion of the REMIC's
servicing, administrative and other non-interest expenses will be allocated as a
separate item to those Regular Certificateholders that are "pass-through
interest holders." Certificateholders that are "pass-through interest holders"
should consult their own tax advisors about the impact of these rules on an
investment in the Regular Certificates. See "Taxation of the
REMIC -- Pass-Through of Non-Interest Expenses of the REMIC" below.
Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued original issue discount) on the Regular Certificates to
a Regular Certificateholder who is a non-U.S. Person not engaged in a trade or
business within the United States, will not be subject to federal withholding
tax if (i) such Regular Certificateholder does not actually or constructively
own 10 percent or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as the Trust
Fund or the beneficial owners of the related Residual Certificates (the
"Issuer")); (ii) such Regular Certificateholder is not a controlled foreign
corporation (within the meaning of Code Section 957), related to the Issuer; and
(iii) such Regular Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that such Regular
Certificateholder is a foreign person and providing the name and address of such
Regular Certificateholder). If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued original issue discount, such holder may be subject to a 30% withholding
tax, subject to reduction under any applicable tax treaty.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Regular Certificateholders Who Are Non-U.S. Persons and persons related to
such holders should not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders should not
acquire any Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Servicer will furnish or
make available, within a reasonable time after the end of each calendar year, to
each Regular Certificateholder at any time during such year, such information as
may be deemed necessary or desirable to assist Regular Certificateholders in
preparing their federal income tax returns, or to enable holders to make such
information available to owners or other financial intermediaries of holders
that hold such Regular Certificates. If a holder, owner or other recipient of a
payment on behalf of an owner fails to supply a certified taxpayer
identification number or if the
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Secretary of the Treasury determines that such person has not reported all
interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "--Prohibited
Transactions and Other Taxes" herein. Instead, each original holder of a
Residual Certificate will report on its federal income tax return, as ordinary
income, its share of the taxable income of the REMIC for each day during the
taxable year on which such holder owns any Residual Certificates. The taxable
income of the REMIC for each day will be determined by allocating the taxable
income of the REMIC for each calendar quarter ratably to each day in the
quarter. Such a holder's share of the taxable income of the REMIC for each day
will be based on the portion of the outstanding Residual Certificates that such
holder owns on that day. The taxable income of the REMIC will be determined
under an accrual method and will be taxable to the Residual Certificateholders
without regard to the timing or amounts of cash distributions by the REMIC.
Ordinary income derived from Residual Certificates will be "portfolio income"
for purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the assets of the Trust
Fund or as debt instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable income from
the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate such a mismatching of
income and cash distributions. This mismatching may be caused by the use of
certain required tax accounting methods by the REMIC, variations in the
prepayment rate of the underlying Mortgage Loans and certain other factors.
Depending upon the structure of a particular transaction, the aforementioned
factors may significantly reduce the after-tax yield of a Residual Certificate
to a Residual Certificateholder. Investors should consult their own tax advisors
concerning the federal income tax treatment of a Residual Certificate and the
impact of such tax treatment on the after-tax yield of a Residual Certificate.
A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such Residual Certificateholder owns such Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce (or increase) the income of a subsequent holder of
a Residual Certificate that purchased such Residual Certificate at a price
greater than (or less than) the adjusted basis such Residual Certificate would
have in the hands of an original Residual Certificateholder. See "--Sale or
Exchange of Residual Certificates" below. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for any such adjustments.
Excess Inclusions. A portion of the income on a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a Residual Certificateholder; (ii) will
be treated as "unrelated business taxable income" within the meaning of Code
Section 512 if the Residual Certificateholder is a pension fund or any other
organization that is subject to tax only on its unrelated business taxable
income (see "--Tax-Exempt Investors" below); and (iii) is not eligible for any
reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor. See "--Non-U.S. Persons" below.
The exception for thrift institutions is available only to the institution
holding the Residual Certificate, and not to any affiliate of the institution,
unless the affiliate is a subsidiary all the stock of which, and substantially
all the indebtedness of which, is held by the institution, and
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which is organized and operated exclusively in connection with the organization
and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate over (ii) the sum of the
"daily accruals" (as defined below) for all days during the calendar quarter on
which the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purpose, the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate, increased by the amount of daily accruals for all prior quarters,
and decreased (but not below zero) by the aggregate amount of payments made on
the Residual Certificate before the beginning of such quarter. The "Federal
long-term rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
As an exception to the general rule described above, the Treasury
Department has authority to issue regulations that would treat the entire amount
of income accruing on a Residual Certificate as excess inclusions if the
Residual Certificates in the aggregate are considered not to have "significant
value." Under the REMIC Regulations, Residual Certificateholders that are thrift
institutions described in Code Section 593 can offset excess inclusions with
unrelated deductions, losses and loss carryovers provided the Residual
Certificates have "significant value." For purposes of applying this rule,
thrift institutions that are members of an affiliated group filing a
consolidated return, together with their subsidiaries formed to issue REMICs,
are treated as separate corporations. Residual Certificates have "significant
value" if: (i) the Residual Certificates have an aggregate issue price that is
at least equal to 2% of the aggregate issue price of all Residual Certificates
and Regular Certificates with respect to the REMIC and (ii) the anticipated
weighted average life of the Residual Certificates is at least 20% of the
anticipated weighted average life of the REMIC based on the anticipated
principal payments to be received with respect thereto (using the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents), except that all
anticipated distributions are to be used if the Residual Certificate is not
entitled to any principal payments or is entitled to a disproportionately small
portion relative to interest payments thereon. The principal amount will be
considered disproportionately small if the issue price of the Residual
Certificates exceeds 125% of their initial principal amount. Finally, an
ordering rule under the REMIC Regulations provides that a thrift institution may
only offset its excess inclusion income with deductions after it has first
applied its deductions against income that is not excess inclusion income.
