As filed with the Securities and Exchange Commission on November 21, 1996
Registration No. 333-4272
================================================================================
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
AMENDMENT NO. 2 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
04-3310019
(I.R.S. employer identification number)
One International Place
Room 608
Boston, MA 02110
(617) 951-7690
(Address, including zip code, and telephone number, including area code, of
registrant's principle executive offices)
Corporation Service Company
1013 Centre Road
Wilmington, Delaware 19805
(302) 998-0595
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
William J. Cullen, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
(212) 912-7682
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Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of this Registration Statement.
<PAGE>
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
plans, please check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Offering Aggregate Amount of
Title of Securities Being Amount Price Offering Registration
Registered to be Registered Per Unit Price Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates $500,000,000 100% $500,000,000 $151,556.74(1)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
disclosure in the 424(b) prospectus. You may wish to supplementally furnish the
staff with copies of draft pages prior to the use of the prospectus supplement
that includes novel or unique features. We would review these draft pages on an
expedited basis.
Response
The Registrant acknowledges comment no. 38.
<PAGE>
Ms. Paula Dubberly
November 21, 1996 Page 16.
If you should have any questions concerning this response letter, please do
not hesitate to call the undersigned at (212) 912-7682 or Sharon Anson at (212)
912-7806.
Very truly yours,
/s/ William J. Cullen
---------------------------
William J. Cullen
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus supplement and the prospectus to which it relates
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED _______, 199_
[Version 1 - Base Prospectus Supplement]
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 199_)
$________________________
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
Depositor
Mortgage Pass-Through Certificates, Series 199__-__
$_____________ Variable Rate Class A Certificates
$_____________ Variable Rate Class B Certificates
$ 100 Variable Rate Class R Certificates
-----------
The Series 199__-__ Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following four classes (each, a "Class"): (i) the Class A
Certificates and Class R Certificates (collectively, the "Senior Certificates");
(ii) the Class B Certificates; and (iii) the Class C Certificates. Only the
Senior Certificates and the Class B Certificates (collectively, the "Offered
Certificates") are offered hereby.
It is a condition of their issuance that the Senior Certificates be rated
not lower than ____, and that the Class B Certificates be rated not lower than
______, by ___________________.
-----------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG
OR ANY OF THEIR AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE DEPOSITOR, DEUTSCHE BANK AG
OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-----------
Prospective investors should review the information appearing under the
caption "Risk Factors" beginning on page S-___ herein and page __ in the
Prospectus before purchasing any Offered Certificate.
See "Index of Principal Definitions" in the Prospectus for location of
meanings of capitalized terms used but not defined herein. See "Index of
Principal Definitions" herein for location of meanings of those other
capitalized terms used herein.
There is currently no secondary market for the Offered Certificates.
_____________________ (the "Underwriter") intends to make a secondary market in
the Offered Certificates, but is not obligated to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop or,
if it does develop, that it will continue. See "Risk Factors-Limited Liquidity"
herein. The Offered Certificates will not be listed on any securities exchange.
The Offered Certificates will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the
[UNDERWRITER]
________________, 199__
<PAGE>
ii
(cover continued)
Depositor estimated to be approximately $_____________, will be ______% of the
initial aggregate Certificate Balance of the Offered Certificates[, plus accrued
interest on the Offered Certificates from the Cut-off Date]. The Offered
Certificates are offered by the Underwriter subject to prior sale, when, as and
if delivered to and accepted by the Underwriter and subject to certain other
conditions. It is expected that the Class A Certificates will be delivered in
book-entry form through the Same-Day Funds Settlement System of DTC and that the
Class B and Class R Certificates will be delivered at the offices of the
Underwriter, _________________________ _________________________________, on or
about _____________, 199__ (the "Delivery Date"), against payment therefor in
immediately available funds.
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be established by the
Depositor, that will consist primarily of a segregated pool (the "Mortgage
Pool") of ____ conventional, fixed- and adjustable-rate, multifamily or
commercial, balloon mortgage loans (the "Mortgage Loans"). As of ____________,
199___ (the "Cut-off Date"), the Mortgage Loans had an aggregate principal
balance (the "Initial Pool Balance") of $___________________, after application
of all payments of principal due on or before such date, whether or not
received. Certain characteristics of the Mortgage Loans are described herein
under "Description of the Mortgage Pool".
The rights of the holders of the Class B and Class C Certificates to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the holders of the Senior Certificates, and the rights of the
holders of the Class C Certificates to receive distributions with respect to the
Mortgage Loans will be subordinate to the rights of the holders of the Class B
Certificates, in each case to the extent described herein and in the Prospectus.
The Class A Certificates will be represented initially by certificates
registered in the name of Cede & Co., as nominee of DTC, as described herein.
The interests of the beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive certificates will be available for the Class A Certificates only
under the limited circumstances described herein and in the Prospectus. See
"Description of the Certificates-Book-Entry Registration of the Class A
Certificates" herein and "Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in the Prospectus.
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. The Class A Certificates, the Class B Certificates and the
Class C Certificates (collectively, the "REMIC Regular Certificates") will
constitute "regular interests", and the Class R Certificates will constitute the
sole class of "residual interests", in the Trust Fund. See "Certain Federal
Income Tax Consequences" herein and in the Prospectus. Transfer of the Class R
Certificates will be prohibited to any non-United States person, and will be
subject to certain additional transfer restrictions described herein under
"Certain Federal Income Tax Consequences-Special Tax Considerations Applicable
to REMIC Residual Certificates" and in the Prospectus under "Certain Federal
Income Tax Consequences-REMICs-Tax and Restrictions on Transfers of REMIC
Residual Certificates to Certain Organizations".
Distributions on the Certificates will be made, to the extent of available
funds, on the 25th day of each month or, if any such day is not a business day,
then on the next business day, beginning in _____________ 199____ (each, a
"Distribution Date"). As described herein, interest distributions on each Class
of Offered Certificates will be made on each Distribution Date based on the
variable pass-through rate (the "Pass-Through Rate") then applicable to such
Class and the stated principal amount (the "Certificate Balance") of such Class
outstanding immediately prior to such Distribution Date. The Pass-Through Rate
for each Class of Offered Certificates applicable to the first Distribution Date
will be _________% per annum. Subsequent to the initial Distribution Date, the
Pass-Through Rate for each Class of Offered Certificates will equal from time to
time the weighted average of, subject to certain adjustments described herein,
the Net Mortgage Rates (as defined herein) on the Mortgage Loans. Principal
distributions on each Class of Offered Certificates will be made in the amounts
and in accordance with the priorities described herein. See "Description of the
Certificates-Distributions" herein.
The yield to maturity on each Class of Offered Certificates will depend on,
among other things, changes in its respective Pass-Through Rate and the rate and
timing of principal payments (including by reason of prepayments, defaults
<PAGE>
iii
(cover continued)
and liquidations) on the Mortgage Loans. See "Yield and Maturity Considerations"
herein and "Yield and Maturity Considerations" and "Risk Factors-Effect of
Prepayments on Average Life of Certificates" in the Prospectus. [The following
disclosure is applicable to Stripped Interest Certificates ("Class S
Certificates"), when offered... The yield to maturity on the Class S
Certificates will be extremely sensitive to the rate and timing of principal
payments (including by reasons of prepayments, defaults and liquidations) on the
Mortgage Loans, which may fluctuate significantly from time to time. A rate of
principal payments on the Mortgage Loans that is more rapid than expected by
investors will have a material negative effect on the yield to maturity of the
Class S Certificates. Investors in the Class S Certificates should consider the
associated risks, including the risk that a rapid rate of principal payments on
the Mortgage Loans could result in the failure of investors in such Certificates
to recover fully their initial investments. See "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" and "Risk
Factors-Effect of Prepayments on Average Life of Certificates" in the
Prospectus.]
[inside front cover]
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING OFFERED
PURSUANT TO ITS PROSPECTUS DATED ____________________, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT 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.
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. An Index of Principal Definitions is included at the end of both
this Prospectus Supplement and the Prospectus. Terms that are used but not
defined in this Prospectus Supplement will have the meanings specified in the
Prospectus.
Title of Certificates............... Mortgage Pass-Through Certificates,
Series 199__-__.
Depositor........................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware Corporation. See
"The Depositor" in the Prospectus. The
Offered Certificates are not insured or
guaranteed by the Depositor, Deutsche
Bank AG or any of their affiliates.
Master Servicer..................... ____________________. See "Servicing of
the Mortgage Loans-The Master Servicer"
herein.
Special Servicer.................... _____________________. See "Servicing of
the Mortgage Loans-The Special Servicer"
herein.
Trustee ........................... _____________________. See "Description
of the Certificates-The Trustee" herein.
REMIC Administrator................. _____________________. See "Certain
Federal Income Tax
Consequences-REMICs-Reporting and Other
Administrative Matters" herein and
"Description of the Pooling
Agreements-Events of Default" and
"-Rights Upon Event of Default" in the
Prospectus.
Mortgage Loan Seller................ ________________________. See
"Description of the Mortgage Pool-The
Mortgage Loan Seller" herein.
Cut-off Date........................ ___________________, 199__.
Delivery Date....................... On or about ___________________, 199__.
Registration; Denominations......... The Class A Certificates will be issued,
maintained and transferred on the
book-entry records of DTC in
denominations of $25,000 and integral
multiples of $1 in excess thereof. The
Class B Certificates will be issued in
fully registered, certificated form in
denominations of $100,000 and in
integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to
the remainder of the initial Certificate
Balance of such Class. The Class R
Certificates will be issued in
registered, certificated form in minimum
denominations of 20% percentage interest
in such Class.
<PAGE>
S-2
The Class A Certificates will be
represented by one or more global
Certificates registered in the name of
Cede & Co., as nominee of DTC. No person
acquiring an interest in the Class A
Certificates (any such person, a "Class
A Certificate Owner") will be entitled
to receive a Class A Certificate in
fully registered, certificated form (a
"Definitive Class A Certificate"),
except under the limited circumstances
described herein and in the Prospectus.
See "Description of the
Certificates-Book-Entry Registration of
the Class A Certificates" herein and
"Description of the
Certificates-Book-Entry Registration and
Definitive Certificates" in the
Prospectus.
The Mortgage Pool................... The Mortgage Pool will consist of _____
conventional, balloon Mortgage Loans
with an Initial Pool Balance of
$_________________. On or prior to the
Delivery Date, the Depositor will
acquire the Mortgage Loans from the
Mortgage Loan Seller pursuant to a
Purchase Agreement, dated [the date
hereof], between the Depositor and the
Mortgage Loan Seller (the "Purchase
Agreement"). In the Purchase Agreement,
the Mortgage Loan Seller has made
certain representations and warranties
to the Depositor regarding the
characteristics and quality of the
Mortgage Loans and, as more particularly
described herein, has agreed to cure any
material breach thereof or repurchase
the affected Mortgage Loan. In
connection with the assignment of its
interests in the Mortgage Loans to the
Trustee, the Depositor will also assign
its rights under the Purchase Agreement
insofar as they relate to or arise out
of the Mortgage Loan Seller's
representations and warranties regarding
the Mortgage Loans. See "Description of
the Mortgage Pool-Representations and
Warranties; Repurchases" herein.
Each Mortgage Loan is secured by a first
mortgage lien on a fee simple estate in
a commercial property being operated as
a _________, _________ or _______ (__
Mortgage Loans which represent ____% of
the Initial Pool Balance) or a
multifamily rental property (__ Mortgage
Loans which represent __% of the Initial
Pool Balance) (each, a "Mortgaged
Property"). ________ of the Mortgage
Loans, which represent _____% of the
Initial Pool Balance, are secured by
liens on Mortgaged Properties located in
_______________. The remaining Mortgaged
Properties are located throughout
___________ other states. See
"Description of the Mortgage
Pool-Additional Mortgage Loan
Information" and "Risk Factors-Risks
Associated With Multifamily Properties"
and "-Risks Associated with ___________
Properties" and "Description of the
Mortgage Pool-Additional Mortgage Loan
Information" herein. ___________ of the
Mortgage Loans, which represent ______%
of the Initial Pool Balance, provide for
scheduled payments of principal and/or
interest ("Monthly Payments") to be due
on the first day of each month; the
remainder of the Mortgage Loans provide
for Monthly Payments to be due on the
____, _____, _____ or _____ day of each
month (the date in any month on which a
Monthly Payment on a Mortgage Loan is
first due, the "Due Date"). The
annualized rate at which interest
accrues (the "Mortgage Rate") on ____ of
the Mortgage Loans (the "ARM Loans"),
which represent _____% of the Initial
Pool Balance, is subject to adjustment
on specified Due Dates
<PAGE>
S-3
(each such date of adjustment, an
"Interest Rate Adjustment Date") by
adding a fixed number of basis points (a
"Gross Margin") to the value of a base
index (an "Index"), subject, in ______
cases, to lifetime maximum and/or
minimum Mortgage Rates, and in _____
cases, to periodic maximum and/or
minimum Mortgage Rates, in each case as
described herein; and the remaining
Mortgage Loans (the "Fixed Rate Loans")
bear interest at fixed Mortgage Rates.
____ of the ARM Loans, which represent
___% of the Initial Pool Balance,
provide for Interest Rate Adjustment
Dates that occur monthly, while the
remainder of the ARM Loans provide for
adjustments of the Mortgage Rate to
occur semi-annually or annually.
[Identify Mortgage Loan Index] See
"Description of the Mortgage
Pool-Certain Payment Characteristics"
herein.
The amount of the Monthly Payment on all
of the ARM Loans is subject to
adjustment on specified Due Dates (each
such date, a "Payment Adjustment Date")
to an amount that would amortize the
outstanding principal balance of the
Mortgage Loan over its then remaining
amortization schedule and pay interest
at the then applicable Mortgage Rate.
The ARM Loans provide for Payment
Adjustment Dates that occur on the Due
Date following each related Interest
Rate Adjustment Date.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly
longer than the remaining terms of such
Mortgage Loans, thereby leaving
substantial principal amounts due and
payable (each such payment, together
with the corresponding interest payment,
a "Balloon Payment") on their respective
maturity dates, unless prepaid prior
thereto.
Description of the Certificates..... The Certificates will be issued pursuant
to a Pooling and Servicing Agreement, to
be dated as of the Cut-off Date, among
the Depositor, the Master Servicer, the
Special Servicer, the Trustee and the
REMIC Administrator (the "Pooling and
Servicing Agreement"), and will
represent in the aggregate the entire
beneficial ownership interest in the
Trust Fund, which will consist of the
Mortgage Pool and certain related
assets.
The aggregate Certificate Balance of the
Certificates as of the Delivery Date
will equal the Initial Pool Balance.
Each Class of Offered Certificates will
have the initial Certificate Balance set
forth on the cover page, and the Class C
Certificates will have an initial
Certificate Balance of $____________.
See "Description of the
Certificates-General" herein.
The Pass-Through Rate applicable to each
Class of Certificates for the initial
Distribution Date will equal _____% per
annum. With respect to any Distribution
Date subsequent to the initial
Distribution Date, the Pass-Through Rate
for each Class of Certificates will
equal the weighted average of the
applicable Effective Net Mortgage Rates
for the Mortgage Loans, weighted on the
basis of their respective Stated
Principal Balances (as described herein)
immediately prior to such Distribution
Date. For
<PAGE>
S-4
purposes of calculating the Pass-Through
Rate for any Class of Certificates and
any Distribution Date, the "applicable
Effective Net Mortgage Rate" for each
Mortgage Loan is an annualized rate
equal to the Mortgage Rate in effect for
such Mortgage Loan as of the [second]
day of the most recently ended calendar
month, (a) reduced by ___ basis points
(the Mortgage Rate, as so reduced, the
"Net Mortgage Rate"), and (b) if the
accrual of interest on such Mortgage
Loan is computed other than on the basis
of a 360-day year consisting of twelve
30-day months (which is the basis of
accrual for interest on the
Certificates), then adjusted to reflect
that difference in computation. See
"Description of the
Certificates-Distributions-Pass-Through
Rates" and "-Distributions-Certain
Calculations with Respect to Individual
Mortgage Loans" herein.
Interest Distributions
on the Senior Certificates........ On each Distribution Date, to the extent
of the Available Distribution Amount,
holders of each Class of Senior
Certificates will be entitled to receive
distributions of interest in an amount
equal to all Distributable Certificate
Interest with respect to such
Certificates for such Distribution Date
and, to the extent not previously paid,
for all prior Distribution Dates. See
"Description of the
Certificates-Distributions" herein.
The "Distributable Certificate Interest"
in respect of any Class of Certificates
for any Distribution Date will equal one
month's interest at the then-applicable
Pass-Through Rate accrued on the
Certificate Balance of such Class of
Certificates immediately prior to such
Distribution Date, reduced (to not less
than zero) by such Class of
Certificates' allocable share (in each
case, calculated as described herein) of
any Net Aggregate Prepayment Interest
Shortfall (also as described herein) for
such Distribution Date. See "Description
of the Certificates-Distributions-
Distributable Certificate Interest"
herein.
The "Available Distribution Amount" for
any Distribution Date is, as described
herein under "Description of the
Certificates-Distributions", the total
of all payments or other collections (or
available advances) on or in respect of
the Mortgage Loans that are available
for distribution on the Certificates on
such date.
Principal Distributions on
the Senior Certificates........... On each Distribution Date, to the extent
of the Available Distribution Amount
remaining after the distributions of
interest to be made on the Senior
Certificates on such date, holders of
the Senior Certificates will be entitled
to distributions of principal (until the
Certificate Balances of such Classes of
Certificates are reduced to zero) in an
aggregate amount equal to the sum of (a)
such holders' pro rata share of the
Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) the
entire Unscheduled Principal
Distribution Amount for such
Distribution Date. Distributions of
principal on the Senior Certificates
will be paid first to the holders of the
Class R Certificates until the
Certificate Balance of such Certificates
is reduced to zero, and then to the
holders of the Class A Certificates. See
"Description of the
<PAGE>
S-5
Certificates-Distributions-Scheduled
Principal Distribution Amount and
Unscheduled Principal Distribution
Amount" herein.
Interest Distributions on
the Class B Certificates.......... On each Distribution Date, to the extent
of the Available Distribution Amount
remaining after all distributions to be
made on the Senior Certificates on such
date (such remaining portion, the "Class
B Available Distribution Amount"),
holders of the Class B Certificates will
be entitled to receive distributions of
interest in an amount equal to all
Distributable Certificate Interest with
respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior
Distribution Dates. See "Description of
the Certificates-Distributions" herein.
Principal Distributions on
the Class B Certificates.......... On each Distribution Date, to the extent
of the Class B Available Distribution
Amount remaining after the distributions
of interest to be made on the Class B
Certificates on such date, holders of
the Class B Certificates will be
entitled to distributions of principal
(until the Certificate Balance of such
Class of Certificates is reduced to
zero) in an amount equal to the sum of
(a) such holders' pro rata share of the
Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) if
the Certificate Balances of the Senior
Certificates have been reduced to zero,
then to the extent not distributed in
reduction of such Certificate Balances
on such Distribution Date, the entire
Unscheduled Principal Distribution
Amount for such Distribution Date. See
"Description of the
Certificates-Distributions" herein.