In the case of any Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to such Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
Residual Certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds, and certain cooperatives are subject
to similar rules.
Payments. Any distribution made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in
such Residual Certificate. To the extent a distribution exceeds such adjusted
basis, it will be treated as gain from the sale of the Residual Certificate.
Sale Or Exchange Of Residual Certificates. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the Residual Certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a Residual Certificate generally equals the cost of such Residual Certificate
to such Residual Certificateholder, increased by the taxable income of the
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REMIC that was included in the income of such Residual Certificateholder with
respect to such Residual Certificate, and decreased (but not below zero) by the
net losses that have been allowed as deductions to such Residual
Certificateholder with respect to such Residual Certificate and by the
distributions received thereon by such Residual Certificateholder. In general,
any such gain or loss will be capital gain or loss provided the Residual
Certificate is held as a capital asset. However, Residual Certificates will be
"evidences of indebtedness" within the meaning of Code Section 582(c)(1), so
that gain or loss recognized from sale of a Residual Certificate by a bank or
thrift institution to which such section applies would be ordinary income or
loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a Residual Certificate reacquires such Residual Certificate, or acquires any
other Residual Certificate, any residual interest in another REMIC or similar
interest in a "taxable mortgage pool" (as defined in Code Section 7701(i))
during the period beginning six months before, and ending six months after, the
date of such sale, such sale will be subject to the "wash sale" rules of Code
Section 1091. In that event, any loss realized by the Residual Certificateholder
on the sale will not be deductible, but, instead, will increase such Residual
Certificateholder's adjusted basis in the newly acquired asset.
TAXATION OF THE REMIC
General. As noted above, although a REMIC is a separate entity for federal
income tax purposes, a REMIC is not generally subject to entity-level tax.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Loans and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and original issue discount on the Regular Certificates
and, except as described below under "--Pass-Through of Non-Interest Expenses of
the REMIC," other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the Regular and Residual Certificates (or, if a class of Certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the Mortgage Loans and other assets of the REMIC in proportion
to their respective fair market values. A Mortgage Loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less than or greater than its principal balance, respectively. Any
such discount (whether market discount or original issue discount) will be
includable in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing original issue discount on the Regular
Certificates. The REMIC expects to elect under Code Section 171 to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to which such
election applies would be amortized under a constant yield method. It is not
clear whether the yield of a Mortgage Loan would be calculated for this purpose
based on scheduled payments or taking account of the Prepayment Assumption.
Additionally, such an election would not apply to any Mortgage Loan originated
on or before September 27, 1985. Instead, premium on such a Mortgage Loan would
be allocated among the principal payments thereon and would be deductible by the
REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and original issue
discount on the Regular Certificates. The amount and method of accrual of
original issue discount will be calculated for this purpose in the same manner
as described above with respect to Regular Certificates except that the 0.25%
per annum de minimis rule and adjustments for subsequent holders described
therein will not apply.
A Residual Certificateholder will not be permitted to amortize the cost of
the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the Residual Certificates will be added to the issue
price of the Regular Certificates in determining the REMIC's initial basis in
its assets. See "--Sale or Exchange of Residual Certificates" herein. For a
discussion of possible adjustments to income of a subsequent holder of a
Residual Certificate to reflect any difference between the actual cost of such
Residual Certificate to such holder and the adjusted basis such
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Residual Certificate would have in the hands of an original Residual
Certificateholder, see "--Allocation of the Income of the REMIC to the Residual
Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any Residual Certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in such Residual Certificate. Any net loss that is not
currently deductible by reason of this limitation may only be used by such
Residual Certificateholder to offset its share of the REMIC's taxable income in
future periods (but not otherwise). The ability of Residual Certificateholders
that are individuals or closely held corporations to deduct net losses may be
subject to additional limitations under the Code.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
Residual Interests. In the case of a "single class REMIC," however, the expenses
and a matching amount of additional income will be allocated, under the Treasury
regulations, among the holders of the Regular Certificates and the holders of
the Residual Interests on a daily basis in proportion to the relative amounts of
income accruing to each Certificateholder on that day. In general terms, a
single class REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and is structured with
the principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related Residual Interests in their entirety and
not to holders of the related Regular Certificates.
In the case of individuals (or trusts, estates, or other persons who
compute their income in the same manner as individuals) who own an interest in a
Regular or Residual Certificate directly or through a pass-through interest
holder which is required to pass miscellaneous itemized deductions through to
its owners or beneficiaries (e.g., a partnership, an S corporation, or a grantor
trust), such expenses will be deductible under Code Section 67 only to the
extent that such expenses, plus other "miscellaneous itemized deductions" of the
individual, exceed 2% of such individual's adjusted gross income. In addition,
Code Section 68 provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a certain amount
(the "Applicable Amount") will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over the Applicable Amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for the taxable year.
The amount of additional taxable income recognized by Residual
Certificateholders who are subject to the limitations of either Code Section 67
or Code Section 68 may be substantial. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS such holder's allocable share, if any, of the
REMIC's non-interest expenses. The term "pass-through interest holder" generally
refers to individuals, entities taxed as individuals and certain pass-through
entities, but does not include real estate investment trusts. Residual
Certificateholders that are "pass-through interest holders" should consult their
own tax advisors about the impact of these rules on an investment in the
Residual Certificates.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments or the
disposition of an asset representing a temporary investment of payments on the
Mortgage Loans pending payment on the Residual Certificates or Regular
Certificates. In addition, the assumption of a Mortgage Loan by a subsequent
purchaser could cause the REMIC to recognize gain, which would also be subject
to the 100 percent tax on prohibited transactions.
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In addition, certain contributions to a REMIC made after the Closing Date
could result in the imposition of a tax on the REMIC equal to 100% of the value
of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related Prospectus Supplement, such tax would be
borne first by the Residual Certificateholders, to the extent of amounts
distributable to them and then by the Master Servicer.
LIQUIDATION AND TERMINATION
If the REMIC 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
REMICs final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any prohibited transaction tax on
such sales, provided that the REMIC credits or distributes in liquidation all of
the sale proceeds plus its cash (other than the amounts retained to meet claims)
to holders of Regular and Residual Certificates within the 90-day period.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC will be treated as a partnership and the Residual Certificateholders will
be treated as the partners thereof; however, under the Treasury regulations if
there is at no time during the taxable year more than one Residual
Certificateholder, a REMIC shall not be subject to the rules of Subchapter C of
Chapter 63 of the Code relating to the treatment of Partnership items for a
taxable year. Accordingly, the REMIC will file an annual tax return on Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. In
addition, certain other information will be furnished quarterly to each Residual
Certificateholder who held such Residual Certificate on any day in the previous
calendar quarter. Each Residual Certificateholder is required to treat items on
its return consistently with their treatment on the REMIC's return, unless the
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC.
TAX-EXEMPT INVESTORS
Any Residual Certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of Code Section 512 will be subject to such tax on
that portion of the distributions received on a Residual Certificate that is
considered an "excess inclusion." See "-- Residual Certificates -- Excess
Inclusions" herein.
NON-U.S. PERSONS
Amounts paid to Residual Certificateholders who are not U.S. persons (see
"-- Regular Certificates -- Non-U.S. Persons") are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual Holders may
qualify as "portfolio interest," subject to the conditions described in
"-- Regular Certificates" above, but only to the extent that the Mortgage Loans
were originated after July 18, 1984, and the Mortgage Loans to which the
Residual Certificates relate are in "registered form" within the meaning of
Section 163(f)(1) of the Code. In general, it is expected that Mortgage Loans
will not be treated as in registered form. Furthermore, the rate of withholding
on any income on a Residual Certificate that is excess inclusion income will not
be subject to reduction under any applicable tax treaties. See "-- Residual
Certificates -- Excess Inclusions." If the portfolio interest exemption is
unavailable, amounts paid will be subject to United States withholding tax when
paid or otherwise distributed (or when the Residual Certificate is disposed of)
under rules similar to those for withholding upon disposition of debt
instruments that have original issue discount. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those amounts
be taken into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where
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the Residual Certificates do not have significant value). See "-- Residual
Certificates -- Excess Inclusions." If the amounts paid to Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of Residual
Certificates, see "-- Tax-Related Restrictions on Transfers of Residual
Certificates" below.