Certain Yield and Prepayment
Considerations.................... The yield on the Offered Certificates of
any class will depend on, among other
things, the Pass-Through Rate for such
Certificates. The yield on any Offered
Certificate that is purchased at a
discount or premium will also be
affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) on the Mortgage Loans and
(ii) the extent to which such principal
payments are applied on any Distribution
Date in reduction of the Certificate
Balance of the Class to which such
Certificate belongs. See "Description of
the Certificates-Distributions-Priority"
and "-Distributions-Scheduled Principal
Distribution Amount and Unscheduled
Principal Distribution Amount" herein.
An investor that purchases an Offered
Certificate at a discount should
consider the risk that a slower than
anticipated rate of principal payments
on such Certificate will result in an
actual yield that is lower than such
investor's expected yield. An investor
that purchases any Offered Certificate
at a premium should consider the risk
that a faster than anticipated rate of
principal payments on such Certificate
will result in an actual yield that is
lower than such investor's expected
yield. Insofar as an investor's initial
investment in any Offered Certificate is
repaid,
<PAGE>
S-6
there can be no assurance that such
amounts can be reinvested in a
comparable alternative investment with a
comparable yield.
The actual rate of prepayment of
principal on the Mortgage Loans cannot
be predicted. The Mortgage Loans may be
prepaid at any time, subject, in the
case of ____ Mortgage Loans, to payment
of a Prepayment Premium. 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 expected
weighted average life of the Certificate
may not be realized. For a discussion of
certain factors affecting prepayment of
the Mortgage Loans, including the effect
of Prepayment Premiums, see "Yield and
Maturity Considerations" herein. In
deciding whether to purchase any Offered
Certificates, an investor should make an
independent decision as to the
appropriate prepayment assumptions to be
used.
[The Structure of the Offered
Certificates causes the yield of certain
Classes to be particularly sensitive to
changes in the rates of prepayment of
the Mortgage Loans and other factors, as
follows:]
[Allocation to the Senior Certificates,
for so long as they are outstanding, of
the entire Unscheduled Principal
Distribution Amount for each
Distribution Date will generally
accelerate the amortization of such
Certificates relative to the actual
amortization of the Mortgage Loans.
Following retirement of the Class A
Certificates, the Unscheduled Principal
Distribution Amount for each
Distribution Date will be allocated to
the Class B Certificates.]
[The following disclosure is applicable
to Stripped Interest Certificates, when
offered... The Stripped Interest
Certificates. The Class S Certificates
are interest-only Certificates and are
not entitled to any distributions in
respect of principal. The yield to
maturity of the Class S Certificates
will be especially sensitive to the
prepayment, repurchase and default
experience on the Mortgage Loans, which
may fluctuate significantly from time to
time. A rate of principal payments that
is more rapid than expected by investors
will have a material negative effect on
the yield to maturity of the Class S
Certificates. See "Yield and Maturity
Considerations-Yield Sensitivity of the
Class S Certificates" herein.]
Class R Certificates: Holders of the
Class R Certificates are entitled to
receive distributions of principal and
interest as described herein; however,
holders of such Certificates may have
tax liabilities with respect to their
Certificates during the early years of
the term of the Trust Fund that
substantially exceed the principal and
interest payable thereon during such
periods. See "Yield and Maturity
Considerations",
<PAGE>
S-7
especially "-Additional Yield
Considerations Applicable Solely to the
Class R Certificates," herein and
"Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Advances............................ The Master Servicer is required to make
advances (each, an "Advance") of
delinquent principal and interest (net
of related Servicing Fees) on the
Mortgage Loans or, in the case of each
Mortgage Loan that is delinquent in
respect of its Balloon Payment or as to
which the related Mortgaged Property was
acquired through foreclosure, deed in
lieu of foreclosure or otherwise, only
of delinquent interest (net of related
Servicing Fees), in any event under the
circumstances and subject to the
limitations set forth herein. Advances
are intended to maintain a regular flow
of scheduled interest and principal
payments to the Certificateholders,
rather than to guarantee or insure
against losses. Accordingly, Advances
which cannot be reimbursed out of
collections on or in respect of the
related Mortgage Loans ("Nonrecoverable
Advances") will represent a portion of
the losses to be borne by
Certificateholders.
The Master Servicer will be entitled to
interest on any Advances made, and the
Master Servicer and the Special Servicer
will each be entitled to interest on
certain servicing expenses incurred by
it or on its behalf, such interest
accruing at the rate and payable under
the circumstances described herein.
Interest accrued on outstanding Advances
will result in a reduction in amounts
payable on the Certificates. See
"Description of the
Certificates-Advances" and
"-Subordination; Allocation of
Collateral Support Deficit" herein and
"Description of the
Certificates-Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements-Certificate Account"
in the Prospectus.
Each Distribution Date Statement
delivered by the Trustee to the
Certificateholders will contain
information relating to the amounts of
Advances made with respect to the
related Distribution Date. See
"Description of the Certificates-Reports
to Certificateholders; Certain Available
Information" herein and "Description of
Certificates-Reports to
Certificateholders" in the Prospectus.
Subordination; Allocation of
Collateral Support Deficit......... The rights of the holders of the Class B
and Class C Certificates to receive
distributions with respect to the
Mortgage Loans will be subordinate to
the rights of the holders of the Senior
Certificates, and the rights of the
holders of the Class C Certificates to
receive distributions with respect to
the Mortgage Loans will be subordinate
to the rights of the holders of the
Class B Certificates, in each case to
the extent described herein and in the
Prospectus. This subordination is
intended to enhance the likelihood of
timely receipt by the holders of the
Senior Certificates of the full amount
of all Distributable Certificate
Interest payable in respect of such
Certificates on each Distribution Date,
and the ultimate receipt by such holders
of principal in an amount equal to the
entire aggregate Certificate Balance of
the Senior Certificates. Similarly, but
to a lesser degree, this subordination
is also intended to enhance the
likelihood of timely receipt by the
holders of the Class B Certificates of
<PAGE>
S-8
the full amount of all Distributable
Certificate Interest payable in respect
of such Certificates on each
Distribution Date, and the ultimate
receipt by such holders of principal in
an amount equal to the entire
Certificate Balance of the Class B
Certificates. Such subordination will be
accomplished by the application of the
Available Distribution Amount on each
Distribution Date to distributions on
the respective Classes of Certificates
in the order described herein under
"Description of the
Certificates-Distributions-Priority". No
other form of Credit Support will be
available for the benefit of the holders
of the Offered Certificates.
Allocation to the Senior Certificates,
for so long as they are outstanding, of
the entire Unscheduled Principal
Distribution Amount for each
Distribution Date will generally
accelerate the amortization of such
Certificates relative to the actual
amortization of the Mortgage Loans. To
the extent that the Senior Certificates
are amortized faster than the Mortgage
Loans, the percentage interest evidenced
by the Senior Certificates in the Trust
Fund will be decreased (with a
corresponding increase in the interest
in the Trust Fund evidenced by the Class
B and Class C Certificates), thereby
increasing, relative to their respective
Certificate Balances, the subordination
afforded the Senior Certificates by the
Class B and Class C Certificates.
Following retirement of the Class A
Certificates, allocation to the Class B
Certificates, for so long as they are
outstanding, of the entire Unscheduled
Principal Distribution Amount for each
Distribution Date will provide a similar
benefit to such Class of Certificates as
regards the relative amount of
subordination afforded thereto by the
Class C Certificates.
As a result of losses and other
shortfalls experienced with respect to
the Mortgage Loans or otherwise with
respect to the Trust Fund (which may
include shortfalls arising both from
interest accrued on Advances and from
Nonrecoverable Advances), the aggregate
Stated Principal Balance of the Mortgage
Pool expected to be outstanding
immediately following any Distribution
Date may be less than the aggregate
Certificate Balance of the Certificates
immediately following the distributions
on such Distribution Date. Such deficit
(the "Collateral Support Deficit") will
be allocated first to the Class C
Certificates, then to the Class B
Certificates and last to the Class A
Certificates (in reduction of their
Certificate Balances), in each case
until the related Certificate Balance
has been reduced to zero. See
"Description of the Certificates -
Subordination; Allocation of Collateral
Support Deficit" herein.
Optional Termination................ At its option, on any Distribution Date
on which the remaining aggregate Stated
Principal Balance of the Mortgage Pool
is less than 5% of the Initial Pool
Balance, the Master Servicer or the
Depositor may purchase all of the
Mortgage Loans and REO Properties, and
thereby effect termination of the Trust
Fund and early retirement of the then
outstanding Certificates. See
"Description of the
Certificates-Termination; Retirement of
Certificates" herein and in the
Prospectus.
<PAGE>
S-9
Certain Federal Income
Tax Consequences............... An election will be made to treat the
Trust Fund as a REMIC for Federal income
tax purposes. Upon the issuance of the
Offered Certificates, ________________,
counsel to the Depositor, will deliver
its opinion generally to the effect
that, assuming compliance with all
provisions of the Pooling and Servicing
Agreement, for Federal income tax
purposes, the Trust Fund will qualify as
a REMIC under Sections 860A through 860G
of the Code. For Federal income tax
purposes, the Class A, Class B and Class
C Certificates will be the "regular
interests" in the Trust Fund, and the
Class R Certificates will be the sole
class of "residual interests" in the
Trust Fund.
Under the REMIC Regulations, the Class R
Certificates will not be regarded as
having "significant value" for purposes
of applying the rules relating to
"excess inclusions." In addition, the
Class R Certificates may constitute
"noneconomic" residual interests for
purposes of the REMIC Regulations.
Transfers of the Class R Certificates
will be restricted under the Pooling and
Servicing Agreement to United States
Persons in a manner designed to prevent
a transfer of a noneconomic residual
interest from being disregarded under
the REMIC Regulations. See "Certain
Federal Income Tax Consequences-Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein and
"Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners
of REMIC Residual Certificates-Excess
Inclusions" and "-Noneconomic REMIC
Residual Certificates" in the
Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years
of the Trust Fund's term that
significantly exceeds distributions on
the Class R Certificates during such
years, with corresponding tax deductions
or losses deferred until the later years
of the Trust Fund's term. Accordingly,
on a present value basis, the tax
detriments occurring in the earlier
years may substantially exceed the sum
of any tax benefits in the later years.
As a result, the Class R
Certificateholders' after-tax rate of
return may be zero or negative, event if
their pre-tax rate of return is
positive.
See "Yield and Maturity Considerations,"
especially "-Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain
Federal Income Tax Consequences-Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein.
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.
Rating ........................... It is a condition of their issuance that
the Senior Certificates be rated not
lower than "___", and that the Class B
Certificates be rated not lower than
"___", by _______________________
([collectively,] the "Rating
Agenc[ies]"). 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. A security
rating does not address the
<PAGE>
S-10
frequency of prepayments of Mortgage
Loans, or the corresponding effect on
yield to investors. [The following
disclosure is applicable to Stripped
Interest Certificates, when offered... A
security rating does not address the
frequency or likelihood of prepayments
(whether voluntary or involuntary) of
Mortgage Loans, or the possibility that,
as a result of prepayments, investors in
the Class S Certificates may realize a
lower than anticipated yield or may fail
to recover fully their initial
investment.] See "Rating" herein.
ERISA Considerations................ Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh
plans, and collective investment funds
and separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that are
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of
Offered Certificates could give rise to
a transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in the
Prospectus.
Legal Investment.................... [The Senior Certificates will constitute
"mortgage related securities" for
purposes of SMMEA, for so long as they
are rated in one of the two highest
ratings categories by one or more
nationally recognized statistical rating
organizations and, as such, are legal
investments for certain entities to the
extent provided in SMMEA. Such
investments, however, will be subject to
general regulatory considerations
governing investment practices under
state and federal law. In addition,
institutions whose investment activities
are subject to review by federal or
state regulatory authorities may be or
may become subject to restrictions,
which may be retroactively imposed by
such regulatory authorities, on the
investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain states
have recently enacted legislation
overriding the legal investment
provisions of SMMEA.]
[The Class B Certificates will not be
"mortgage related securities" within the
meaning of SMMEA. As a result, the
appropriate characterization of the
Class B Certificates under various legal
investment restrictions, and thus the
ability of investors subject to these
restrictions to purchase the Class B
Certificates, may be subject to
significant interpretative
uncertainties.]
Investors should consult their legal
advisors to determine whether and to
what extent the Offered Certificates
constitute legal investments for them.
See "Legal Investment" herein and in the
Prospectus.
<PAGE>
S-11
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among other
things, the following risk factors (as well as the risk factors set forth under
"Risk Factors" in the Prospectus) in connection with an investment therein.
Limited Liquidity. There is currently no secondary market for the Offered
Certificates. The Underwriter has indicated its intention to make a secondary
market in the Offered Certificates, but it is not obligated 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 Offered
Certificates with liquidity of investment or that it will continue for the life
of the Offered Certificates. The Offered Certificates will not be listed on any
securities exchange. See "Risk Factors-Limited Liquidity" in the Prospectus.
Potential Liability to the Trust Fund Relating to a Materially Adverse
Environmental Condition. [An environmental site assessment was performed at
[each][all but ___] of the Mortgaged Properties during the _____ month period
prior to the Cut-off Date. [Note any special environmental problems.]
[Otherwise,] no such environmental assessment revealed any material adverse
environmental condition or circumstance at any Mortgaged Property[, except for
(i) those cases in which the condition or circumstance was remediated or an
escrow for such remediation has been established and (ii) those cases in which
an operations and maintenance plan or periodic monitoring of nearby properties
was recommended, which recommendations are consistent with industrywide
practices].
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property securing a
defaulted Mortgage Loan prior to acquiring title thereto or assuming its
operation. Such prohibition effectively precludes enforcement of the security
for the related Mortgage Note until a satisfactory environmental site assessment
is obtained (or until any required remedial action is thereafter taken), but
will decrease the likelihood that the Trust Fund will become liable for a
material adverse environmental condition at the Mortgaged Property. However,
there can be no assurance that the requirements of the Pooling and Servicing
Agreement will effectively insulate the Trust Fund from potential liability for
a materially adverse environmental condition at any Mortgaged Property. See
"Description of the Pooling Agreements-Realization Upon Defaulted Mortgage
Loans", "Risk Factors-Certain Factors Affecting Delinquency, Foreclosure and
Loss of the Mortgage Loans-Risk of Liability Arising from Environmental
Conditions" and "Certain Legal Aspects of Mortgage Loans-Environmental
Considerations" in the Prospectus.
Exposure of the Mortgage Pool to Adverse Economic or other Developments
Based on Geographic Concentration. ______ Mortgage Loans, which represent ____%
of the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in _____________. In general, that concentration increases the exposure
of the Mortgage Pool to any adverse economic or other developments that may
occur in _________. In recent periods, _____________ (along with other regions
of the United States) has experienced a significant downturn in the market value
of real estate.
Increased Risk of Loss Associated With Concentration of Mortgage Loans and
Borrowers. Several of the Mortgage Loans have Cut-off Date Balances that are
substantially higher than the average Cut-off Date Balance. In general,
concentrations in a mortgage pool of loans with larger-than-average balances can
result in losses that are more severe, relative to the size of the pool, than
would be the case if the aggregate balance of the pool were more evenly
distributed. Concentration of borrowers also poses increased risks. For
instance, if a borrower that owns several Mortgaged Properties experiences
financial difficulty at one Mortgaged Property, or at another income-producing
property that it owns, it could attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting Monthly Payments
for an indefinite period on all of the related Mortgage Loans.
Increased Risk of Default Associated with Adjustable Rate Mortgage Loans.
________ of the Mortgage Loans, which represent ____% of the Initial Pool
Balance, are ARM Loans. Increases in the required Monthly Payments on
<PAGE>
S-12
ARM Loans in excess of those assumed in the original underwriting of such loans
may result in a default rate higher than that on mortgage loans with fixed
mortgage rates.
Increased Risk of Default Associated with Balloon Payments. None of the
Mortgage Loans is fully amortizing over its term to maturity. Thus, each
Mortgage Loan will have a substantial payment (that is, a Balloon Payment) due
at its stated maturity unless prepaid prior thereto. Loans with Balloon Payments
involve a greater likelihood of default than self-amortizing loans because the
ability of a borrower to make a Balloon Payment typically will depend upon its
ability either to refinance the loan or to sell the related mortgaged property.
See "Risk Factors-Certain Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans-Increased Risk of Default Associated With Balloon Payments"
in the Prospectus.
Extension Risk Associated With Modification of Mortgage Loans with Balloon
Payments. In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Special Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is reasonably
foreseeable; subject, however, to the limitations described under "Servicing of
the Mortgage Loans-Modifications, Waivers and Amendments" herein. There can be
no assurance, however, that any such extension or modification will increase the
present value of recoveries in a given case. Any delay in collection of a
Balloon Payment that would otherwise be distributable in respect of a Class of
Offered Certificates, whether such delay is due to borrower default or to
modification of the related Mortgage Loan by the Special Servicer, will likely
extend the weighted average life of such Class of Offered Certificates. See
"Yield and Maturity Considerations" herein and in the Prospectus.
[Risks Particular to ______________ Properties. [Add disclosure relating to
property types with respect to which there exists a material concentration in a
particular Trust Fund.]]
[Risks Particular to Multifamily Properties. In the case of multifamily
lending in particular, adverse economic conditions, either local, regional or
national, may limit the amount of rent that can be charged and may result in a
reduction in timely rent payments or a reduction in occupancy levels. Occupancy
and rent levels may also be affected by construction of additional housing
units, local military base closings and national and local politics, including
current or future rent stabilization and rent control laws and agreements. In
addition, the level of mortgage interest rates may encourage tenants to purchase
single-family housing. Further, the cost of operating a multifamily property may
increase, including the costs of utilities and the costs of required capital
expenditures. All of these conditions and events may increase the possibility
that a borrower may be unable to meet its obligation under its Mortgage Loan.]
Risks Relating to Lack of Certificateholder Control Over Trust Fund.
Certificateholders generally do not have a right to vote, except with respect to
required consents to certain amendments to the Pooling and Servicing Agreement.
Furthermore, Certificateholders will generally not have the right to make
decisions with respect to the administration of the Trust Fund. Such decisions
are generally made, subject to the express terms of the Pooling and Servicing
Agreement, by the Master Servicer, the Trustee, the Special Servicer or the
REMIC Administrator, as applicable. Any decision made by one of those parties in
respect of the Trust Fund, even if made in the best interests of the
Certificateholders (as determined by such party in its good faith and reasonable
judgment), may be contrary to the decision that would have been made by the
holders of any particular Class of Offered Certificates and may negatively
affect the interests of such holders.