Regular Certificateholders and persons related to such holders should not
acquire any Residual Certificates, and Residual Certificateholders and persons
related to Residual Certificateholders should not acquire any Regular
Certificates without consulting their tax advisors as to the possible adverse
tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations" (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization." The amount of the tax equals the product of (A) an
amount (as determined under the REMIC regulations) equal to the present value of
the total anticipated "excess inclusions" with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middlemen) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A "disqualified
organization" means (A) the United States, any State, possession, or political
subdivision thereof, any foreign government, any international organization, or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization, and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet issued, any person holding an interest in a
pass-through entity as a nominee for another will, with respect to such
interest, be treated as a pass-through entity.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a Residual Certificate may be,
directly or indirectly, purchased, transferred or sold without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the Residual Certificate as a
nominee or agent for a disqualified organization, and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the Residual
Certificate.
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Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a "U.S. Person," as defined below, if a significant purpose of the transfer
is to enable the transferor to impede the assessment or collection of tax. A
Noneconomic Residual Certificate is any Residual Certificate (including a
Residual Certificate with a positive value at issuance) unless, at the time of
transfer, taking into account the Prepayment Assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents, (i) the present value of the expected future
distributions on the Residual Certificate 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. 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 transferor is presumed not to have such knowledge
if (i) the transferor conducted a reasonable investigation of the transferee and
(ii) the transferee acknowledges to the transferor that the residual interest
may generate tax liabilities in excess of the cash flow and the transferee
represents that it intends to pay such taxes associated with the residual
interest as they become due. If a transfer of a Noneconomic Residual Certificate
is disregarded, the transferor would continue to be treated as the owner of the
Residual Certificate and would continue to be subject to tax on its allocable
portion of the net income of the REMIC.
Mark to Market Rules. Prospective purchasers of a Residual Certificate
should be aware that on January 3, 1995, the IRS released proposed regulations
under Section 475 (the "Proposed Regulations"). The Proposed Regulations provide
that any Residual Certificate acquired after January 3, 1995, cannot be marked
to market, regardless of the value of such Residual Certificate. The Proposed
Regulations change temporary regulations under Section 475 (the "Temporary
Regulations") which were issued on December 28, 1993, and which allowed
securities dealers to mark to market securities held for sale to customers,
including Residual Certificates which did not have "negative value." In general,
a Residual Certificate has negative value if, as of the date a taxpayer acquires
the Residual Certificate, the present value of the tax liabilities associated
with holding the Residual Certificate exceeds the sum of (i) the present value
of the expected future distributions on the Residual Certificate, and (ii) the
present value of the anticipated tax savings associated with holding the
Residual Certificate as the REMIC generates losses. The amounts and present
values of the anticipated tax liabilities, expected future distributions and
anticipated tax savings are all to be determined using (i) the prepayment and
reinvestment assumptions adopted under Section 1272(a)(6), or that would have
been adopted had the REMIC's regular interests been issued with original issue
discount, (ii) any required or permitted clean up calls, or required qualified
liquidation, provided for in the REMIC's organizational documents and (iii) a
discount rate equal to the "applicable Federal rate" (as specified in Section
1274(d)(1), that would apply to a debt instrument issued on the date of
acquisition of the Residual Certificate. The Proposed Regulations still apply to
any REMIC residual interest acquired on or prior to January 3, 1995. Thus,
Holders of positive value REMIC residual interests acquired on or prior to
January 3, 1995, may continue to mark such residual interests to market for the
entire economic life of such interests. Prospective purchasers of a Residual
Certificate should consult their tax advisors regarding the possible application
of the Proposed Regulations.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a "U.S. Person," unless such transferee's income in
respect of the Residual Certificate is effectively connected with the conduct of
a United Sates trade or business. A Residual Certificate is deemed to have a tax
avoidance potential unless, at the time of transfer, the transferor reasonably
expects that the REMIC will distribute to the transferee amounts that will equal
at least 30 percent of each excess inclusion, and that such amounts will be
distributed at or after the time the excess inclusion accrues and not later than
the end of the calendar year following the year of accrual. If the non-U.S.
Person transfers the Residual Certificate to a U.S. Person, the transfer will be
disregarded, and the foreign transferor will continue to be treated as the
owner, if the transfer has the effect of allowing the transferor to avoid tax on
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accrued excess inclusions. The Agreement will provide that no record or
beneficial ownership interest in a Residual Certificate may be, directly or
indirectly, transferred to a non-U.S. Person unless such person provides the
Trustee with a duly completed I.R.S. Form 4224 and the Trustee consents to such
transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in Residual Certificates are advised to consult their own
tax advisors with respect to transfers of the Residual Certificates and, in
addition, pass-through entities are advised to consult their own tax advisors
with respect to any tax which may be imposed on a pass-through entity.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described above in
"Certain Federal Income Tax Considerations," potential investors should consider
the state, local and other tax consequences relating to the acquisition,
ownership and disposition of the Certificates. State, local and other income tax
law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the tax laws other than
federal income tax law. Therefore, potential investors should consult their tax
advisors with respect to the state, local and other tax consequences to them
arising from an investment in the Certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Act of 1974, as amended ("ERISA") and the Code, which apply
only to Certificates of a Series that are not divided into subclasses. If
Certificates are divided into subclasses the related Prospectus Supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to such Certificates.
ERISA imposes requirements on employee benefit plans subject to ERISA (and
on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are invested
subject to the requirement of ERISA and/or the Code) (collectively "Plans") and
on persons who are fiduciaries with respect to such Plans. Generally, ERISA
applies to investments made by Plans. Among other things, ERISA requires that
the assets of Plans be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority and discretion to manage and
control the assets of such Plans. ERISA also imposes certain duties on persons
who are fiduciaries of Plans. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of such Plan (subject to certain exceptions
not here relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Senior Certificates without regard to the ERISA considerations
described above and below, subject to the provisions of applicable state law.
Any such plan which is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction rules set
forth in Code Section 503.
On November 13, 1986, the United States Department of Labor ("Labor")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation or
partnership in which a Plan invests will not be deemed for purposes of ERISA to
be assets of such Plan if the equity interest acquired by the investing Plan is
a publicly-offered security. A publicly-offered
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security, as defined in the Labor Reg. Section 2510.3-101, is a security that is
widely held, freely transferable and registered under the Securities Exchange
Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Because the
Mortgage Loans may be deemed Plan assets of each Plan that purchases
Certificates, an investment in the Certificates by a Plan might be a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise tax under
Code Section 4975 unless a statutory or administrative exemption applies.
PTE 83-1
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, Labor exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions that might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in Certificates that represent
interests in a Mortgage Pool consisting of Mortgage Loans representing loans for
single family homes ("Single Family Certificates") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Certificates at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Certificates, and at least 50% of all Single Family Certificates are purchased
by persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Certificates.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinate Certificate may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Certificates. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Certificates issued in a Series consisting of only a single class of
Certificates; and (ii) Offered Certificates issued in a Series in which there is
only one class of Offered Certificates; provided that the Certificates in the
case of clause (i), or the Offered Certificates in the case of clause (ii),
evidence the beneficial ownership of both a specified percentage of future
interest payments (greater than 0%) and a specified percentage (greater than 0%)
of future principal payments on the Mortgage Loans. It is not clear whether a
class of Certificates that evidences the beneficial ownership in a Trust Fund
divided into Mortgage Loan Groups, beneficial ownership of a specified
percentage of interest payments only or principal payments only, or a notional
amount of either principal or interest payments, or a class of Certificates
entitled to receive payments of interest and principal on the Mortgage Loans
only after payments to other classes or after the occurrence of certain
specified events would be a "mortgage pass-through certificate" for purposes of
PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other
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funds inuring to its benefit, to not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided by
the pool sponsor to the Mortgage Pool. The Depositor believes that the first
general condition referred to above will be satisfied with respect to the
Certificates in a Series issued without a subordination feature, or the Senior
Certificates only in a Series issued with a subordination feature, provided that
the subordination and Reserve Fund, subordination by shifting of interests, the
pool insurance or other form of credit enhancement described herein (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
Series of Certificates is maintained in an amount not less than the greater of
one percent of the aggregate principal balance of the Mortgage Loans or the
principal balance of the largest Mortgage Loan. See "Description of the
Certificates" herein. In the absence of a ruling that the system of insurance or
other protection with respect to a Series of Certificates satisfies the first
general condition referred to above, there can be no assurance that these
features will be so viewed by Labor. The Trustee will not be affiliated with the
Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Certificates
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
UNDERWRITER EXEMPTIONS
Labor has issued to various underwriters substantially similar individual
exemptions (each, an "Underwriter Exemption" and collectively, the "Underwriter
Exemptions") which apply to certain sales and servicing of "certificates" that
are obligations of a "trust" with respect to which such underwriters are the
underwriter, manager or co-manager of an underwriting syndicate. The Underwriter
Exemptions provide relief which is generally similar to that provided by PTE
83-1, but is broader in several respects.
The Underwriter Exemptions contain several requirements, some of which
differ from those in PTE 83-1. The Underwriter Exemptions contain an expanded
definition of "certificate," which includes an interest which entitles the
Holder to pass-through payments of principal, interest and/or other payments.