Yield Risk Associated With Changes in Concentrations. If and as payments in
respect of principal (including any principal prepayments, liquidations and the
principal portion of the repurchase prices of any Mortgage Loans repurchased due
to breaches of representations) are received with respect to the Mortgage Loans,
the remaining Mortgage Loans as a group may exhibit increased concentration with
respect to the type of properties, property characteristics, number of
Mortgagors and affiliated Mortgagors and geographic location. Because
unscheduled collections of principal on the Mortgage Loans is payable on the
Class A, Class B and Class C Certificates in sequential order, such Classes that
have
<PAGE>
S-13
a lower sequential priority are relatively more likely to be exposed to any
risks associated with changes in concentrations of loan or property
characteristics.
Subordination of Class B and Class C Certificates. As and to the extent
described herein, the rights of the holders of the Class B and Class C
Certificates to receive distributions of amounts collected or advanced on or in
respect of the Mortgage Loans will be subordinated to those of the holders of
the Senior Certificates and also, in the case of the holders of the Class C
Certificates, also to those of the holders of the Class B Certificates. See
"Description of the Certificates-Distributions-Priority" and "-Subordination;
Allocation of Collateral Support Deficit" herein.
Book-Entry Registration. The Class A Certificates will be initially
represented by one or more certificates registered in the name of Cede & Co., as
the nominee for DTC, and will not be registered in the names of the related
holders of Certificates or their nominees. As a result, holders of Class A
Certificates will not be recognized as "Certificateholders." Hence, those
beneficial owners will be able to exercise the rights of holders of Certificates
only indirectly through DTC and DTC Participants. See "Description of the
Certificates-General" and "-Book-Entry Registration" herein and "Description of
the Certificates-Book-Entry Registration and Definitive Certificates" in the
Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
General
The Trust Fund will consist primarily of ___ conventional, balloon Mortgage
Loans with an Initial Pool Balance of $_______________. Each Mortgage Loan is
evidenced by a promissory note (a "Mortgage Note") and secured by a mortgage,
deed of trust or other similar security instrument (a "Mortgage") that creates a
first mortgage lien on a fee simple estate in a commercial or multifamily rental
property (a "Mortgaged Property"). All percentages of the Mortgage Loans, or of
any specified group of Mortgage Loans, referred to herein without further
description are approximate percentages by aggregate Cut-off Date Balance. The
"Cut-off Date Balance" of any Mortgage Loan is the unpaid principal balance
thereof as of the Cut-off Date, after application of all payments due on or
before such date, whether or not received.
The Mortgage Loans are not insured or guaranteed by any governmental entity
or private mortgage insurer. The Depositor has not undertaken any evaluation of
the significance of the recourse provisions of any of a number of the Mortgage
Loans that provide for recourse against the related borrower or another person
in the event of a default. Accordingly, investors should consider all of the
Mortgage Loans to be nonrecourse loans as to which recourse in the case of
default will be limited to the specific property and such other assets, if any,
as were pledged to secure a Mortgage Loan.
On or prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to the Purchase Agreement and will
thereupon assign its interests in the Mortgage Loans, without recourse, to the
Trustee for the benefit of the Certificateholders. See "-The Mortgage Loan
Seller" herein and "Description of the Pooling Agreements-Assignment of Mortgage
Loans; Repurchases" in the Prospectus. For purposes of the Prospectus, the
Mortgage Loan Seller constitutes a "Mortgage Asset Seller".
The Mortgage Loans were originated between 19__ and 19__. The Mortgage Loan
Seller originated ____ of the Mortgage Loans, which represent ___% of the
Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof, generally in accordance with the underwriting
criteria described below under "-Underwriting Standards".
Certain Payment Characteristics
<PAGE>
S-14
___ of the Mortgage Loans, which represent ___% of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The remaining
Mortgage Loans have Due Dates that occur on the ______ (____% of the Mortgage
Loans), _____ (____% of the Mortgage Loans), _____ (____% of the Mortgage
Loans), and _______ (____% of the Mortgage Loans) day of each month.
____________ of the Mortgage Loans, which represent ____% of the Initial
Pool Balance, are ARM Loans. The ARM Loans bear interest at Mortgage Rates that
are subject to adjustment on periodically occurring Interest Rate Adjustment
Dates by adding the related Gross Margin to the applicable value of the related
Index, subject in ______ cases to rounding conventions and lifetime minimum
and/or maximum Mortgage Rates and, in the case of ________ Mortgage Loans, which
represent ____% of the Initial Pool Balance, to periodic minimum and/or maximum
Mortgage Rates. The remaining Mortgage Loans are Fixed Rate Loans. None of the
ARM Loans is convertible into a Fixed Rate Loan.
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates on the
ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment Date,
or may be based on the value of the related Index as most recently published as
of an Interest Rate Adjustment Date or as of a designated date preceding an
Interest Rate Adjustment Date. ____ of the ARM Loans, which represent ___% of
the Initial Pool Balance, provide for Interest Rate Adjustment Dates that occur
monthly; ____ of the ARM Loans, which represent ___% of the Initial Pool
Balance, provide for Interest Rate Adjustment Dates that occur semi-annually;
and the remaining ARM Loans provide for Interest Rate Adjustment Dates that
occur annually.
The Monthly Payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule and
pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date following each related Interest Rate
Adjustment Date. None of the ARM Loans provide for negative amortization.
All of the Mortgage Loans provide for monthly payments of principal based
on amortization schedules significantly longer than the remaining terms of such
Mortgage Loans. Thus, each Mortgage Loan will have a Balloon Payment due at its
stated maturity date, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Prepayment Premiums are payable
to the Master Servicer as additional servicing compensation, to the extent not
otherwise applied to offset Prepayment Interest Shortfalls, and may be waived by
the Master Servicer in accordance with the servicing standard described under
"Servicing of the Mortgage Loans-General" herein.
[The Index]
Describe Index and include 5 year history.
[Delinquent and Nonperforming Mortgage Loans]
[Describe those delinquent and nonperforming Mortgage Loans, if any,
included in the Trust Fund.]
Additional Mortgage Loan Information
The following tables set forth the specified characteristics of, in each
case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to rounding.
<PAGE>
S-15
<PAGE>
S-16
Mortgage Rates as of the Cut-off Date
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Range of Mortgage Rates(%) Loans Date Balance Date Balance
-------------------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------- --------------------
Total.................................
============== ==================- ====================
</TABLE>
Weighted Average
Mortgage Rate (All Mortgage Loans):
______% per annum
Weighted Average
Mortgage Rate (ARM Loans): ____% per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): _____% per annum
Gross Margins for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Number of Aggregate Cut-off Aggregate Cut-off
Range of Gross Margins(%) ARM Loans Date Balance Date Balance
------------------------- --------- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------ -------------------
Total....................................
============== ================== ==================-
</TABLE>
Weighted Average
Gross Margin: ____%
<PAGE>
S-17
Frequency of Adjustments to Mortgage Rates and Monthly Payments for the ARM
Loans
<TABLE>
<CAPTION>
Monthly
Mortgage Rate Payment Number of Percent by
Adjustment Adjustment Mortgage Aggregate Cut-off Aggregate Cut-off
Frequency Frequency Loans Date Balance Date Balance
--------- --------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
-------------- ------------------ -------------------
Total............................
============== ================== ==================-
</TABLE>
Maximum Lifetime Mortgage Rates for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Date Balance
-------------------------- --------- ------------ ------------
<S> <C> <C> <C>
Total...............................
============== ================== ==================-
</TABLE>
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
- ----------
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
Minimum Lifetime Mortgage Rates for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Date Balance
-------------------------- --------- ------------ ------------
<S> <C> <C> <C>
Total...............................
============== ================== ==================-
</TABLE>
Weighted Average Minimum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
- ----------
(A) This calculation does not include the __________ ARM Loans without minimum
lifetime Mortgage Rates.
<PAGE>
S-18
Maximum Annual Mortgage Rates for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Annual Mortgage Rates(%) ARM Loans Date Balance Date Balance
------------------------ --------- ------------ ------------
<S> <C> <C> <C>
Total...............................
============== ================== ===================
</TABLE>
Weighted Average Maximum Annual
Mortgage Rate (ARM Loans): _____% per annum (A)
- ----------
(A) This calculation does not include the __________ ARM Loans without maximum
annual Mortgage Rates.
Minimum Annual Mortgage Rates for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Annual Mortgage Rates(%) ARM Loans Date Balance Date Balance
------------------------ --------- ------------ ------------
<S> <C> <C> <C>
Total...............................
============== ================== ===================
</TABLE>
Weighted Average Minimum Annual
Mortgage Rate (ARM Loans): _____% per annum (A)
- ----------
(A) This calculation does not include the __________ ARM Loans without minimum
annual Mortgage Rates.
<PAGE>
S-19
Cut-off Date Balances
<TABLE>
<CAPTION>
Number of Percent by
Cut-off Date Mortgage Aggregate Cut-off Aggregate Cut-off
Balance Range ($) Loans Date Balance Date Balance
----------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------ -------------------
Total..................................
============== ================== ===================
</TABLE>
Average Cut-off Date
Balance (All Mortgage
Loans): $____________
Average Cut-off Date
Balance (ARM Loans): $____________
Average Cut-off Date
Balance (Fixed Rate Loans): $____________
Types of Mortgaged Properties
<TABLE>
<CAPTION>
Percent by
Number of Aggregate Cut-off Average Cut-off Aggregate Cut-off Weighted Average
Property Type Mortgage Loans Date Balance Date Balance Date Balance Occupancy Rate
------------- -------------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Multifamily...............
[other property
types]....................
Total...............
</TABLE>
Geographic Distribution of the Mortgaged Properties
<TABLE>
<CAPTION>
Number of Aggregate Cut-off Percent by Aggregate Weighted Average
State Mortgage Loans Date Balance Cut-off Date Balance DSC Ratio
----- -------------- -------------- -------------------- ---------
<S> <C> <C> <C> <C>
Total.................
</TABLE>
<PAGE>
S-20
<PAGE>
S-21
Original Term to Stated Maturity (in Months)
<TABLE>
<CAPTION>
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
----------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------------- ---------------------
Total..................................
============== ========================= =====================
</TABLE>
Weighted Average Original
Term to Stated Maturity
(All Mortgage Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): ____ months
Remaining Term to Stated Maturity (in Months)
as of the Cut-off Date
<TABLE>
<CAPTION>
Number of Percent by
Range of Remaining Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
----------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------------- -------------------
Total..................................
============== ========================- ===================
</TABLE>
Weighted Average Remaining
Term to Stated Maturity
(All Mortgage Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): ___ months
<PAGE>
S-22
Year of Origination
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
---- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------------- -------------------
Total..................................
============== ========================= ===================
</TABLE>
Year of Scheduled Maturity
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
---- ----- ------------ ------------
<S> <C> <C> <C>
--------------------- ------------------ -------------------
Total.......................
===================== ================== ===================
</TABLE>
<PAGE>
S-23
The following table sets forth a range of Debt Service Coverage Ratios for
the Mortgage Loans. The "Debt Service Coverage Ratio" set forth in the following
table for any Mortgage Loan is the ratio of (i) Net Operating Income produced by
the related Mortgaged Property for the period (annualized if the period was less
than one year) covered by the most recent operating statement available to the
Depositor to (ii) the amount of the Monthly Payment in effect as of the Cut-off
Date multiplied by 12. "Net Operating Income" is the revenue derived from the
use and operation of a Mortgaged Property (consisting primarily of rental income
and deposit forfeitures), less operating expenses (such as utilities, general
administrative expenses, management fees, advertising, repairs and maintenance),
and further less fixed expenses (such as insurance and real estate taxes). Net
Operating Income generally does not reflect capital expenditures. The following
table was prepared using operating statements obtained from the respective
mortgagors or the related property managers. In each case, the information
contained in such operating statements was unaudited, and the Depositor has made
no attempt to verify its accuracy. In the case of _____ Mortgage Loans (____ ARM
Loans and ____ Fixed Rate Loans), representing __% of the Initial Pool Balance,
operating statements could not be obtained, and accordingly, Debt Service
Coverage Ratios for those Mortgage Loans were not calculated. The last day of
the period (which may not correspond to the end of the calendar year most recent
to the Cut-off Date) covered by each operating statement from which a Debt
Service Coverage Ratio was calculated is set forth in Annex A with respect to
the related Mortgage Loan.
Debt Service Coverage Ratios(A)
<TABLE>
<CAPTION>
Range of Number of Percent by
Debt Service Mortgage Aggregate Cut-off Aggregate Cut-off
Coverage Ratios Loans Date Balance Date Balance
--------------- ----- ------------ ------------
<S> <C> <C> <C>
Not Calculated(B).............. -------------- --------------------------- -------------------
Total..........................
============== ==========================- ===================
</TABLE>
Weighted Average
Debt Service Coverage
Ratio (All Mortgage
Loans): _____x(C)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans): _____x(D)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): _____x(E)
- ----------
(A) The Debt Service Coverage Ratios are based on the most recently available
operating statements obtained from the respective mortgagors or the related
property managers.
(B) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(C) This calculation does not include the ________ Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ________ ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(E) This calculation does not include the ________ Fixed Rate Loans as to which
Debt Service Coverage Ratios were not calculated.
<PAGE>
S-24
The following tables set forth the range of LTV Ratios of the Mortgage
Loans at origination and the Cut-off Date. An "LTV Ratio" for any Mortgage Loan,
as of any date of determination, is a fraction, expressed as a percentage, the
numerator of which is the original principal balance of such Mortgage Loan or
the Cut-off Date Balance of such Mortgage Loan, as applicable, and the
denominator of which is the appraised value of the related Mortgaged Property as
determined by an appraisal thereof obtained in connection with the origination
of such Mortgage Loan. Because it is based on the value of a Mortgaged Property
determined as of loan origination, the information set forth in the table below
is not necessarily a reliable measure of the related borrower's current equity
in each Mortgaged Property. In a declining real estate market, the fair market
value of a Mortgaged Property could have decreased from the value determined at
origination, and the current actual loan-to-value ratio of a Mortgage Loan may
be higher than even its LTV Ratio at origination, notwithstanding taking into
account amortization since origination.
LTV Ratios at Origination
<TABLE>
<CAPTION>
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Aggregate Cut-off
LTV Ratios(%) Loans Date Balance Date Balance
------------- ----- ------------ ------------
<S> <C> <C> <C>
--------------------- ------------------ ------------------
Total...................
====================- ================== ==================
</TABLE>
Weighted Average Original
LTV Ratio (All Mortgage
Loans): _____%
Weighted Average Original
LTV Ratio (ARM Loans):
-----%
Weighted Average Original
LTV Ratio (Fixed Rate
Loans): _____%
<PAGE>
S-25
LTV Ratios at Cut-off Date
<TABLE>
<CAPTION>
Number of Percent by
Range of LTV Ratios(%) Mortgage Aggregate Cut-off Aggregate Cut-off
as of Cut-off Date Loans Date Balance Date Balance
------------------ ----- ------------ ------------
<S> <C> <C> <C>
--------------------- ------------------ ------------------
Total...................
-==================== ================== ==================
</TABLE>
Weighted Average LTV
Ratio as of Cut-off Date
(All Mortgage Loans):
-----%
Weighted Average LTV
Ratio as of Cut-off Date
(ARM Loans): _____%
Weighted Average LTV
Ratio as of Cut-off Date
(Fixed Rate Loans):
-----%
<PAGE>
S-26
Occupancy Rates
<TABLE>
<CAPTION>
Number of Percent by
Range of Mortgage Aggregate Cut-off Aggregate Cut-off
Occupancy Rates(A) Loans Date Balance Date Balance
------------------ ----- ------------ ------------
<S> <C> <C> <C>
--------------------- ------------------ -------------------
Total............................
===================== ================== ===================
</TABLE>
Weighted Average Occupancy Rate (All
Mortgage Loans)(A): _____%
Weighted Average Occupancy Rate
(ARM Loans)(A): _____%
Weighted Average Occupancy Rate
(Fixed Rate Loans)(A): _____%
- ----------
(A) Physical occupancy rates calculated based on rent rolls provided by the
respective Mortgagors or related property managers as of a date no more
than ___ months prior to the Cut-off Date.
Prepayment Restrictions in Effect as of the Cut-off Date
<TABLE>
<CAPTION>
% by Cum.
Aggregate Aggregate % of
Cut-off Cut-off Initial
Prepayment Number Date Date Pool
Restrictions of Loans Balance Balance Balance
------------ -------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Locked Out (A)
Yield Maintenance (B)
Declining Percentage Premium
____% Premium
____% Premium
No Prepayment Restrictions
TOTALS
<CAPTION>
Weighted Averages
----------------------------------------------------------------------------
Indicative
Stated Remaining Cut-off
Prepayment Mortgage Remaining Amort. Implied Date
Restrictions Rate Term (Mo.) Term (Mo.) DSCR DSCR LTV
------------ -------- ----------- ----------- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Locked Out (A)
Yield Maintenance (B)
Declining Percentage Premium
____% Premium
____% Premium
No Prepayment Restrictions
TOTALS
</TABLE>
- ----------
(A) The weighted average term to the expiration of the lock-out periods is ___
years. _____ of the Mortgage Loans within their lock-out periods are
subject to declining percentage Prepayment Premiums after the expiration of
their lock-out periods; the remaining Mortgage Loans are subject to a yield
maintenance-type Prepayment Premium following such expiration.
(B) All Mortgage Loans subject to yield maintenance-type Prepayment Premiums
remain subject to payment of the Prepayment Premium until at least ___
months prior to maturity.
<PAGE>
S-27
Specified in Annex A to this Prospectus Supplement are the foregoing and
certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage Loans
is contained herein under "-Underwriting Standards" and "-Representations and
Warranties; Repurchases" and in the Prospectus under "Description of the Trust
Funds-Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans".
[Delinquencies. As of the Cut-off Date, [no] Mortgage Loan was more than 30
days delinquent in respect of any Monthly Payment.]
The Mortgage Loan Seller
General. [The Mortgage Loans Seller [, a wholly-owned subsidiary of
__________,] is a _________________ organized in 19___ under the laws of
__________________. As of December 31, 199_, the Mortgage Loan Seller had a net
worth of approximately $_________________, and currently holds and services for
its own account a total residential and commercial mortgage loan portfolio of
approximately $__________________, of which approximately $__________________
constitutes multifamily mortgage loans.]
The information set forth herein concerning the Mortgage Loan Seller and
its underwriting standards has been provided by the Mortgage Loan Seller, and
neither the Depositor nor the Underwriter makes any representation or warranty
as to the accuracy or completeness of such information.
Underwriting Standards
[All of the Mortgage Loans were originated or acquired by the Mortgage Loan
Seller, generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
The Depositor believes that the Mortgage Loans selected for inclusion in
the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so selected
on any basis which would have a material adverse effect on the
Certificateholders.]
Representations and Warranties; Repurchases
In the Purchase Agreement, the Mortgage Loan Seller has represented and
warranted with respect to each Mortgage Loan, as of [the Delivery Date], or as
of such other date specifically provided in the representation and warranty,
among other things, that:
[Specify significant representations and warranties.]