The Underwriter Exemptions contain an expanded definition of "trust" which
permits the trust corpus to consist of secured consumer receivables, including
obligations secured by shares issued by a cooperative housing association. The
definition of "trust," however, does not include private mortgage-backed
securities like the Private Mortgage-Backed Securities, and does not include any
other investment pool unless, inter alia: (i) the investment pool consists only
of assets of the type which have been included in other investment pools; (ii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to the
Plan's acquisition of certificates pursuant to the Underwriter Exemptions; and
(iii) certificates in such other investment pools have been rated in one of the
three highest generic rating categories of the four credit rating agencies noted
below. Generally, the Underwriter Exemptions hold that the acquisition of
certificates by a Plan must be 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. The Underwriter Exemptions
require that the rights and interests evidenced by the certificates held by a
Plan not be "subordinated" to the rights and interests evidenced by other
certificates of the same trust. Further, the Underwriter Exemptions require that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
Standard and Poor's Ratings Services, Moody's Investors Service, Inc., Duff &
Phelps Inc. or Fitch Investors Service, Inc. The Underwriter Exemptions also
specify that the pool trustee must not be an affiliate of the pool sponsor, nor
an affiliate of the underwriter, the pool servicer, any obligor with respect to
mortgage loans included in the trust constituting more than five percent of the
aggregate unamortized principal balance of the assets in the trust, or any
affiliate of such entities. Finally, the Underwriter Exemptions stipulate that
any Plan investing in the certificates must be an "accredited investor," as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
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Commission under the Securities Act of 1933. The Prospectus Supplement relating
to a Series of Certificates will describe the Underwriters Exemption, if any,
that may be applicable to such Series of Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase Certificates
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1, and the potential consequences in their specific
circumstances, prior to making such investment. The Prospectus Supplement for a
Series of Certificates will contain additional information with respect to PTE
83-1 and other prohibited transaction exemptions that may be applicable to such
Series of Certificates. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment procedure and
diversification an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Certificates will specify
which, if any, of the Classes of Certificates offered thereby will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Certificates that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
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 as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991, specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
the Certificates that qualify as mortgage related securities will constitute
legal investments for entities subject to such legislation only to the extent
provided therein. Approximately twenty-one states adopted such legislation prior
to the October 4, 1991, deadline. SMMEA provides, however, that in no event will
the enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in Certificates that qualify as mortgage
related securities, or require the sale or other disposition of such
Certificates, so long as such contractual commitment was made or such
Certificates acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
SS24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the 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, and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), (whether or not the Class of Certificates
under consideration for purchase constitutes a "mortgage related security").
All depository institutions considering an investment in the Certificates
(whether or not the Class of Certificates under consideration for purchase
constitutes a mortgage related security should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement"), setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including mortgage related securities, which are "high-risk
mortgage securities" as defined in the Policy Statement. According to the Policy
Statement, such "high-risk mortgage securities" include securities such as
Certificates not entitled to distributions allocated to principal or interest,
or Subordinated Certificates. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals
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thereafter), whether a particular mortgage derivative product is a "high-risk
mortgage security," and whether the purchase (or retention) of such a product
would be consistent with the Policy Statement.
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 and provisions
that may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will be
offered in Series. The distribution of the Certificates may be effected 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. If so specified in the related
Prospectus Supplement, the Certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by First Union Capital Markets, an affiliate of the Depositor, acting as
underwriter with other underwriters, if any, named therein. In such event, the
Prospectus Supplement may also specify that the underwriters will not be
obligated to pay for any Certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Depositor. In connection with
the sale of the Certificates, underwriters may receive compensation from the
Depositor or from purchasers of the Certificates in the form of discounts,
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Certificates
will be distributed by First Union Capital Markets acting as agent or in some
cases as principal with respect to Certificates that it has previously purchased
or agreed to purchase. If First Union Capital Markets acts as agent in the sale
of Certificates, First Union Capital Markets will receive a selling commission
with respect to each Series of Certificates, depending on market conditions,
expressed as a percentage of the aggregate principal balance of the Certificates
sold hereunder as of the Cut-off Date. The exact percentage for each Series of
Certificates will be disclosed in the related Prospectus Supplement. To the
extent that First Union Capital Markets elects to purchase Certificates as
principal, First Union Capital Markets may realize losses or profits based upon
the difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of
Certificates of such Series.
This Prospectus and the related Prospectus Supplement may be used by First
Union Capital Markets, an affiliate of the Depositor, in connection with offers
and sales related to market-making transactions in the Certificates. First Union
Capital Markets may act as principal or agent in such transactions. Such sales
will be made at prices related to prevailing market prices at the time of sale
or otherwise.
The Depositor will indemnify First Union Capital Markets and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments First Union Capital
Markets and any underwriters may be required to make in respect thereof.
In the ordinary course of business, First Union Capital Markets and the
Depositor may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's Mortgage
Loans pending the sale of such Mortgage Loans or interests therein, including
the Certificates.
The Depositor anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be
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<PAGE> 197
deemed to be "underwriters" within the meaning of the Securities Act of 1933 in
connection with reoffers and sales by them of Certificates. Holders of
Certificates should consult with their legal advisors in this regard prior to
any such reoffer or sale.
Underwriters or agents and their associates may be customers of (including
borrowers from), engage in transactions with and/or perform services for, FUNB,
its affiliates and the Trustee in the ordinary course of business.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters relating to the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Kilpatrick Stockton LLP.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, a class of Book-Entry Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Residential Mortgage Pass-Through
Certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. Holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such Holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their Participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Residential Mortgage Pass-Through
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading Between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
Residential Mortgage Pass-Through Certificates issues in same-day funds.