If the Mortgage Loan Seller has been notified of a material breach of any
of the foregoing representations and warranties as described in the Prospectus
and if the Mortgage Loan Seller cannot cure such breach within a period of 90
days following its receipt of such notice, then the Mortgage Loan Seller will be
obligated pursuant to the Purchase Agreement (the relevant rights under which
will be assigned, together with its interests in the Mortgage Loans, by the
Depositor to the Trustee) to repurchase the affected Mortgage Loan within such
90-day period at a price (the "Purchase Price") equal to the sum of (i) the
unpaid principal balance of such Mortgage Loan, (ii) unpaid accrued interest on
such Mortgage Loan at the Mortgage Rate from the date to which interest was last
paid to the Due Date in the Due Period in which the purchase is to occur, and
(iii) certain servicing expenses that are reimbursable to the Master Servicer
and the Special Servicer.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. The
<PAGE>
S-28
Mortgage Loan Seller will be the sole Warranting Party in respect of the
Mortgage Loans, and none of the Depositor, the Master Servicer or any of their
affiliates [(other than the Mortgage Loan Seller)] will be obligated to
repurchase any affected Mortgage Loan in connection with a breach of the
Mortgage Loan Seller's representations and warranties if the Mortgage Loan
Seller defaults on its obligation to do so. However, the Depositor will not
include any Mortgage Loan in the Mortgage Pool if anything has come to the
Depositor's attention prior to the Closing Date that would cause it to believe
that the representations and warranties made by the Mortgage Loan Seller
regarding such Mortgage Loan will not be correct in all material respects. See
"Description of the Pooling Agreements-Representations and Warranties;
Repurchases" in the Prospectus.
Changes in Mortgage Pool Characteristics
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for the
scheduled principal payments due on or before the Cut-off Date. Prior to the
issuance of the Offered Certificates, a Mortgage Loan may be removed from the
Mortgage Pool if the Depositor deems such removal necessary or appropriate or if
it is prepaid. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Offered Certificates, unless
including such Mortgage Loans would materially alter the characteristics of the
Mortgage Pool as described herein. The Depositor believes that the information
set forth herein will be representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Offered Certificates are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date and
will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph, such
removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
General
Each of the Master Servicer and the Special Servicer will be required to
service and administer the Mortgage Loans for which it is responsible, either
directly or through sub-servicers, on behalf of the Trustee and in the best
interests of and for the benefit of the Certificateholders (as determined by the
Master Servicer or the Special Servicer, as the case may be, in its good faith
and reasonable judgment), in accordance with applicable law, the terms of the
Pooling and Servicing Agreement, the terms of the respective Mortgage Loans and,
to the extent consistent with the foregoing, in the same manner as would prudent
institutional mortgage lenders and loan servicers servicing mortgage loans
comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are located, and with a view to the maximization of timely and
complete recovery of principal and interest, but without regard to: (i) any
relationship that the Master Servicer or the Special Servicer, as the case may
be, or any affiliate thereof, may have with the related mortgagor; (ii) the
ownership of any Certificate by the Master Servicer or the Special Servicer, as
the case may be, or any affiliate thereof; (iii) the Master Servicer's or the
Special Servicer's, as the case may be, obligation to make advances, whether in
respect of delinquent payments of principal and/or interest or to cover certain
servicing expenses; and (iv) the Master Servicer's or the Special Servicer's, as
the case may be, right to receive compensation for its services under the
Pooling and Servicing Agreement or with respect to any particular transaction.
Except as otherwise described under "-Inspections; Collection of Operating
Information" below, the Master Servicer initially will be responsible for the
servicing and administration of the entire Mortgage Pool. With respect to any
Mortgage Loan (i) which has a Balloon Payment which is past due or any other
payment which is more than [60]
<PAGE>
S-29
days past due, (ii) as to which the borrower has entered into or consented to
bankruptcy, appointment of a receiver or conservator or a similar insolvency
proceeding, or the borrower has become the subject of a decree or order for such
a proceeding which shall have remained in force undischarged or unstayed for a
period of [60] days, (iii) as to which the Master Servicer shall have received
notice of the foreclosure or proposed foreclosure of any other lien on the
Mortgaged Property, or (iv) as to which, in the judgment of the Master Servicer,
a payment default has occurred or is imminent and is not likely to be cured by
the borrower within [60] days, and prior to acceleration of amounts due under
the related Mortgage Note or commencement of any foreclosure or similar
proceedings, the Master Servicer will transfer its servicing responsibilities to
the Special Servicer, but will continue to receive payments on such Mortgage
Loan (including amounts collected by the Special Servicer), to make certain
calculations with respect to such Mortgage Loan and to make remittances and
prepare certain reports to the Certificateholders with respect to such Mortgage
Loan. If the related Mortgaged Property is acquired in respect of any such
Mortgage Loan (upon acquisition, an "REO Property"), whether through
foreclosure, deed-in-lieu of foreclosure or otherwise, the Special Servicer will
continue to be responsible for the operation and management thereof. The
Mortgage Loans serviced by the Special Servicer are referred to herein as the
"Specially Serviced Mortgage Loans" and, together with any REO Properties,
constitute the "Specially Serviced Mortgage Assets". The Master Servicer shall
have no responsibility for the performance by the Special Servicer of its duties
under the Pooling and Servicing Agreement.
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing Mortgage Loan for at least [90] days, the Special Servicer
will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below, following the subsection captioned "-The Master Servicer",
is a description of certain pertinent provisions of the Pooling and Servicing
Agreement relating to the servicing of the Mortgage Loans. Reference is also
made to the Prospectus, in particular to the section captioned "Pooling and
Servicing Agreements", for important information in addition to that set forth
herein regarding the terms and conditions of the Pooling and Servicing Agreement
as they relate to the rights and obligations of the Master Servicer thereunder.
The Master Servicer
[__________________________________, a ___________________, will act as
Master Servicer with respect to the Mortgage Pool. Founded in ____ as a
____________, the Master Servicer today furnishes a variety of wholesale banking
services. As of December 31, 19__, the Master Servicer had a net worth of
approximately $__________, and a total mortgage loan servicing portfolio of
approximately $___________, of which approximately $_____________ represented
multifamily mortgage loans.
The offices of the Master Servicer that will be primarily responsible for
servicing and administering the Mortgage Pool are located at
____________________________.
[If and to the extent available and relevant to an investment decision: The
following table sets forth the historical prepayment information with respect to
the Master Servicer's multifamily and commercial mortgage loan servicing
portfolio:
<PAGE>
S-30
Prepayment Experience of Master Servicer's Multifamily and Commercial Mortgage
Loan Servicing Portfolio
[Table to include relevant information regarding the size of the Master
Servicer's multifamily and commercial mortgage loan servicing portfolio (by
number and/or balance) and the portion of such loans that was subject to
prepayment.]]
The information set forth herein concerning the Master Servicer has been
provided by the Master Servicer, and neither the Depositor nor the Underwriter
makes any representation or warranty as to the accuracy or completeness of such
information.
The Special Servicer
[_______________________________, a ____________________, will be
responsible for the servicing and administration of the Specially Serviced
Mortgage Assets. As of December 31, 19___, the Special Servicer had a total
mortgage loan servicing portfolio of approximately $____________, of which
approximately $_____________ represented multifamily mortgage loans.
The Special Servicer has ___ offices in ___ states with a total staff of
____ employees. Its principal executive offices are located at
_________________________.]
The information set forth herein concerning the Special Servicer has been
provided by the Special Servicer, and neither the Depositor nor the Underwriter
makes any representation or warranty as to the accuracy or completeness of such
information.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities will be the Master Servicing Fee. The "Master
Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each Mortgage Loan, will accrue in accordance
with the terms of the related Mortgage Note at a rate equal to ________% per
annum, in the case of Mortgage Loans other than Specially Serviced Mortgage
Loans, and ____% per annum, in the case of Specially Serviced Mortgage Loans,
and will be computed on the basis of the same principal amount and for the same
period respecting which any related interest payment on the related Mortgage
Loan is computed. [As additional servicing compensation, the Master Servicer
will be entitled to retain all Prepayment Premiums, assumption and modification
fees, late charges and penalty interest and, as and to the extent described
below, Prepayment Interest Excesses collected from mortgagors. In addition, the
Master Servicer is authorized but not required to invest or direct the
investment of funds held in the Certificate Account in Permitted Investments,
and the Master Servicer will be entitled to retain any interest or other income
earned on such funds.]
The principal compensation to be paid to the Special Servicer in respect of
its special servicing activities will consist of the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and the Workout
Fee. Like the Master Servicing Fee, the "Special Servicing Fee" will be payable
monthly on a loan-by-loan basis from amounts received in respect of interest on
each Mortgage Loan, will accrue in accordance with the terms of the related
Mortgage Note at a rate equal to _____% per annum, in the case of Mortgage Loans
other than Specially Serviced Mortgage Loans, and ___% per annum, in the case of
Specially Serviced Mortgage Loans, and will be computed on the basis of the same
principal amount and for the same period respecting which any related interest
payment on the related Mortgage Loan is computed. The "Workout Fee" will equal a
specified percentage (varying from ____% to ____% (the "Workout Fee Rate")
depending on the related unpaid principal balance) of, and will be payable from,
all collections and proceeds received in respect of principal of each Mortgage
Loan which is or has been a Specially Serviced Mortgage Loan (including those
for which servicing has been returned to the Master Servicer); provided that, in
the case of Liquidation Proceeds, the otherwise fixed Workout Fee Rate will be
proportionately reduced to reflect the extent to which, if at all, the principal
portion of such Liquidation Proceeds is less than the unpaid principal balance
of the related Mortgage Loan
<PAGE>
S-31
immediately prior to the receipt thereof. As additional servicing compensation,
the Special Servicer will be entitled to retain all assumption and modification
fees received on Mortgage Loans serviced thereby.
Although the Master Servicer and Special Servicer are each required to
service and administer the Mortgage Pool in accordance with the general
servicing standard described under "-General" above and, accordingly, without
regard to its right to receive compensation under the Pooling and Servicing
Agreement, additional servicing compensation in the nature of assumption and
modification fees, Prepayment Premiums and Prepayment Interest Excesses may
under certain circumstances provide the Master Servicer or the Special Servicer,
as the case may be, with an economic disincentive to comply with such standard.
[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period (as defined herein) on a date that is prior to its Due
Date in such Due Period, a Prepayment Interest Shortfall may result. If such a
principal prepayment occurs during any Due Period after the Due Date for such
Mortgage Loan in such Due Period, the amount of interest (net of related
Servicing Fees) that accrues on the amount of such principal prepayment may
exceed (such excess, a "Prepayment Interest Excess") the corresponding amount of
interest accruing on the Certificates. As to any Due Period, to the extent
Prepayment Interest Excesses collected for all Mortgage Loans are greater than
Prepayment Interest Shortfalls incurred, such excess will be paid to the Master
Servicer as additional servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates-Advances", the Master Servicer will be entitled to receive interest
on Advances, and the Master Servicer and the Special Servicer will be entitled
to receive interest on reimbursable servicing expenses, such interest to be
paid, contemporaneously with the reimbursement of the related Advance or
servicing expense, out of any other collections on the Mortgage Loans.]
The Master Servicer generally will be required to pay all expenses incurred
by it in connection with its servicing activities under the Pooling and
Servicing Agreement, and will not be entitled to reimbursement therefor except
as expressly provided in the Pooling and Servicing Agreement. However, the
Master Servicer will be permitted to pay certain of such expenses directly out
of the Certificate Account and at times without regard to the relationship
between the expense and the funds from which it is being paid. In connection
therewith, the Master Servicer will be responsible for all fees of any
sub-servicers, other than management fees earned in connection with the
operation of an REO Property, which management fees the Master Servicer will be
authorized to pay out of revenues received from such property (thereby reducing
the portion of such revenues that would otherwise be available for distribution
to Certificateholders). See "Description of the
Certificates-Distributions-Method, Timing and Amount" herein and "Description of
the Pooling Agreements-Certificate Account" and "-Servicing Compensation and
Payment of Expenses" in the Prospectus.
Modifications, Waivers and Amendments
The Master Servicer or the Special Servicer may, consistent with its normal
servicing practices, agree to modify, waive or amend any term of any Mortgage
Loan, without the consent of the Trustee or any Certificateholder, subject,
however, to each of the following limitations, conditions and restrictions:
(a) with limited exception, the Master Servicer and the Special
Servicer may not agree to any modification, waiver or amendment that will
(i) affect the amount or timing of any scheduled payments of principal or
interest on the Mortgage Loan or (ii) in its judgment, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely
payment of amounts due thereon; unless, in any such case, in the Master
Servicer's or the Special Servicer's judgment, as the case may be, a
material default on the Mortgage Loan has occurred or a payment default is
reasonably foreseeable, and such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation.
(b) [describe additional limitations to permitted modification
standards]
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The Master Servicer and the Special Servicer will notify the Trustee of any
modification, waiver or amendment of any term of any Mortgage Loan, and must
deliver to the Trustee or the related Custodian, for deposit in the related
Mortgage File, an original counterpart of the agreement related to such
modification, waiver or amendment, promptly (and in any event within [10]
business days) following the execution thereof. Copies of each agreement whereby
any such modification, waiver or amendment of any term of any Mortgage Loan is
effected are to be available for review during normal business hours at the
offices of the [Trustee]. See "Description of the Certificates-Reports to
Certificateholders; Certain Available Information" herein.
Inspections; Collection of Operating Information
The Special Servicer will perform physical inspections of each Mortgaged
Property at such times and in such manner as are consistent with the Special
Servicer's normal servicing procedures, but in any event (i) at least once per
calendar year, commencing in the calendar year _______, and (ii), if any
scheduled payment becomes more than 60 days delinquent on the related Mortgage
Loan, as soon as practicable thereafter. The Special Servicer will prepare a
written report of each such inspection describing the condition of the Mortgaged
Property and specifying the existence of any material vacancies in the Mortgaged
Property, of any sale, transfer or abandonment of the Mortgaged Property, of any
material change in the condition or value of the Mortgaged Property, or of any
waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to deliver
such statements, the Special Servicer is also required to collect and review the
annual operating statements of the related Mortgaged Property. [Most] of the
Mortgages obligate the related borrower to deliver annual property operating
statements. However, there can be no assurance that any operating statements
required to be delivered will in fact be delivered, nor is the Special Servicer
likely to have any practical means of compelling such delivery in the case of an
otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to above
are to be available for review by Certificateholders during normal business
hours at the offices of the [Trustee]. See "Description of the
Certificates-Reports to Certificateholders; Certain Available Information"
herein.
Additional Obligations of the Master Servicer with Respect to ARM Loans
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is not
published or is otherwise unavailable, then the Master Servicer is required to
select a comparable alternative index over which it has no direct control, that
is readily verifiable and that is acceptable under the terms of the related
Mortgage Note. If the Mortgage Rate or the Monthly Payment with respect to any
ARM Loan is not properly adjusted by the Master Servicer pursuant to the terms
of such Mortgage Loan and applicable law, the Master Servicer is required to
deposit in the Certificate Account on or prior to the Due Date of the affected
Monthly Payment, an amount equal to the excess, if any, of (i) the amount that
would have been received from the borrower if the Mortgage Rate or Monthly
Payment had been properly adjusted, over (ii) the amount of such improperly
adjusted Monthly Payment, subject to reimbursement only out of such amounts as
are recovered from the borrower in respect of such excess.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all payments
under and proceeds of the Mortgage Loans received after the Cut-off Date
(exclusive of payments of principal and interest due on or before the Cut-off
Date); (ii) any REO Property; (iii) such funds or assets as from time to time
are deposited in the Certificate Account; (iv) the rights of the mortgagee under
all insurance policies with respect to the Mortgage
<PAGE>
S-33
Loans; and (v) certain rights of the Depositor under the Purchase Agreement
relating to Mortgage Loan document delivery requirements and the representations
and warranties of the Mortgage Loan Seller regarding the Mortgage Loans.
The Certificates will consist of the following four Classes: (i) the Class
A Certificates and the Class R Certificates (collectively, the "Senior
Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. The Class A Certificates will have an initial Certificate Balance
of $____________, which represents ____% of the Initial Pool Balance; the Class
B Certificates will have an initial Certificate Balance of $____________, which
represents ____% of the Initial Pool Balance; the Class C Certificates will have
an initial Certificate Balance of $____________, which represents ___% of the
Initial Pool Balance; and the Class R Certificates will have an initial
Certificate Balance of $100. The Certificate Balance of any Class of
Certificates outstanding at any time represents the maximum amount which the
holders thereof are entitled to receive as distributions allocable to principal
from the cash flow on the Mortgage Loans and the other assets in the Trust Fund.
On each Distribution Date, the Certificate Balance of each Class of Certificates
will be reduced by any distributions of principal actually made on, and any
Collateral Support Deficit actually allocated to, such Class of Certificates on
such Distribution Date.
Only the Senior Certificates and the Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C Certificates have
not been registered under the Securities Act of 1933 and are not offered hereby.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its DTC Participants in denominations of $25,000
and integral multiples of $1 in excess thereof. The Class B Certificates will be
issued in fully registered, certificated form in denominations of $100,000 and
integral multiples of $1,000 in excess thereof, with one Class B Certificate
evidencing an additional amount equal to the remainder of the initial
Certificate Balance of such Class. The Class R Certificates will be issued in
registered, certificated form in minimum denominations of 20% Percentage
Interest in such Class. The "Percentage Interest" evidenced by any Offered
Certificate is equal to the initial denomination thereof as of the Delivery
Date, divided by the initial Certificate Balance of the Class to which it
belongs.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The Depositor
has been informed by DTC that DTC's nominee will be Cede & Co. No Class A
Certificate Owner will be entitled to receive a Definitive Class A Certificate
representing its interest in such Class, except as set forth below under
"-Book-Entry Registration of the Class A Certificates-Definitive Class A
Certificates". Unless and until Definitive Class A Certificates are issued, all
references to actions by holders of the Class A Certificates will refer to
actions taken by DTC upon instructions received from Class A Certificate Owners
through DTC Participants, and all references herein to payments, notices,
reports and statements to holders of the Class A Certificates will refer to
payments, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Class A Certificates, for distribution to Class A
Certificate Owners through its DTC Participants in accordance with DTC
procedures. See "Description of the Certificates-Book-Entry Registration and
Definitive Certificates" in the Prospectus.
Until Definitive Class A Certificates are issued, interests in such Class
will be transferred on the book-entry records of DTC and its DTC Participants.
Subject to certain restrictions on the transfer of such Certificates to Plans
(see "ERISA Considerations" herein), the Class B and Class R Certificates may be
transferred or exchanged at the offices of ___________________________ located
at ______________________________________________, without the payment of any
service charges, other than any tax or other governmental charge payable in
connection therewith. ________________________ will initially serve as registrar
(in such capacity, the "Certificate Registrar") for purposes of recording and
otherwise providing for the registration of the Offered Certificates and of
transfers and exchanges of the Class B and, if issued, the Definitive Class A
Certificates.