Trading Between Cedel and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
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Trading Between DTC Seller and CEDEL or Euroclear Purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading Between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account will be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the
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intended value date (i.e., the trade fails), receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would instead be valued
as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the Holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial owners of
Global Securities that are non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form
W-8 must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with Actively Connected Income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or Reduced Rate for Non-U.S. Persons Resident in Treaty
Countries (Form 1001). Non-U.S. Persons that are Certificate Owners
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the Certificate Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom
it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
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The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includable in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
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INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1986 Act.................................................... 66
Accrual Certificates........................................ 28
Accrual period.............................................. 72
Act......................................................... 54
Adjusted issue price........................................ 67
Advance..................................................... 8
AFR......................................................... 68
Agency Securities........................................... i
Agreement................................................... 1
ALTA........................................................ 23
Applicable Amount........................................... 80
ARM Loans................................................... 67
Available Distribution Amount............................... 27
Balloon Loan................................................ 23
Balloon payments............................................ 2
Balloon Period.............................................. 23
Bankruptcy Bond............................................. 37
Bankruptcy Bonds............................................ 7
Beneficial owner............................................ 31
Book-Entry Certificates..................................... 31
Buydown Fund................................................ 13
Buydown Loans............................................... 13
Capital asset............................................... 76
Cede........................................................ 31
CEDEL....................................................... 31
CEDEL Participants.......................................... 32
CERCLA...................................................... 59
Certificate Balance......................................... 29
Certificate Owners.......................................... 31
Certificate Register........................................ 26
Certificates................................................ 1
Charter Act................................................. 18
Closing Date................................................ 1
Code........................................................ 8
Collateral Value............................................ 14
Collection Account.......................................... 42
Combined Loan-to-Value Ratio................................ 14
Commission.................................................. ii
Cooperative................................................. 33
Cooperative Loans........................................... 2
Cooperatives................................................ 2
Cut-off Date................................................ 6
Deferred Interest........................................... 67
Definitive Certificate...................................... 31
Depositor................................................... 1
Detailed Description........................................ 12
Determination Date.......................................... 28
Disqualified organization................................... 82
Distribution Date........................................... 5
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DTC......................................................... 31
Due-on-sale................................................. 3
Eligible Investments........................................ 42
EPA......................................................... 59
ERISA....................................................... 9
Euroclear................................................... 31
Euroclear Operator.......................................... 33
Euroclear Participants...................................... 32
European Depositaries....................................... 31
Excess inclusion............................................ 77
Excess inclusions........................................... 82
Excess servicing............................................ 65
FDIC........................................................ 24
Federal long-term rate...................................... 78
FHA......................................................... 2
FHA Insurance............................................... 7
FHA Loans................................................... 15
FHLMC....................................................... 23
FHLMC Act................................................... 17
FHLMC Certificate Group..................................... 17
FHLMC Certificates.......................................... 3
Financial Intermediary...................................... 31
FNMA........................................................ 23
FNMA Certificates........................................... 3
FUNB........................................................ 1
Funding Period.............................................. 8
Garn-St Germain Act......................................... 60
Global Securities........................................... II-1
GNMA........................................................ 1
GNMA Certificates........................................... 3
GNMA Issuer................................................. 15
Guaranty Agreement.......................................... 15
Home Equity Loans........................................... 2
Housing Act................................................. 15
HUD......................................................... 48
Insurance Proceeds.......................................... 43
Insured Expenses............................................ 43
IRS......................................................... 63
Issuer...................................................... 69
Labor....................................................... 84
Legislative History......................................... 66
Letter of Credit............................................ 7
Limited Guarantee........................................... 7
Liquidation Expenses........................................ 43
Liquidation Proceeds........................................ 43
Loan-to-Value Ratio......................................... 14
lockout periods............................................. 3
Master REMIC................................................ 10
Master Servicer............................................. 1
Master Servicing Fee........................................ 49
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Morgan...................................................... 31
Mortgage.................................................... 41
Mortgage Assets............................................. 1
Mortgage Loans.............................................. i
Mortgage Note............................................... 41
Mortgage pass-through certificate........................... 85
Mortgage Pool............................................... 1
Mortgage Pool Insurance Policy.............................. 6
Mortgage Rate............................................... 5
Mortgage related securities................................. 8
Mortgaged Properties........................................ 12
Mortgagor................................................... 10
NCUA........................................................ 87
Net Liquidation Proceeds.................................... 43
OID Regulations............................................. 66
Participant................................................. 31
Parties in Interest......................................... 85
Pass-through entity......................................... 82
Pass-through interest holder................................ 80
Pass-Through Rate........................................... 5
Plans....................................................... 5
PMBS Agreement.............................................. 20
PMBS Issuer................................................. 20
PMBS Servicer............................................... 20
PMBS Trustee................................................ 20
Policy Statement............................................ 87
Pool Insurer................................................ 35
Pre-Funded Amount........................................... 1
Pre-Funding Account......................................... 8
Prepayment Assumption....................................... 66
Primary Insurer............................................. 46
Primary Mortgage Insurance Policy........................... 12
Principal Prepayments....................................... 29
Private Mortgage-Backed Securities.......................... i
Proposed Regulations........................................ 83
PTE 83-1.................................................... 85
Purchase Price.............................................. 25
Qualified mortgage.......................................... 70
Rating Agency............................................... 9
Record Date................................................. 26
Regular Certificates........................................ 69
Regular interests........................................... 27
Relevant Depositary......................................... 31
Relief Act.................................................. 61
REMIC....................................................... 8
REMIC Regulations........................................... 61
Reserve Fund................................................ 6
Residual Certificates....................................... 69
Residual interests.......................................... 27
Retained Interest........................................... 25
</TABLE>
iii
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Rules....................................................... 31
Seller...................................................... i
Sellers..................................................... 12
Senior Certificates......................................... 4
Series...................................................... 1
Significant value........................................... 78
Single Family Certificates.................................. 85
SMMEA....................................................... 8
Special Hazard Insurance Policy............................. 6
Special Hazard Insurer...................................... 36
Stripped ARM Obligations.................................... 67
Stripped Bond Certificates.................................. 65
Stripped bonds.............................................. 65
Stripped Coupon Certificates................................ 65
Stripped coupons............................................ 65
Sub-Servicer................................................ 1
Subordinated Certificates................................... 4
Subsequent Mortgage Assets.................................. 1
Subsidiary REMIC............................................ 70
Subsidy Account............................................. 23
Subsidy Loans............................................... 23
Subsidy Payments............................................ 23
Surety Bond................................................. 7
Temporary Regulations....................................... 83
Terms and Conditions........................................ 33
Title V..................................................... 61
Trust Fund.................................................. i
Trustee..................................................... 1
U.S. Person................................................. 69
Underwriter Exemption....................................... 86
Underwriter Exemptions...................................... 86
VA.......................................................... 2
VA Guaranty Policy.......................................... 49
VA Insurance................................................ 7
VA Loans.................................................... 15
</TABLE>
iv
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======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE OFFERED CERTIFICATES OFFERED HEREBY, NOR AN OFFER OF THE OFFERED
CERTIFICATES IN ANY STATE OR JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM,
SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO
BE DELIVERED, THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR
SUPPLEMENTED ACCORDINGLY.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference..................................... v
Summary of Terms of the Offered Certificates.... S-1
Risk Factors.................................... S-19
The Mortgage Loan Pool.......................... S-24
The Seller and the Servicer..................... S-37
Prepayment and Yield Considerations............. S-39
Formation of the Trust Fund and Trust
Property...................................... S-46
Description of the Certificates................. S-46
Description of the Mortgage Loan Purchase
Agreement..................................... S-74
The Trustee..................................... S-75
Certain Legal Aspects of the Mortgage Loans..... S-75
Certain Federal Income Tax Consequences......... S-79
State Taxes..................................... S-82
ERISA Considerations............................ S-82
Use of Proceeds................................. S-85
Legal Investment Considerations................. S-85
Underwriting.................................... S-85
Legal Matters................................... S-86
Certificate Rating.............................. S-86
Index of Principal Terms........................ S-87
Appendix A...................................... A-1
PROSPECTUS
Prospectus Supplement........................... ii
Available Information........................... ii
Reports to Certificateholders................... ii
Incorporation of Certain Information by
Reference..................................... ii
Summary of Terms................................ 1
Risk Factors.................................... 10
The Trust Fund.................................. 12
Use of Proceeds................................. 21
The Depositor................................... 21
Mortgage Loan Program........................... 22
Description of the Certificates................. 25
Credit Enhancement.............................. 34
Yield and Prepayment Considerations............. 39
The Pooling and Servicing Agreement............. 40
Certain Legal Aspects of The Mortgage Loans..... 53
Certain Federal Income Tax Consequences......... 61
State, Local and Other Tax Considerations....... 84
ERISA Considerations............................ 84
Legal Investment................................ 87
Method of Distribution.......................... 88
Legal Matters................................... 89
Financial Information........................... 89
Rating.......................................... 89
Annex I -- Global Clearance, Settlement and Tax
Documentation Procedures...................... II-1
Index to Defined Terms.......................... i
</TABLE>
======================================================
======================================================
$347,077,774
FIRST UNION
RESIDENTIAL SECURITIZATION
TRANSACTIONS, INC.,
Depositor
MORTGAGE
PASS-THROUGH CERTIFICATES,
SERIES 1998-A
FIRST UNION NATIONAL BANK,
Seller
FIRST UNION MORTGAGE CORPORATION,
Servicer
---------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------
FIRST UNION CAPITAL MARKETS
DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
April 24, 1998
======================================================