Book-Entry Registration of the Class A Certificates
General. The Class A Certificates will be registered as one or more global
Certificates held by Cede & Co., as nominee of DTC. Beneficial interests in such
Certificates will be held by investors through the book-entry facilities of
<PAGE>
S-34
DTC. Except as described below, no Class A Certificate Owner will be entitled to
receive a physical certificate representing its beneficial interest in such
Certificates (a "Definitive Class A Certificate").
Beneficial ownership of a Class A 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 related Class
A Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Class A 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 related Class A Certificate Owner's Financial Intermediary is not a DTC
Participant). Therefore, the related Class A Certificate Owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Class A
Certificate. Beneficial ownership of a Class A Certificate may only be
transferred by compliance with the procedures of such Financial Intermediaries
and DTC Participants. Arrangements may be made for clearance and settlement
through the Euroclear System and CEDEL, S.A., if they are DTC Participants.
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 Class A Certificates, whether held
for its own account or as a nominee for another person. In general, beneficial
ownership of Class A Certificates will be subject to the rules, regulations and
procedures governing DTC and DTC Participants as in effect from time to time.
Distributions of principal of and interest 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 Class A
Certificate Owners 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 Class A Certificate Owners that it represents.
Under a book-entry format, Class A Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Trustee to DTC. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a Class A Certificate Owner to pledge to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such Class A Certificates, may be limited due to the lack of physical
certificates for such Class A Certificates. In addition, issuance of the Class A
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.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action permitted
to be taken by a Certificateholder under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose
depository accounts the Class A Certificates are credited. DTC may take
conflicting actions with respect to other Class A Certificates to the extent
that such actions are taken on behalf of Financial Intermediaries whose holdings
include such Class A Certificates.
Definitive Class A Certificates. Definitive Class A Certificates will be
issued to Class A Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only under the limited conditions set forth in the
Prospectus under "Description of the Certificates-Book-Entry Registration and
Definitive Certificates."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates-Book-Entry Registration and
Definitive Certificates," the Trustee is required to notify, through DTC, DTC
Participants who have ownership of Class A Certificates as indicated on the
records of DTC of the availability of Definitive Class A Certificates. Upon
surrender by DTC of the definitive certificates representing the Class A
Certificates and upon receipt of instructions from DTC for re-registration, the
Trustee will reissue the Class A Certificates as Definitive Class A Certificates
issued in the respective principal amounts owned by individual Class A
Certificate Owners,
<PAGE>
S-35
and thereafter the Trustee and the Master Servicer will recognize the holders of
such Definitive Class A Certificates as Certificateholders under the Pooling and
Servicing Agreement.
For additional information regarding DTC and Certificates maintained on the
book-entry records thereof, see "Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in the Prospectus.
Distributions
Method, Timing and Amount. Distributions on the Certificates will be made
by the [Trustee], to the extent of available funds, on the 25th day of each
month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in _________ 199__ (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Each such distribution will be made by wire transfer in immediately
available funds to the account specified by the Certificateholder at a bank or
other entity having appropriate facilities therefor, if such Certificateholder
will have provided the [Trustee] with wiring instructions [no less than five
business days prior to the related Record Date (which wiring instructions may be
in the form of a standing order applicable to all subsequent distributions) and
is the registered owner of Certificates with an aggregate initial principal
amount of at least $5,000,000], or otherwise by check mailed to such
Certificateholder. The final distribution on any Certificate will be made in
like manner, but only upon presentation and surrender of such Certificate at the
location that will be specified in a notice of the pendency of such final
distribution. All distributions made with respect to a Class of Certificates
will be allocated pro rata among the outstanding Certificates of such Class
based on their respective Percentage Interests.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date (the "Available Distribution Amount") will, in general,
equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans and
any REO Properties that is on deposit in the Certificate Account as of the
related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a Due Date
subsequent to the related Due Period,
(ii) all principal prepayments (together with related payments of
interest thereon and related Prepayment Premiums), Liquidation
Proceeds, Insurance Proceeds, Condemnation Proceeds and other
unscheduled recoveries received subsequent to the related Due Period,
and
(iii) all amounts in the Certificate Account that are due or
reimbursable to any person other than the Certificateholders; and
(b) all Advances made by the Master Servicer with respect to such
Distribution Date. See "Description of the Pooling Agreements-Certificate
Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that begins
on the [second] day of the month preceding the month in which such Distribution
Date occurs and ends on the [first] day of the month in which such Distribution
Date occurs. For purposes of the discussion in the Prospectus, the Due Period is
also the Prepayment Period. The "Determination Date" for each Distribution Date
is the [15th] day of the month in which such Distribution Date occurs or, if any
such [15th] day is not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Certificate
Balances of the Offered Certificates have not been reduced to zero, the
[Trustee] will (except as otherwise described under "-Termination; Retirement of
Certificates"
<PAGE>
S-36
below) apply amounts on deposit in the Certificate Account, to the extent of the
Available Distribution Amount, in the following order of priority:
(1) to distributions of interest to the holders of the Senior
Certificates, pro rata among the respective Classes thereof, in an
amount equal to all Distributable Certificate Interest in respect of
the Senior Certificates for such Distribution Date and, to the extent
not previously paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Senior
Certificates in an amount equal to the sum of (a) the product of (i)
the Senior Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) the entire Unscheduled Principal Distribution Amount for such
Distribution Date (but not more than would be necessary to reduce the
aggregate Certificate Balance of the Senior Certificates to zero);
(3) to distributions to the holders of the Class A Certificates, until all
amounts of Collateral Support Deficit previously allocated to the
Class A Certificates, but not previously reimbursed, have been
reimbursed in full;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class B Certificates for such Distribution
Date and, to the extent not previously paid, for all prior
Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of (i)
the Class B Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) if the Certificate Balances of the Senior Certificates have
been reduced to zero, then to the extent not distributed in reduction
of such Certificate Balances on such Distribution Date, the entire
Unscheduled Principal Distribution Amount for such Distribution Date
(but not more than would be necessary to reduce the Certificate
Balance of the Class B Certificates to zero);
(6) to distributions to the holders of the Class B Certificates , until
all amounts of Collateral Support Deficit previously allocated to the
Class B Certificates, but not previously reimbursed, have been
reimbursed in full;
(7) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class C Certificates for such Distribution
Date and, to the extent not previously distributed, for all prior
Distribution Dates;
(8) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(9) to distributions to the holders of the Class C Certificates, until all
amounts of Collateral Support Deficit previously allocated to the
Class C Certificates, but not previously reimbursed, have been
reimbursed in full; and
(10) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance, if any, of the Available
Distribution Amount.
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S-37
The distributions of principal to the holders of the Senior Certificates as
described in clause (2) above will be paid first to the holders of the Class R
Certificates until the Certificate Balance of such Certificates is reduced to
zero, and then to the holders of the Class A Certificates. Accordingly, it is
expected that the Certificate Balance of the Class R Certificates would be
reduced to zero on the initial Distribution Date and that no other distributions
of interest or principal would thereafter be made on the Class R Certificates
except pursuant to subparagraph (10) immediately above.
Reimbursement of previously allocated Collateral Support Deficit will not
constitute distributions of principal for any purpose and will not result in an
additional reduction in the Certificate Balance of the Class of Certificates in
respect of which any such reimbursement is made.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Certificates for the initial Distribution Date will equal _______% per annum.
With respect to any Distribution Date subsequent to the initial Distribution
Date, the Pass-Through Rate for each Class of Certificates will equal the
weighted average of the applicable Effective Net Mortgage Rates for the Mortgage
Loans, weighted on the basis of their respective Stated Principal Balances
immediately prior to such Distribution Date. For purposes of calculating the
Pass-Through Rate for any Class of Certificates and any Distribution Date, the
"applicable Effective Net Mortgage Rate" for each Mortgage Loan is: (a) if such
Mortgage Loan accrues interest on the basis of a 360-day year consisting of
twelve 30-day months (a "30/360 basis", which is the basis of accrual for
interest on the Certificates), the Net Mortgage Rate in effect for such Mortgage
Loan as of the commencement of the related Due Period; and (b) if such Mortgage
Loan does not accrue interest on a 30/360 basis, the annualized rate at which
interest would have to accrue during the one month period preceding the Due Date
for such Mortgage Loan during the related Due Period on a 30/360 basis in order
to produce the aggregate amount of interest (adjusted to the actual Net Mortgage
Rate) accrued during such period. The "Net Mortgage Rate" for each Mortgage Loan
is equal to the related Mortgage Rate in effect from time to time less the
Servicing Fee Rate.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of Certificates for each Distribution Date
represents that portion of the Accrued Certificate Interest in respect of such
Class of Certificates for such Distribution Date that is net of such Class's
allocable share (calculated as described below) of the aggregate of any
Prepayment Interest Shortfalls resulting from voluntary principal prepayments
made on the Mortgage Loans during the related Due Period that are not offset by
Prepayment Interest Excesses collected during the related Due Period (the
aggregate of such Prepayment Interest Shortfalls that are not so offset or
covered, as to such Distribution Date, the "Net Aggregate Prepayment Interest
Shortfall").
The "Accrued Certificate Interest" in respect of each Class of Certificates
for each Distribution Date is equal to one month's interest at the Pass-Through
Rate applicable to such Class of Certificates for such Distribution Date accrued
on the related Certificate Balance outstanding immediately prior to such
Distribution Date. Accrued Certificate Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of Certificates will equal the
product of (a) such Net Aggregate Prepayment Interest Shortfall, multiplied by
(b) a fraction, the numerator of which is equal to the Accrued Certificate
Interest in respect of such Class of Certificates for such Distribution Date,
and the denominator of which is equal to the Accrued Certificate Interest in
respect of all the Classes of Certificates for such Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments [, net of any related Workout Fees
payable therefrom to the Special Servicer], due during or, if and to the extent
not previously received or advanced and distributed to Certificateholders on a
preceding Distribution Date, prior to the related Due Period, in each case to
the extent paid by the related borrower or advanced by the Master Servicer and
included in the Available Distribution Amount for such Distribution Date. The
Scheduled Principal Distribution Amount from time to time will include all late
payments of principal made by a borrower, including
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S-38
late payments in respect of a delinquent Balloon Payment, regardless of the
timing of such late payments, except to the extent such late payments are
otherwise reimbursable to the Master Servicer for prior Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution Date
will equal the aggregate of: (a) all voluntary prepayments of principal received
on the Mortgage Loans during the related Due Period [, net of any related
Workout Fees payable therefrom to the Special Servicer]; and (b) any other
collections (exclusive of payments by borrowers) received on the Mortgage Loans
and any REO Properties during the related Due Period, whether in the form of
Liquidation Proceeds, Insurance Proceeds, Condemnation Proceeds, net income from
REO Property or otherwise, that were identified and applied by the Master
Servicer as recoveries of previously unadvanced principal of the related
Mortgage Loan [, net of any related Workout Fees payable therefrom to the
Special Servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as the
"Distributable Principal".
The "Ownership Percentage" evidenced by any Class or Classes of
Certificates as of any date of determination will equal a fraction, expressed as
a percentage, the numerator of which is the then Certificate Balance(s) of such
Class(es) of Certificates, and the denominator of which is the then aggregate
Stated Principal Balance of the Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans. The "Stated
Principal Balance" of each Mortgage Loan outstanding at any time represents the
principal balance of such Mortgage Loan ultimately due and payable to the
Certificateholders subject to the Special Servicer's right to receive any
Workout Fee with respect to such Mortgage Loan. The Stated Principal Balance of
each Mortgage Loan will initially equal the Cut-off Date Balance thereof and, on
each Distribution Date, will be reduced by the portion of the Distributable
Principal for such date that is attributable to such Mortgage Loan. The Stated
Principal Balance of a Mortgage Loan may also be reduced in connection with any
forced reduction of the actual unpaid principal balance thereof imposed by a
court presiding over a bankruptcy proceeding wherein the related borrower is the
debtor. See "Certain Legal Aspects of Mortgage Loans-Foreclosure-Bankruptcy
Laws" in the Prospectus. If any Mortgage Loan is paid in full or such Mortgage
Loan (or any Mortgaged Property acquired in respect thereof) is otherwise
liquidated, then, as of the first Distribution Date that follows the end of the
Due Period in which such payment in full or liquidation occurred, and
notwithstanding that a loss may have occurred in connection with any such
liquidation, the Stated Principal Balance of such Mortgage Loan shall be zero.
For purposes of calculating distributions on, and allocations of Collateral
Support Deficit to, the Certificates, as well as for purposes of calculating the
amount of Servicing Fees payable each month, each REO Property will be treated
as if there exists with respect thereto an outstanding mortgage loan (an "REO
Loan"), and all references to "Mortgage Loan", "Mortgage Loans" and "Mortgage
Pool" herein and in the Prospectus, when used in such context, will be deemed to
also be references to or to also include, as the case may be, any "REO Loans".
Each REO Loan will generally be deemed to have the same characteristics as its
actual predecessor Mortgage Loan, including the same adjustable or fixed
Mortgage Rate (and, accordingly, the same Net Mortgage Rate and Effective Net
Mortgage Rate) and the same unpaid principal balance and Stated Principal
Balance. Amounts due on such predecessor Mortgage Loan, including any portion
thereof payable or reimbursable to the Master Servicer, will continue to be
"due" in respect of the REO Loan; and amounts received in respect of the related
REO Property, net of payments to be made, or reimbursement to the Master
Servicer or the Special Servicer for payments previously advanced, in connection
with the operation and management of such property, generally will be applied by
the Master Servicer as if received on the predecessor Mortgage Loan. However,
notwithstanding the terms of the predecessor Mortgage Loan, the Monthly Payment
"due" on an REO Loan will in all cases, for so long as the related Mortgaged
Property is part of the Trust Fund, be deemed to equal one month's interest
thereon at the applicable Mortgage Rate.
<PAGE>
S-39
Subordination; Allocation of Collateral Support Deficit
The rights of holders of the Class B Certificates and the Class C
Certificates to receive distributions of amounts collected or advanced on the
Mortgage Loans will be subordinated, to the extent described herein, to the
rights of holders of the Senior Certificates; and the rights of holders of the
Class C Certificates to receive distributions of amounts collected or advanced
on the Mortgage Loans will be subordinated, to the extent described herein, to
the rights of holders of the Class B Certificates. This subordination is
intended to enhance the likelihood of timely receipt by the holders of the
Senior Certificates of the full amount of all Distributable Certificate Interest
payable in respect of such Certificates on each Distribution Date, and the
ultimate receipt by such holders of principal in an amount equal to the entire
aggregate Certificate Balance of the Senior Certificates. Similarly, but to a
lesser degree, this subordination is also intended to enhance the likelihood of
timely receipt by the holders of the Class B Certificates of the full amount of
all Distributable Certificate Interest payable in respect of such Certificates
on each Distribution Date, and the ultimate receipt by such holders of principal
in an amount equal to the entire Certificate Balance of the Class B
Certificates. This subordination will be accomplished by the application of the
Available Distribution Amount on each Distribution Date in accordance with the
order of priority described under "-Distributions-Priority" above. No other form
of Credit Support will be available for the benefit of the holders of the
Offered Certificates.
Allocation to the Senior Certificates, for so long as they are outstanding,
of the entire Unscheduled Principal Distribution Amount for each Distribution
Date will generally accelerate the amortization of such Certificates relative to
the actual amortization of the Mortgage Loans. To the extent that the Senior
Certificates are amortized faster than the Mortgage Loans, the percentage
interest evidenced by the Senior Certificates in the Trust Fund will be
decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Class B and Class C Certificates), thereby increasing, relative
to their respective Certificate Balances, the subordination afforded the Senior
Certificates by the Class B and Class C Certificates. Following retirement of
the Class A Certificates, allocation to the Class B Certificates, for so long as
they are outstanding, of the entire Unscheduled Principal Distribution Amount
for each Distribution Date will provide a similar benefit to such Class of
Certificates as regards the relative amount of subordination afforded thereto by
the Class C Certificates.
On each Distribution Date, immediately following the distributions to be
made to the Certificateholders on such date, the [Trustee] is to calculate the
amount, if any, by which (i) the aggregate Stated Principal Balance of the
Mortgage Pool expected to be outstanding immediately following such Distribution
Date is less than (ii) the then aggregate Certificate Balance of the REMIC
Regular Certificates (any such deficit, "Collateral Support Deficit"). The
[Trustee] will be required to allocate any such Collateral Support Deficit among
the respective Classes of Certificates as follows: first, to the Class C
Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; second, to the Class B Certificates, until the
remaining Certificate Balance of such Class of Certificates is reduced to zero;
and last, to the Class A Certificates, until the remaining Certificate Balance
of such Class of Certificates has been reduced to zero. Any allocation of
Collateral Support Deficit to a Class of Certificates will be made by reducing
the Certificate Balance thereof by the amount so allocated. Any Collateral
Support Deficit allocated to a Class of REMIC Regular Certificates will be
allocated among the respective Certificates of such Class in proportion to the
Percentage Interests evidenced thereby. In general, Collateral Support Deficit
will result from the occurrence of: (i) losses and other shortfalls on or in
respect of the Mortgage Loans, including as a result of defaults and
delinquencies thereon, Nonrecoverable Advances made in respect thereof and the
payment to the Master Servicer of interest on Advances and certain servicing
expenses; and (ii) certain unanticipated, non-Mortgage Loan specific expenses of
the Trust Fund, including certain reimbursements to the Trustee as described
under "Description of the Pooling Agreements - Certain Matters Regarding the
Trustee" in the Prospectus, certain reimbursements to the Master Servicer and
the Depositor as described under "Description of the Pooling Agreements -
Certain Matters Regarding the Master Servicer and the Depositor" in the
Prospectus and certain federal, state and local taxes, and certain tax-related
expenses, payable out of the Trust Fund as described under "Certain Federal
Income Tax Consequences - REMICs - Prohibited Transactions Tax and Other Taxes "
in the Prospectus. Accordingly, the allocation of Collateral Support Deficit as
described above will constitute an allocation of losses and other shortfalls
experienced by the Trust Fund.
<PAGE>
S-40
Advances
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability determination
described in the next paragraph, to make advances (each, an "Advance") out of
its own funds or, subject to the replacement thereof as provided in the Pooling
and Servicing Agreement, funds held in the Certificate Account that are not
required to be part of the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of: (i) all Monthly Payments (net of
the related Servicing Fee), other than Balloon Payments, which were due on the
Mortgage Loans during the related Due Period and delinquent as of the related
Determination Date; (ii) in the case of each Mortgage Loan delinquent in respect
of its Balloon Payment as of the related Determination Date, an amount equal to
one month's interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee), but
only to the extent that the related mortgagor has not made a payment sufficient
to cover such amount under any forbearance arrangement or otherwise that has
been included in the Available Distribution Amount for such Distribution Date;
and (iii) in the case of each REO Property, an amount equal to thirty days'
imputed interest with respect thereto at the related Mortgage Rate in effect as
of the commencement of the related Due Period (net of the related Servicing
Fee), but only to the extent that such amount is not covered by any net income
from such REO Property included in the Available Distribution Amount for such
Distribution Date. The Master Servicer's obligations to make Advances in respect
of any Mortgage Loan or REO Property will continue through liquidation of such
Mortgage Loan or disposition of such REO Property, as the case may be.
The Master Servicer will be entitled to recover any Advance made out of its
own funds from any amounts collected in respect of the Mortgage Loan as to which
such Advance was made, whether in the form of late payments, Insurance Proceeds,
Condemnation Proceeds, Liquidation Proceeds or otherwise ("Related Proceeds").
Notwithstanding the foregoing, the Master Servicer will not be obligated to make
any Advance that it determines in its reasonable good faith judgment would, if
made, not be recoverable out of Related Proceeds (a "Nonrecoverable Advance"),
and the Master Servicer will be entitled to recover any Advance that it so
determines to be a Nonrecoverable Advance out of general funds on deposit in the
Certificate Account. Nonrecoverable Advances will represent a portion of the
losses to be borne by the Certificateholders. See "Description of the
Certificates-Advances in Respect of Delinquencies" and "Description of the
Pooling Agreements-Certificate Account" in the Prospectus.
In connection with its recovery of any Advance or reimbursable servicing
expense, each of the Master Servicer and the Special Servicer will be entitled
to be paid, out of any amounts then on deposit in the Certificate Account,
interest at ____% per annum (the "Reimbursement Rate") accrued on the amount of
such Advance or expense from the date made to but not including the date of
reimbursement.
To the extent not offset or covered by amounts otherwise payable on the
Class C Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Class B Certificates; and to the extent not
offset or covered by amounts otherwise payable on the Class B and Class C
Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Senior Certificates. To the extent that any
holder of an Offered Certificate must bear the cost of the Master Servicer's
and/or Special Servicer's Advances, the benefits of such Advances to such holder
will be contingent on the ability of such holder to reinvest the amounts
received as a result of such Advances at a rate of return equal to or greater
than the Reimbursement Rate.]
Each Distribution Date Statement delivered by the Trustee to the
Certificateholders will contain information relating to the amounts of Advances
made with respect to the related Distribution Date. See "Description of the
Certificates-Reports to Certificateholders; Certain Available Information"
herein and "Description of Certificates-Reports to Certificateholders" in the
Prospectus.
<PAGE>
S-41
Reports to Certificateholders; Certain Available Information
On each Distribution Date, the [Trustee] will be required to forward by
mail to each holder of an Offered Certificate a statement (a "Distribution Date
Statement") providing various items of information relating to distributions
made on such date with respect to the relevant Class and the recent status of
the Mortgage Pool. For a more detailed discussion of the particular items of
information to be provided in each Distribution Date Statement, as well as a
discussion of certain annual information reports to be furnished by the
[Trustee] to persons who at any time during the prior calendar year were holders
of the Offered Certificates, see "Description of the Certificates-Reports to
Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [Trustee] make
available at its offices primarily responsible for [administration of the Trust
Fund], during normal business hours, for review by any holder of an Offered
Certificate, originals or copies of, among other things, the following items:
(a) the Pooling and Servicing Agreement and any amendments thereto, (b) all
Distribution Date Statements delivered to holders of the relevant Class of
Offered Certificates since the Delivery Date, (c) all officer's certificates
delivered to the Trustee since the Delivery Date as described under "Description
of the Pooling Agreements-Evidence as to Compliance" in the Prospectus, (d) all
accountants' reports delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements-Evidence as to
Compliance" in the Prospectus, (e) the most recent property inspection report
prepared by or on behalf of the Special Servicer and delivered to the Trustee in
respect of each Mortgaged Property, (f) the most recent annual operating
statements, if any, collected by or on behalf of the Special Servicer and
delivered to the Trustee in respect of each Mortgaged Property, and (g) any and
all modifications, waivers and amendments of the terms of a Mortgage Loan
entered into by the Master Servicer or the Special Servicer and delivered to the
Trustee. Copies of any and all of the foregoing items will be available from the
[Trustee] upon request; however, the [Trustee] will be permitted to require
payment of a sum sufficient to cover the reasonable costs and expenses of
providing such copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and DTC
Participants. Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Financial Intermediaries and Class A
Certificate Owners, and by Financial Intermediaries to Class A Certificate
Owners, will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time. The Master
Servicer, the Special Servicer, the Trustee, the Depositor, the REMIC
Administrator and the Certificate Registrar are required to recognize as
Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee for
DTC.
Voting Rights
At all times during the term of the Pooling and Servicing Agreement, the
voting rights for the series offered hereby (the "Voting Rights") shall be
allocated among the respective Classes of Certificateholders in proportion to
the Certificate Balances of their Certificates. Voting Rights allocated to a
Class of Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
Termination; Retirement of Certificates
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in respect
thereof) or other liquidation of the last Mortgage Loan or REO Property subject
thereto, and (ii) the purchase of all of the assets of the Trust Fund by the
Master Servicer or the Depositor. Written notice of termination of the Pooling
and Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at the office of the Certificate Registrar or other location
specified in such notice of termination.
<PAGE>
S-42
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (a) the sum of (i) the aggregate Purchase Price of all the
Mortgage Loans (exclusive of REO Loans) then included in the Trust Fund and (ii)
the aggregate fair market value of all REO Properties then included in the Trust
Fund (which fair market value for any REO Property may be less than the Purchase
Price for the corresponding REO Loan), as determined by an appraiser mutually
agreed upon by the Master Servicer and the Trustee, over (b) the aggregate of
amounts payable or reimbursable to the Master Servicer under the Pooling and
Servicing Agreement. Such purchase will effect early retirement of the then
outstanding Offered Certificates, but the right of the Master Servicer or the
Depositor to effect such termination is subject to the requirement that the then
aggregate Stated Principal Balance of the Mortgage Pool be less than 5% of the
Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer or the Depositor, as the case may be, for the Mortgage Loans and other
assets in the Trust Fund (if the Trust Fund is to be terminated as a result of
the purchase described in the preceding paragraph), together with all other
amounts on deposit in the Certificate Account and not otherwise payable to a
person other than the Certificateholders (see "Description of the Pooling
Agreements-Certificate Account" in the Prospectus), will be applied generally as
described above under "-Distributions-Priority", except that the distributions
of principal described thereunder will, in the case of each Class of
Certificates, be made, subject to available funds, in an amount equal to the
related Certificate Balance then outstanding.
<PAGE>
S-43
The Trustee
____________, a _____________________, will act as Trustee on behalf of the
Certificateholders. [The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee.] The offices of the Trustee primarily
responsible for the administration of the Trust Fund are located at
_____________________________. See "Description of the Pooling Agreements-the
Trustee", "-Duties of the Trustee", "-Certain Matters Regarding the Trustee" and
"-Resignation and Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
Yield Considerations
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the rate
and timing of payments of principal on such Certificate; and (iii) the aggregate
amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will equal the weighted average
of the applicable Effective Net Mortgage Rates. Accordingly, the yield on the
Offered Certificates will be sensitive to (x) adjustments to the Mortgage Rates
on the ARM Loans and (y) changes in the relative composition of the Mortgage
Pool as a result of scheduled amortization, voluntary prepayments and
involuntary liquidations of the Mortgage Loans. See "Description of the Mortgage
Pool" herein and "-Yield Considerations-Rate and Timing of Principal Payments"
below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by the
rate and timing of principal payments on the Mortgage Loans (including principal
prepayments on the Mortgage Loans resulting from both voluntary prepayments by
the mortgagors and involuntary liquidations). The rate and timing of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules thereof, the dates on which Balloon Payments are due and the rate and
timing of principal prepayments and other unscheduled collections thereon
(including for this purpose, collections made in connection with liquidations of
Mortgage Loans due to defaults, casualties or condemnations affecting the
Mortgaged Properties, or purchases of Mortgage Loans out of the Trust Fund).
Prepayments and, assuming the respective stated maturity dates therefor have not
occurred, liquidations and purchases of the Mortgage Loans, will result in
distributions on the Offered Certificates of amounts that would otherwise be
distributed over the remaining terms of the Mortgage Loans. Defaults on the
Mortgage Loans, particularly at or near their stated maturity dates, may result
in significant delays in payments of principal on the Mortgage Loans (and,
accordingly, on the Offered Certificates) while work-outs are negotiated or
foreclosures are completed. See "Servicing of the Mortgage Loans-Modifications,
Waivers and Amendments" herein and "Description of the Pooling
Agreements-Realization Upon Defaulted Mortgage Loans" and "Certain Legal Aspects
of Mortgage Loans-Foreclosure" in the Prospectus. Because the rate of principal
payments on the Mortgage Loans will depend on future events and a variety of
factors (as described below), no assurance can be given as to such rate or the
rate of principal prepayments in particular. The Depositor is not aware of any
relevant publicly available or authoritative statistics with respect to the
historical prepayment experience of a large group of mortgage loans comparable
to the Mortgage Loans.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which such Certificates are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans are in turn distributed
on such Certificates. An investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on such Certificate could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments on such Certificate could result in an
actual yield to such investor that is lower than the anticipated yield. In
general, the earlier a payment of principal is made on an Offered Certificate
purchased at a discount or
<PAGE>
S-44
premium, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments on such
investor's Offered Certificates occurring at a rate higher (or lower) than the
rate anticipated by the investor during any particular period would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net Aggregate
Prepayment Interest Shortfalls, generally be borne: first, by the holders of the
Class C Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; second, by the holders of the Class B
Certificates, to the extent of amounts otherwise distributable in respect of
their Certificates; and last, by the holders of the Senior Certificates. As more
fully described herein under "Description of the
Certificates-Distributions-Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective Classes
of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by a
number of factors, including, without limitation, prevailing interest rates, the
terms of the Mortgage Loans (for example, Prepayment Premiums, adjustable
Mortgage Rates and amortization terms that require Balloon Payments), the
demographics and relative economic vitality of the areas in which the Mortgaged
Properties are located and the general supply and demand for rental properties
in such areas, the quality of management of the Mortgaged Properties, the
servicing of the Mortgage Loans, possible changes in tax laws and other
opportunities for investment. See "Risk Factors" and "Description of the
Mortgage Pool" herein and "Risk Factors" and "Yield and Maturity
Considerations-Yield and Prepayment Considerations" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Although most of the Mortgage Loans are ARM Loans, adjustments to the
Mortgage Rates thereon will generally be limited by lifetime and/or periodic
caps and floors and, in each case, will be based on the related Index (which may
not rise and fall consistently with mortgage interest rates then available) plus
the related Gross Margin (which may be different from margins then offered on
adjustable rate mortgage loans). See "Description of the Mortgage Pool-Certain
Payment Characteristics" and "-The Index" herein. As a result, the Mortgage
Rates on the ARM Loans at any time may not be comparable to prevailing market
interest rates. In addition, as prevailing market interest rates decline, and
without regard to whether the Mortgage Rates on the ARM Loans decline in a
manner consistent therewith, related borrowers may have an increased incentive
to refinance for purposes of either (i) converting to a fixed rate loan and
thereby "locking in" such rate, or (ii) taking advantage of a different index,
margin or rate cap or floor on another adjustable rate mortgage loan. The
Mortgage Loans may be prepaid at any time and, in ____ cases (approximately
_____% of the Initial Pool Balance), may be prepaid in whole or in part without
payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by Federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to which
a default will have occurred as of any date or as to the overall rate of
prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until a date that is scheduled to be at least
_____ days and as many as ______ days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of the
Offered Certificates will be lower than the
<PAGE>
S-45
yield that would otherwise be produced by the applicable Pass-Through Rates and
purchase prices (assuming such prices did not account for such delay).
Unpaid Distributable Certificate Interest. As described under "Description
of the Certificates-Distributions-Priority" herein, if the portion of the
Available Distribution Amount distributable in respect of interest on any Class
of Offered Certificates on any Distribution Date is less than the Distributable
Certificate Interest then payable for such Class, the shortfall will be
distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
Weighted Average Life
The weighted average life of an Offered Certificate refers to the average
amount of time that will elapse from the date of its issuance until each dollar
allocable to principal of such Certificate is distributed to the investor. The
weighted average life of an Offered Certificate will be influenced by, among
other things, the rate at which principal on the Mortgage Loans is paid or
otherwise collected, which may be in the form of scheduled amortization,
voluntary prepayments, Insurance Proceeds, Condemnation Proceeds and Liquidation
Proceeds.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the ["Constant Prepayment
Rate" or "CPR" model. The CPR model represents an assumed constant annual rate
of prepayment each month, expressed as a per annum percentage of the then
scheduled principal balance of the pool of mortgage loans. As used in each of
the following tables, the column headed "0%" assumes that none of the Mortgage
Loans is prepaid before maturity. The columns headed "___%", "___%", "___%" and
"___%" assume that prepayments on the Mortgage Loans are made at those levels of
CPR. There is no assurance, however, that prepayments of the Mortgage Loans will
conform to any level of CPR, and no representation is made that the Mortgage
Loans will prepay at the levels of CPR shown or at any other prepayment rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each of the Class A Certificates and the Class B Certificates that
would be outstanding after each of the dates shown at various CPRs and the
corresponding weighted average life of each such Class of Certificates. The
tables have been prepared on the basis of the following assumptions, among
others: (i) scheduled monthly payments of principal and interest on the Mortgage
Loans, in each case prior to any prepayment of the loan, will be timely received
(with no defaults) and will be distributed on the 25th day of each month
commencing in ________ 199___; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan, until
its next Interest Rate Adjustment Date, when a new Mortgage Rate that is to
remain in effect to maturity will be calculated reflecting the value of the
related Index as of ________, 199__, subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 30/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the Cut-off
Date will continue to be due (a) in the case of each Fixed Rate Loan, on each
Due Date until maturity and (b) in the case of each ARM Loan, until its next
Payment Adjustment Date, when a new payment that is to be due on each Due Date
until maturity will be calculated reflecting the appropriate Mortgage Rate and
remaining amortization term; (v) any principal prepayments on the Mortgage Loans
will be received on their respective Due Dates at the respective levels of CPR
set forth in the tables, and there will be no Net Aggregate Prepayment Interest
Shortfalls in connection therewith; and (vi) the Mortgage Loan Seller will not
be required to repurchase any Mortgage Loan, and neither the Master Servicer nor
the Depositor will exercise its option to purchase all the Mortgage Loans and
thereby cause an early termination of the Trust Fund. To the extent that the
Mortgage Loans have characteristics that differ from those assumed in preparing
the tables set forth below, the Class A Certificates or the Class B Certificates
may mature earlier or later than indicated by the tables. It is highly unlikely
that the Mortgage Loans will prepay at any constant rate until maturity or that
all the Mortgage Loans will prepay at the same rate. In addition, variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentages of initial Certificate Balances
(and weighted average lives) shown in the following tables. Such variations may
occur even if the average prepayment experience of
<PAGE>
S-46
the Mortgage Loans were to equal any of the specified CPR percentages. Investors
are urged to conduct their own analyses of the rates at which the Mortgage Loans
may be expected to prepay. Based on the foregoing assumptions, the following
table indicates the resulting weighted average lives of the Class A Certificates
and sets forth the percentage of the initial Certificate Balance of the Class A
Certificates that would be outstanding after each of the dates shown at the
indicated CPRs.
Percent of the Initial Certificate Balance of the
Class A Certificates at the Respective CPRs
Set Forth Below:
<TABLE>
<CAPTION>
Date 0% % % % %
- ---- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
Delivery Date................................................ 100.0 100.0 100.0 100.0 100.0
_________ 25, 1997...........................................
_________ 25, 1998...........................................
_________ 25, 1999...........................................
_________ 25, 2000...........................................
_________ 25, 2001...........................................
_________ 25, 2002...........................................
_________ 25, 2003...........................................
_________ 25, 2004...........................................
_________ 25, 2005...........................................
Weighted Average Life (years)(A).............................
</TABLE>
- ----------
(A) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the number
of years from the date of issuance of the Class A Certificates to the
related Distribution Date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the reductions in the principal balance of
such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth the
percentage of the initial Certificate Balance of the Class B Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
Percent of the Initial Certificate Balance of the
Class B Certificates at the Respective CPRs
Set Forth Below:
<TABLE>
<CAPTION>
Date 0% % % % %
- ---- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
Delivery Date............................................ 100.0 100.0 100.0 100.0 100.0
_________ 25, 1997.......................................
_________ 25, 1998.......................................
_________ 25, 1999.......................................
_________ 25, 2000.......................................
_________ 25, 2001.......................................
_________ 25, 2002.......................................
_________ 25, 2003.......................................
_________ 25, 2004.......................................
_________ 25, 2005.......................................
Weighted Average Life (years)(A).........................
</TABLE>
<PAGE>
S-47
- ----------
(A) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class B Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class B Certificate.
[The following disclosure is applicable to Stripped Interest Certificates, when
offered...
Yield Sensitivity of the Class S Certificates
The yield to maturity of the Class S Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the Mortgage
Loans, which may fluctuate significantly from time to time. A rapid rate of
principal payments will have a material negative effect on the yield to maturity
of the Class S Certificates. There can be no assurance that the Mortgage Loans
will prepay at any particular rate. Prospective investors in the Class S
Certificates should fully consider the associated risks, including the risk that
such investors may not fully recover their initial investment.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class S Certificates to various constant rates of prepayment on
the Mortgage Loans by projecting the monthly aggregate payments of interest on
the Class S Certificates and computing the corresponding pre-tax yields to
maturity on a corporate bond equivalent basis, based on the assumptions
described in the third paragraph under the heading "--Weighted Average Life"
above, including the assumptions regarding the characteristics and performance
of the Mortgage Loans which differ from the actual characteristics and
performance thereof and assuming the aggregate purchase price set forth below.
Any differences between such assumptions and the actual characteristics and
performance of the Mortgage Loans and of the Class S Certificates may result in
yields being different from those shown in such table. Discrepancies between
assumed and actual characteristics and performance underscore the hypothetical
nature of the table, which is provided only to give a general sense of the
sensitivity of yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Class S Certificates
at the Following CPRs
<TABLE>
<CAPTION>
Assumed Purchase Price 0% % % % % %
- ---------------------- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
$________________............................... ____% ____% ____% ____% ____% ____%
</TABLE>
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class S Certificates, would cause
the discounted present value of such assumed stream of cash flows to equal the
assumed purchase price listed in the table. Accrued interest is included in the
assumed purchase price and is used in computing the corporate bond equivalent
yields shown. These yields 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 S Certificates, and thus do not reflect the return on
any investment in the Class S Certificates when any reinvestment rates other
than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Class S
Certificates is likely to differ from those shown in the tables, even if all of
the Mortgage Loans prepay at the indicated CPRs over any given time period or
over the entire life of the Certificates.
<PAGE>
S-48
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class S Certificates will conform to
the yields described herein. Investors are urged to make their investment
decisions based on the determinations as to anticipated rates of prepayment
under a variety of scenarios. Investors in the Class S Certificates should fully
consider the risk that a rapid rate of prepayments on the Mortgage Loans could
result in the failure of such investors to fully recover their investments.]
Additional Yield Considerations Applicable Solely to the Class R Certificates
The Class R Certificateholders' after-tax rate of return on the Class R
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Class R Certificates. Holders of Class R
Certificates may have tax liabilities with respect to their Certificates during
the early years of the Trust Fund's term that substantially exceed any
distributions payable thereon during any such period. In addition, holders of
Class R Certificates 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 the Class R
Certificates may be negative or may otherwise be significantly adversely
affected. The timing and amount of taxable income attributable to the Class R
Certificates will depend on, among other things, the timing and amounts of
prepayments and losses experienced with respect to the Mortgage Pool.
The Class R Certificateholders should consult their tax advisors as to the
effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Class R Certificates on after-tax rates of
return on such Certificates. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and Class C Certificates will evidence
"regular interests" in such REMIC and (ii) the Class R Certificates will be the
sole class of "residual interests" in such REMIC, each within the meaning of the
REMIC Provisions in effect on the date hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Trust Fund
will be classified as a grantor trust under Subpart E, part I of subchapter J of
the Code, and not as an association taxable as a corporation or as a
partnership.]
The __________ Certificates [may] [will] [will not] be treated as having
been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of __%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Original
Issue Discount" in the Prospectus.
The ___________________ Certificates may be treated for Federal income tax
purposes as having been issued at a premium. Whether any holder of [either] such
Class of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Premium" in
the Prospectus.
<PAGE>
S-49
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest described in
Section 856(c)(3)(B) of the Code. Moreover, the Offered Certificates will be
"qualified mortgages" within the meaning of Section 860(A)(3) of the Code. See
"Certain Federal Income Tax Consequences-REMICs-Characterization of Investments
in REMIC Certificates" in the Prospectus.
________________________, a _______________, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences-REMICs-Reporting and Other Administrative
Matters" and "Description of the Pooling Agreements-Certain Matters Regarding
the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "-Events of Default" and "-Rights Upon Event of Default" in the
Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences-REMICs" in the Prospectus.
Special Tax Considerations Applicable to REMIC Residual Certificates
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests to
United States persons. Pursuant to the Pooling and Servicing Agreement, the
Class R Certificates may not be transferred to non-United States persons. See
"Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating to
"excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Class R Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences-REMICs-Taxation of
Owners of REMIC Residual Certificates-Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if "a significant purpose of the transfer was
to impede the assessment or collection of tax." Based on the REMIC Regulations,
the Class R Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Class R Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Class R Certificates. All transfers of the Class R
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Class R Certificates
constitute noneconomic residual interests. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Residual
Certificates-Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Certificateholders from the Trust Fund with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources
<PAGE>
S-50
of funds sufficient to pay any federal income taxes due in the earlier years of
the Trust Fund's term as a result of their ownership of the Class R
Certificates. In addition, the required inclusion of this amount of taxable
income during the Trust Fund's earlier accrual periods and the deferral of
corresponding tax losses or deductions until later accrual periods or until the
ultimate sale or disposition of a Class R Certificate (or possibly later under
the "wash sale" rules of Section 1091 of the Code) may cause the Class R
Certificateholders' after-tax rate of return to be zero or negative even if the
Class R Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Class R Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage Interest
in the Class R Certificates shall, by its acceptance of such Certificates, agree
to irrevocably appoint the Master Servicer as its agent to perform all of the
duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations-Additional Yield Considerations Applicable Solely to the Class R
Certificates" herein and "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated _____________, 199_ (the "Underwriting Agreement"), ______________________
(the "Underwriter") has agreed to purchase and the Depositor has agreed to sell
to the Underwriter each class of the Offered Certificates. It is expected that
delivery of the Class A Certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that the delivery of
the Class B and Class R Certificates will be made at the offices of the
Underwriter, _____________________, on or about _____________, 199_ against
payment therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of its Certificates is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
Depositor from the sale of the Offered Certificates, before deducting expenses
payable by the Depositor, will be approximately ____% of the aggregate
Certificate Balance of the Offered Certificates plus accrued interest thereon
from the Cut-off Date. The Underwriter may effect such transactions by selling
its Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
Underwriter and any dealers that participate with such Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Depositor, against certain civil liabilities under the Securities Act of
1933, as amended, or contribute to payments required to be made in respect
thereof.
<PAGE>
S-51
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the Prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement. Except
as described herein under "Description of the Certificates--Reports to
Certificateholders; Certain Available Information", there can be no assurance
that any additional information regarding the Offered Certificates will be
available through any other source. In addition, the Depositor is not aware of
any source through which price information about the Offered Certificates will
be generally available on an ongoing basis. The limited nature of such
information regarding the Offered Certificates may adversely affect the
liquidity of the Offered Certificates, even if a secondary market for the
Offered Certificates becomes available.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made at
negotiated prices determined at the time of sale.]
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Underwriter by ________________. Certain federal income tax matters and
other matters will be passed upon for the Depositor by Thacher Proffitt & Wood.
RATING
It is a condition to issuance that the Senior Certificates be rated not
lower than "__", and the Class B Certificates be rated not lower than "__", by
____________________________________.
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood or
frequency of prepayments (whether voluntary or involuntary) on the Mortgage
Loans, [The following disclosure is applicable to Stripped Interest
Certificates, when offered... or the possibility that as a result of prepayments
investors in the Class S Certificates may realize a lower than anticipated yield
or may fail to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any Class
thereof and, if so, what such rating would be. A rating assigned to any Class of
Offered Certificates by a rating agency that has not been requested by the
Depositor to do so may be lower than the rating assigned thereto by
___________________________.
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. 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.
LEGAL INVESTMENT
[As long as the Senior Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, the Senior Certificates will constitute "mortgage related
securities" within the meaning of SMMEA, and as such 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 whose authorized investments are subject to
<PAGE>
S-52
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Under SMMEA, however, if a State enacted legislation on or prior to
October 3, 1991 specifically limiting the legal investment authority of any such
entities with respect to "mortgage related securities," such securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain States have enacted legislation which
overrides the preemption provisions of SMMEA.]
[The Class B Certificates will not be "mortgage related securities" for
purposes of SMMEA. As a result, the appropriate characterization of the Class B
Certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase the Class B Certificates,
is subject to significant interpretive uncertainties.]
The Depositor makes no representation as to the proper characterization of
any class of Offered Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase 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 or 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.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh plans
and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, including insurance company general
accounts, that is subject to ERISA, or Section 4975 of the Code (each, a "Plan")
should review with its legal advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction that is prohibited or is not
otherwise permitted either under ERISA or Section 4975 of the Code or whether
there exists any statutory or administrative exemption applicable thereto.
[The U.S. Department of Labor issued to [Underwriter] an individual
prohibited transaction exemption, Prohibited Transaction Exemption _____ (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code
and Section 501(i) of ERISA, certain transactions, among others, relating to the
servicing and operation of mortgage pools, such as the Mortgage Pool, and the
purchase, sale and holding of mortgage pass-through certificates, such as the
Class A Certificates, underwritten by an Underwriter (as hereinafter defined),
provided that certain conditions set forth in the Exemption are satisfied. For
purposes of this Section "ERISA Considerations", the term "Underwriter" shall
include (a) [Underwriter], (b) any person directly or indirectly, through one or
more intermediaries, controlling, controlled by or under common control with
[Underwriter], and (c) any member of the underwriting syndicate or selling group
of which a person described in (a) or (b) is a manager or co-manager with
respect to the 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 A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the 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
A Certificates must not be subordinated to the rights and interests evidenced by
the other certificates of the same trust. Third, the Class A Certificates at the
time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by Standard & Poor's Corporation ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit
Rating Co. ("Duff & Phelps") or Fitch Investors Service, Inc. ("Fitch"). Fourth,
the Trustee cannot be an affiliate of any other member of the "Restricted
Group", which consists of any Underwriter, the Depositor, the Trustee, the
<PAGE>
S-53
Master Servicer, the Special Servicer, any sub-servicer, and any mortgagor with
respect to Mortgage Loans constituting more than 5% of the aggregate unamortized
principal balance of the Mortgage Loans as of the date of initial issuance of
the Class A Certificates. Fifth, the sum of all payments made to and retained by
the Underwriter must represent not more than reasonable compensation for
underwriting the 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
obligations; and the sum of all payments made to and retained by the Master
Servicer, the Special Servicer and any sub-servicer 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 A Certificates are not subordinated to any other Class of
Certificates, the second general condition set forth above is satisfied with
respect to such Certificates. It is a condition of the issuance of the Class A
Certificates that they be rated not lower than "__" by
_______________________________________________________. As of the Delivery
Date, the fourth general condition set forth above will be satisfied with
respect to the Class A Certificates. A fiduciary of a Plan contemplating
purchasing a Class A Certificate in the secondary market must make its own
determination that, at the time of such purchase, the Class A Certificates
continue to satisfy the third and fourth general conditions set forth above. A
fiduciary of a Plan contemplating purchasing a Class A Certificate, whether in
the initial issuance of such Certificates or in the secondary market, must make
its own determination that the first, fifth and sixth general conditions set
forth above will be satisfied with respect to such Class A Certificate.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates in such other
investment pools must have been rated in one of the three highest categories of
Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least one year prior
to the Plan's acquisition of Class A Certificates; and (iii) certificates in
such other investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of Class A
Certificates.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1) (A) through (D) of the Code) in connection
with (i) the direct or indirect sale, exchange or transfer of Class A
Certificates in the initial issuance of Certificates between the Depositor or an
Underwriter and a Plan when the Depositor, the Underwriter, the Trustee, the
Master Servicer, the Special Servicer, a Sub-Servicer or a mortgagor is a Party
in Interest with respect to the investing Plan, (ii) the direct or indirect
acquisition or disposition in the secondary market of the Class A Certificates
by a Plan and (iii) the holding of Class A Certificates by a Plan. However, no
exemption is provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2)
and 407 of ERISA for the acquisition or holding of a Class A Certificate on
behalf of an "Excluded Plan" by any person who has discretionary authority or
renders investment advice with respect to the assets of such Excluded Plan. For
purposes hereof, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Certificates between
the Depositor or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in such Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the Mortgage Loans or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Class A Certificates by a Plan and (3) the holding of Class A Certificates by a
Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
<PAGE>
S-54
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Mortgage Pool.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Offered Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A Certificates constitute "certificates" for
purposes of the Exemption and (ii) the specific and general conditions and the
other requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider the availability
of any other prohibited transaction exemptions. See "ERISA Considerations" in
the Prospectus. A purchaser of a Class A Certificate should be aware, however,
that even if the conditions specified in one or more exemptions are satisfied,
the scope of relief provided by an exemption may not cover all acts which might
be construed as prohibited transactions.
Because the characteristics of the Class B Certificates [and the Class R
Certificates] do not meet the requirements of the Exemption, the purchase or
holding of such Certificates by a Plan may result in prohibited transactions or
the imposition of excise taxes or civil penalties. As a result, no transfer of a
Class B Certificate [or Class R Certificate] or any interest therein may be made
to a Plan or to any person who is directly or indirectly purchasing such
Certificate or interest therein on behalf of, as named fiduciary of, as trustee
of, or with assets of a Plan, unless the prospective transferee provides the
Certificate Registrar with a certification of facts and an opinion of counsel
which establish to the satisfaction of the Certificate Registrar that such
transfer will not result in a violation of Section 406 of ERISA or Section 4975
of the Code or cause the Master Servicer, the Special Servicer or the Trustee to
be deemed a fiduciary of such Plan or result in the imposition of an excise tax
under Section 4975 of the Code. See "ERISA Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase an Offered Certificate 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.
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus Supplement and
the Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Depositor or by the
Underwriter. This Prospectus Supplement and the Prospectus do not constitute an
offer to sell, or a solicitation of an offer t buy, the securities offered
hereby to anyone in any jurisdiction in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make any such offer or solicitation. Neither the delivery of this Prospectus
Supplement and the Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this Prospectus Supplement or the
Prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary................................................
Risk Factors...........................................
Description of the Mortgage Pool.......................
Servicing of the Mortgage Loans........................
Description of the Certificates........................
Yield and Maturity Considerations......................
Certain Federal Income Tax Consequences................
Method of Distribution.................................
Legal Matters..........................................
Rating.................................................
Legal Investment.......................................
ERISA Considerations...................................
Index of Principal Definitions.........................
Prospectus
Prospectus Supplement..................................
Available Information..................................
Incorporation of Certain Information by Reference......
Summary of Prospectus..................................
Risk Factors...........................................
Description of the Trust Funds.........................
Yield and Maturity Considerations......................
The Depositor..........................................
Description of the Certificates........................
Description of the Pooling Agreements..................
Description of Credit Support..........................
Certain Legal Aspects of Mortgage Loans................
Certain Federal Income Tax Consequences................
State Tax and Other Considerations.....................
ERISA Considerations...................................
Legal Investment.......................................
Use of Proceeds........................................
Method of Distribution.................................
Legal Matters..........................................
Financial Information..................................
DEUTSCHE MORTGAGE & ASSET RECEIVING
CORPORATION
$___________
Mortgage Pass-Through
Certificates
Series 199_-_
Class A Certificates Variable Rate $___________
Class B Certificates Variable Rate $___________
Class R Certificates Variable Rate $ 100
-----------
PROSPECTUS SUPPLEMENT
-----------
[UNDERWRITER]
Dated __________, 199_
<PAGE>
Rating.................................................
Index of Principal Definitions.........................
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
---------------------------------------------
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
30/360 basis ..........................................................S-34
Accrued Certificate Interest................................................S-35
Advance .....................................................S-6, S-37
ARM Loans ...........................................................S-2
Available Distribution Amount...............................................S-33
Balloon Payment ...........................................................S-3
CEDEL ..........................................................S-13
Certificate Balance...........................................................ii
Certificate Registrar.......................................................S-31
Certificates .............................................................i
Class .............................................................i
Class A Certificate Owner....................................................S-2
Class B Available Distribution Amount........................................S-5
Class S Certificates.........................................................iii
Collateral Support Deficit.............................................S-8, S-37
Constant Prepayment Rate....................................................S-42
CPR ..........................................................S-42
Cut-off Date ............................................................ii
Cut-off Date Balance........................................................S-13
Debt Service Coverage Ratio.................................................S-21
Definitive Class A Certificate.........................................S-2, S-31
Delivery Date ............................................................ii
Depositor ...........................................................S-1
Determination Date..........................................................S-33
Distributable Certificate Interest..........................................S-35
Distributable Principal.....................................................S-35
Distribution Date ......................................................ii, S-32
Distribution Date Statement.................................................S-38
Due Date ...........................................................S-2
Due Period ..........................................................S-33
Effective Net Mortgage Rate.................................................S-34
ERISA ..........................................................S-10
ERISA Considerations........................................................S-49
Euroclear ..........................................................S-13
Financial Intermediary......................................................S-31
Fixed Rate Loans ...........................................................S-3
Form 8-K ..........................................................S-26
Gross Margin ...........................................................S-3
Index ...........................................................S-3
Initial Pool Balance..........................................................ii
Interest Rate Adjustment Date................................................S-2
LTV Ratio ..........................................................S-22
Master Servicer ...........................................................S-1
Master Servicing Fee........................................................S-28
Monthly Payments ...........................................................S-2
Mortgage ..........................................................S-13
Mortgage Loan Seller.........................................................S-1
Mortgage Loans ............................................................ii
Mortgage Note ..........................................................S-13
Mortgage Pool ............................................................ii
Mortgage Rate ...........................................................S-2
Mortgaged Property.....................................................S-2, S-13
Net Aggregate Prepayment Interest Shortfall.................................S-35
Net Mortgage Rate ...........................................................S-4
Net Operating Income........................................................S-21
Nonrecoverable Advance......................................................S-38
Offered Certificates.....................................................i, S-31
Ownership Percentage........................................................S-35
Pass-Through Rate ............................................................ii
Payment Adjustment Date......................................................S-3
Percentage Interest.........................................................S-31
Plan ..........................................................S-49
Pooling and Servicing Agreement..............................................S-3
Prepayment Interest Excess..................................................S-29
Prepayment Premiums.........................................................S-14
Purchase Agreement...........................................................S-2
Purchase Price ..........................................................S-25
Reimbursement Rate..........................................................S-38
Related Proceeds ..........................................................S-37
REMIC Administrator..........................................................S-1
REMIC Regular Certificates....................................................ii
REO Loan ..........................................................S-36
REO Property ....................................................S-27, S-30
Senior Certificates......................................................i, S-30
Servicing Fees ..........................................................S-28
Special Servicer ...........................................................S-1
Special Servicing Fee.......................................................S-28
Specially Serviced Mortgage Assets..........................................S-27
Specially Serviced Mortgage Loans...........................................S-27
Stated Principal Balance....................................................S-36
Trust Fund ............................................................ii
Trustee ...........................................................S-1
Underwriter .......................................................i, S-47
Underwriting Agreement......................................................S-47
Voting Rights ..........................................................S-39
Workout Fee ..........................................................S-28
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus supplement and the prospectus to which it relates
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED _______, 199_
[Version 2 - Health Care Concentration]
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 199_)
$__________________________
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
Depositor
Mortgage Pass-Through Certificates, Series 199__-__
$_____________ Variable Rate Class A Certificates
$_____________ Variable Rate Class B Certificates
$ 100 Variable Rate Class R Certificates
-----------
The Series 199__-__ Mortgage Pass-Through Certificates (the
"Certificates") will consist of the following four classes (each, a "Class"):
(i) the Class A Certificates and Class R Certificates (collectively, the "Senior
Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. Only the Senior Certificates and the Class B Certificates
(collectively, the "Offered Certificates") are offered hereby.
It is a condition of their issuance that the Senior Certificates be
rated not lower than ____, and that the Class B Certificates be rated not lower
than ______, by ___________________.
-----------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG
OR ANY OF THEIR AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE DEPOSITOR, DEUTSCHE BANK AG
OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-----------
Prospective investors should review the information appearing under the
caption "Risk Factors" beginning on page S-___ herein and page __ in the
Prospectus before purchasing any Offered Certificate.
See "Index of Principal Definitions" in the Prospectus for location of
meanings of capitalized terms used but not defined herein. See "Index of
Principal Definitions" herein for location of meanings of those other
capitalized terms used herein.
There is currently no secondary market for the Offered Certificates.
_____________________ (the "Underwriter") intends to make a secondary market in
the Offered Certificates, but is not obligated to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop or,
if it does develop, that it will continue. See "Risk Factors-Limited Liquidity"
herein. The Offered Certificates will not be listed on any securities exchange.
The Offered Certificates will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the
[UNDERWRITER]
________________, 199__
<PAGE>
ii
(cover continued)
Depositor estimated to be approximately $_____________, will be ______% of the
initial aggregate Certificate Balance of the Offered Certificates[, plus accrued
interest on the Offered Certificates from the Cut-off Date]. The Offered
Certificates are offered by the Underwriter subject to prior sale, when, as and
if delivered to and accepted by the Underwriter and subject to certain other
conditions. It is expected that the Class A Certificates will be delivered in
book-entry form through the Same-Day Funds Settlement System of DTC and that the
Class B and Class R Certificates will be delivered at the offices of the
Underwriter, _________________________ _________________________________, on or
about _____________, 199__ (the "Delivery Date"), against payment therefor in
immediately available funds.
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be established by the
Depositor, that will consist primarily of a segregated pool (the "Mortgage
Pool") of ____ conventional, fixed- and adjustable-rate, multifamily or
commercial, balloon mortgage loans (the "Mortgage Loans"). Each Mortgage Loan is
secured by a first mortgage lien on a fee simple estate in real property
operated as a Health Care-Related Facility (as defined in the Prospectus),
retail property, office building or multifamily rental property. As of
____________, 199___ (the "Cut-off Date"), the Mortgage Loans had an aggregate
principal balance (the "Initial Pool Balance") of $___________________, after
application of all payments of principal due on or before such date, whether or
not received. Certain characteristics of the Mortgage Loans are described herein
under "Description of the Mortgage Pool".
The rights of the holders of the Class B and Class C Certificates to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the holders of the Senior Certificates, and the rights of the
holders of the Class C Certificates to receive distributions with respect to the
Mortgage Loans will be subordinate to the rights of the holders of the Class B
Certificates, in each case to the extent described herein and in the Prospectus.
The Class A Certificates will be represented initially by certificates
registered in the name of Cede & Co., as nominee of DTC, as described herein.
The interests of the beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive certificates will be available for the Class A Certificates only
under the limited circumstances described herein and in the Prospectus. See
"Description of the Certificates-Book-Entry Registration of the Class A
Certificates" herein and "Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in the Prospectus.
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. The Class A Certificates, the Class B Certificates and the
Class C Certificates (collectively, the "REMIC Regular Certificates") will
constitute "regular interests", and the Class R Certificates will constitute the
sole class of "residual interests", in the Trust Fund. See "Certain Federal
Income Tax Consequences" herein and in the Prospectus. Transfer of the Class R
Certificates will be prohibited to any non-United States person, and will be
subject to certain additional transfer restrictions described herein under
"Certain Federal Income Tax Consequences-Special Tax Considerations Applicable
to REMIC Residual Certificates" and in the Prospectus under "Certain Federal
Income Tax Consequences-REMICs-Tax and Restrictions on Transfers of REMIC
Residual Certificates to Certain Organizations".
Distributions on the Certificates will be made, to the extent of available
funds, on the 25th day of each month or, if any such day is not a business day,
then on the next business day, beginning in _____________ 199____ (each, a
"Distribution Date"). As described herein, interest distributions on each Class
of Offered Certificates will be made on each Distribution Date based on the
variable pass-through rate (the "Pass-Through Rate") then applicable to such
Class and the stated principal amount (the "Certificate Balance") of such Class
outstanding immediately prior to such Distribution Date. The Pass-Through Rate
for each Class of Offered Certificates applicable to the first Distribution Date
will be _________% per annum. Subsequent to the initial Distribution Date, the
Pass-Through Rate for each Class of Offered Certificates will equal from time to
time the weighted average of, subject to certain adjustments described herein,
the Net Mortgage Rates (as defined herein) on the Mortgage Loans. Principal
distributions on each Class of Offered Certificates will be made in the amounts
and in accordance with the priorities described herein. See "Description of the
Certificates-Distributions" herein.
<PAGE>
iii
(cover continued)
The yield to maturity on each Class of Offered Certificates will depend on,
among other things, changes in its respective Pass-Through Rate and the rate and
timing of principal payments (including by reason of prepayments, defaults and
liquidations) on the Mortgage Loans. See "Yield and Maturity Considerations"
herein and "Yield and Maturity Considerations" and "Risk Factors-Effect of
Prepayments on Average Life of Certificates" in the Prospectus. [The following
disclosure is applicable to Stripped Interest Certificates ("Class S
Certificates"), when offered... The yield to maturity on the Class S
Certificates will be extremely sensitive to the rate and timing of principal
payments (including by reasons of prepayments, defaults and liquidations) on the
Mortgage Loans, which may fluctuate significantly from time to time. A rate of
principal payments on the Mortgage Loans that is more rapid than expected by
investors will have a material negative effect on the yield to maturity of the
Class S Certificates. Investors in the Class S Certificates should consider the
associated risks, including the risk that a rapid rate of principal payments on
the Mortgage Loans could result in the failure of investors in such Certificates
to recover fully their initial investments. See "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" and "Risk
Factors-Effect of Prepayments on Average Life of Certificates" in the
Prospectus.]
[inside front cover]
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING OFFERED
PURSUANT TO ITS PROSPECTUS DATED ____________________, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT 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.
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. An Index of Principal Definitions is included at the end of both
this Prospectus Supplement and the Prospectus. Terms that are used but not
defined in this Prospectus Supplement will have the meanings specified in the
Prospectus.
Title of Certificates ............... Mortgage Pass-Through Certificates,
Series 199__-__.
Depositor ........................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware Corporation. See
"The Depositor" in the Prospectus. The
Offered Certificates are not insured or
guaranteed by the Depositor, Deutsche
Bank AG or any of their affiliates.
Master Servicer ..................... ____________________. See "Servicing of
the Mortgage Loans-The Master Servicer"
herein.
Special Servicer .................... _____________________. See "Servicing of
the Mortgage Loans-The Special Servicer"
herein.
Trustee ............................. _____________________. See "Description
of the Certificates-The Trustee" herein.
REMIC Administrator ................. _____________________. See "Certain
Federal Income Tax
Consequences-REMICs-Reporting and Other
Administrative Matters" herein and
"Description of the Pooling
Agreements-Events of Default" and
"-Rights Upon Event of Default" in the
Prospectus.
Mortgage Loan Seller ................ ________________________. See
"Description of the Mortgage Pool-The
Mortgage Loan Seller" herein.
Cut-off Date ........................ ___________________, 199__.
Delivery Date ....................... On or about ___________________, 199__.
Registration; Denominations ......... The Class A Certificates will be issued,
maintained and transferred on the
book-entry records of DTC in
denominations of $25,000 and integral
multiples of $1 in excess thereof. The
Class B Certificates will be issued in
fully registered, certificated form in
denominations of $100,000 and in
integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to
the remainder of the initial Certificate
Balance of such Class. The Class R
Certificates will be issued in
registered, certificated form in minimum
denominations of 20% percentage interest
in such Class.
The Class A Certificates will be
represented by one or more global
Certificates registered in the name of
Cede & Co., as nominee of DTC. No person
acquiring an interest in the Class A
Certificates (any such person, a "Class
A Certificate Owner") will be entitled
to receive a Class A Certificate in
fully registered, certificated form (a
"Definitive Class A Certificate"),
except under the limited circumstances
described herein and
<PAGE>
S-2
in the Prospectus. See "Description of
the Certificates-Book-Entry Registration
of the Class A Certificates" herein and
"Description of the
Certificates-Book-Entry Registration and
Definitive Certificates" in the
Prospectus.
The Mortgage Pool ................... The Mortgage Pool will consist of _____
conventional, balloon Mortgage Loans
with an Initial Pool Balance of
$_________________. On or prior to the
Delivery Date, the Depositor will
acquire the Mortgage Loans from the
Mortgage Loan Seller pursuant to a
Purchase Agreement, dated [the date
hereof], between the Depositor and the
Mortgage Loan Seller (the "Purchase
Agreement"). In the Purchase Agreement,
the Mortgage Loan Seller has made
certain representations and warranties
to the Depositor regarding the
characteristics and quality of the
Mortgage Loans and, as more particularly
described herein, has agreed to cure any
material breach thereof or repurchase
the affected Mortgage Loan. In
connection with the assignment of its
interests in the Mortgage Loans to the
Trustee, the Depositor will also assign
its rights under the Purchase Agreement
insofar as they relate to or arise out
of the Mortgage Loan Seller's
representations and warranties regarding
the Mortgage Loans. See "Description of
the Mortgage Pool-Representations and
Warranties; Repurchases" herein.
Each Mortgage Loan is secured by a first
mortgage lien on a fee simple estate in
real property (as to such Mortgage Loan,
the "Mortgaged Property") operated as a
Health Care-Related Facility (__
Mortgage Loans which represent ____% of
the Initial Pool Balance), a retail
property (__ Mortgage Loans which
represent ___% of the Initial Pool
Balance), an office building (__
Mortgage Loans which represent ____% of
the Initial Pool Balance) or a
multifamily rental property (__ Mortgage
Loans which represent __% of the Initial
Pool Balance). ________ of the Mortgage
Loans, which represent _____% of the
Initial Pool Balance, are secured by
liens on Mortgaged Properties located in
_______________. The remaining Mortgaged
Properties are located throughout
___________ other states. See
"Description of the Mortgage
Pool-Additional Mortgage Loan
Information" and "Risk Factors-Risks
Associated With Multifamily Properties"
and "-Risks Associated with ___________
Properties" and "Description of the
Mortgage Pool-Additional Mortgage Loan
Information" herein. ___________ of the
Mortgage Loans, which represent ______%
of the Initial Pool Balance, provide for
scheduled payments of principal and/or
interest ("Monthly Payments") to be due
on the first day of each month; the
remainder of the Mortgage Loans provide
for Monthly Payments to be due on the
____, _____, _____ or _____ day of each
month (the date in any month on which a
Monthly Payment on a Mortgage Loan is
first due, the "Due Date"). The
annualized rate at which interest
accrues (the "Mortgage Rate") on ____ of
the Mortgage Loans (the "ARM Loans"),
which represent _____% of the Initial
Pool Balance, is subject to adjustment
on specified Due Dates (each such date
of adjustment, an "Interest Rate
Adjustment Date") by adding a fixed
number of basis points (a "Gross
Margin") to the value of a base index
(an "Index"), subject, in ______ cases,
to lifetime maximum and/or minimum
Mortgage Rates, and in _____ cases, to
periodic maximum and/or
<PAGE>
S-3
minimum Mortgage Rates, in each case as
described herein; and the remaining
Mortgage Loans (the "Fixed Rate Loans")
bear interest at fixed Mortgage Rates.
____ of the ARM Loans, which represent
___% of the Initial Pool Balance,
provide for Interest Rate Adjustment
Dates that occur monthly, while the
remainder of the ARM Loans provide for
adjustments of the Mortgage Rate to
occur semi-annually or annually.
[Identify Mortgage Loan Index] See
"Description of the Mortgage
Pool-Certain Payment Characteristics"
herein.
The amount of the Monthly Payment on all
of the ARM Loans is subject to
adjustment on specified Due Dates (each
such date, a "Payment Adjustment Date")
to an amount that would amortize the
outstanding principal balance of the
Mortgage Loan over its then remaining
amortization schedule and pay interest
at the then applicable Mortgage Rate.
The ARM Loans provide for Payment
Adjustment Dates that occur on the Due
Date following each related Interest
Rate Adjustment Date.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly
longer than the remaining terms of such
Mortgage Loans, thereby leaving
substantial principal amounts due and
payable (each such payment, together
with the corresponding interest payment,
a "Balloon Payment") on their respective
maturity dates, unless prepaid prior
thereto.
Description of the Certificates ..... The Certificates will be issued pursuant
to a Pooling and Servicing Agreement, to
be dated as of the Cut-off Date, among
the Depositor, the Master Servicer, the
Special Servicer, the Trustee and the
REMIC Administrator (the "Pooling and
Servicing Agreement"), and will
represent in the aggregate the entire
beneficial ownership interest in the
Trust Fund, which will consist of the
Mortgage Pool and certain related
assets.
The aggregate Certificate Balance of the
Certificates as of the Delivery Date
will equal the Initial Pool Balance.
Each Class of Offered Certificates will
have the initial Certificate Balance set
forth on the cover page, and the Class C
Certificates will have an initial
Certificate Balance of $____________.
See "Description of the
Certificates-General" herein.
The Pass-Through Rate applicable to each
Class of Certificates for the initial
Distribution Date will equal _____% per
annum. With respect to any Distribution
Date subsequent to the initial
Distribution Date, the Pass-Through Rate
for each Class of Certificates will
equal the weighted average of the
applicable Effective Net Mortgage Rates
for the Mortgage Loans, weighted on the
basis of their respective Stated
Principal Balances (as described herein)
immediately prior to such Distribution
Date. For purposes of calculating the
Pass-Through Rate for any Class of
Certificates and any Distribution Date,
the "applicable Effective Net Mortgage
Rate" for each Mortgage Loan is an
annualized rate equal to the Mortgage
Rate in effect for such Mortgage Loan as
of the [second] day of the most recently
ended calendar month, (a) reduced by ___
basis
<PAGE>
S-4
points (the Mortgage Rate, as so
reduced, the "Net Mortgage Rate"), and
(b) if the accrual of interest on such
Mortgage Loan is computed other than on
the basis of a 360-day year consisting
of twelve 30-day months (which is the
basis of accrual for interest on the
Certificates), then adjusted to reflect
that difference in computation. See
"Description of the
Certificates-Distributions-Pass-Through
Rates" and "-Distributions-Certain
Calculations with Respect to Individual
Mortgage Loans" herein.
Interest Distributions
on the Senior Certificates ........ On each Distribution Date, to the extent
of the Available Distribution Amount,
holders of each Class of Senior
Certificates will be entitled to receive
distributions of interest in an amount
equal to all Distributable Certificate
Interest with respect to such
Certificates for such Distribution Date
and, to the extent not previously paid,
for all prior Distribution Dates. See
"Description of the
Certificates-Distributions" herein.
The "Distributable Certificate Interest"
in respect of any Class of Certificates
for any Distribution Date will equal one
month's interest at the then-applicable
Pass-Through Rate accrued on the
Certificate Balance of such Class of
Certificates immediately prior to such
Distribution Date, reduced (to not less
than zero) by such Class of
Certificates' allocable share (in each
case, calculated as described herein) of
any Net Aggregate Prepayment Interest
Shortfall (also as described herein) for
such Distribution Date. See "Description
of the Certificates-Distributions-
Distributable Certificate Interest"
herein.
The "Available Distribution Amount" for
any Distribution Date is, as described
herein under "Description of the
Certificates-Distributions", the total
of all payments or other collections (or
available advances) on or in respect of
the Mortgage Loans that are available
for distribution on the Certificates on
such date.
Principal Distributions on
the Senior Certificates ........... On each Distribution Date, to the extent
of the Available Distribution Amount
remaining after the distributions of
interest to be made on the Senior
Certificates on such date, holders of
the Senior Certificates will be entitled
to distributions of principal (until the
Certificate Balances of such Classes of
Certificates are reduced to zero) in an
aggregate amount equal to the sum of (a)
such holders' pro rata share of the
Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) the
entire Unscheduled Principal
Distribution Amount for such
Distribution Date. Distributions of
principal on the Senior Certificates
will be paid first to the holders of the
Class R Certificates until the
Certificate Balance of such Certificates
is reduced to zero, and then to the
holders of the Class A Certificates. See
"Description of the
Certificates-Distributions-Scheduled
Principal Distribution Amount and
Unscheduled Principal Distribution
Amount" herein.
Interest Distributions on
the Class B Certificates .......... On each Distribution Date, to the extent
of the Available Distribution Amount
remaining after all distributions to be
made on the Senior
<PAGE>
S-5
Certificates on such date (such
remaining portion, the "Class B
Available Distribution Amount"), holders
of the Class B Certificates will be
entitled to receive distributions of
interest in an amount equal to all
Distributable Certificate Interest with
respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior
Distribution Dates. See "Description of
the Certificates-Distributions" herein.
Principal Distributions on
the Class B Certificates .......... On each Distribution Date, to the extent
of the Class B Available Distribution
Amount remaining after the distributions
of interest to be made on the Class B
Certificates on such date, holders of
the Class B Certificates will be
entitled to distributions of principal
(until the Certificate Balance of such
Class of Certificates is reduced to
zero) in an amount equal to the sum of
(a) such holders' pro rata share of the
Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) if
the Certificate Balances of the Senior
Certificates have been reduced to zero,
then to the extent not distributed in
reduction of such Certificate Balances
on such Distribution Date, the entire
Unscheduled Principal Distribution
Amount for such Distribution Date. See
"Description of the Certificates-
Distributions" herein.
Certain Yield and Prepayment
Considerations .................... The yield on the Offered Certificates of
any class will depend on, among other
things, the Pass-Through Rate for such
Certificates. The yield on any Offered
Certificate that is purchased at a
discount or premium will also be
affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) on the Mortgage Loans and
(ii) the extent to which such principal
payments are applied on any Distribution
Date in reduction of the Certificate
Balance of the Class to which such
Certificate belongs. See "Description of
the Certificates-Distributions-Priority"
and "-Distributions-Scheduled Principal
Distribution Amount and Unscheduled
Principal Distribution Amount" herein.
An investor that purchases an Offered
Certificate at a discount should
consider the risk that a slower than
anticipated rate of principal payments
on such Certificate will result in an
actual yield that is lower than such
investor's expected yield. An investor
that purchases any Offered Certificate
at a premium should consider the risk
that a faster than anticipated rate of
principal payments on such Certificate
will result in an actual yield that is
lower than such investor's expected
yield. Insofar as an investor's initial
investment in any Offered Certificate is
repaid, there can be no assurance that
such amounts can be reinvested in a
comparable alternative investment with a
comparable yield.
The actual rate of prepayment of
principal on the Mortgage Loans cannot
be predicted. The Mortgage Loans may be
prepaid at any time, subject, in the
case of ____ Mortgage Loans, to payment
of a Prepayment Premium. The investment
performance of the Offered Certificates
may vary materially and adversely from
the investment expectations of
<PAGE>
S-6
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 expected
weighted average life of the Certificate
may not be realized. For a discussion of
certain factors affecting prepayment of
the Mortgage Loans, including the effect
of Prepayment Premiums, see "Yield and
Maturity Considerations" herein. In
deciding whether to purchase any Offered
Certificates, an investor should make an
independent decision as to the
appropriate prepayment assumptions to be
used.
[The structure of the Offered
Certificates causes the yield of certain
Classes to be particularly sensitive to
changes in the rates of prepayment of
the Mortgage Loans and other factors, as
follows:]
[Allocation to the Senior Certificates,
for so long as they are outstanding, of
the entire Unscheduled Principal
Distribution Amount for each
Distribution Date will generally
accelerate the amortization of such
Certificates relative to the actual
amortization of the Mortgage Loans.
Following retirement of the Class A
Certificates, the Unscheduled Principal
Distribution Amount for each
Distribution Date will be allocated to
the Class B Certificates.]
[The following disclosure is applicable
to Stripped Interest Certificates, when
offered The Stripped Interest
Certificates. The Class S Certificates
are interest-only Certificates and are
not entitled to any distributions in
respect of principal. The yield to
maturity of the Class S Certificates
will be especially sensitive to the
prepayment, repurchase and default
experience on the Mortgage Loans, which
may fluctuate significantly from time to
time. A rate of principal payments that
is more rapid than expected by investors
will have a material negative effect on
the yield to maturity of the Class S
Certificates. See "Yield and Maturity
Considerations-Yield Sensitivity of the
Class S Certificates" herein.]
Class R Certificates: Holders of the
Class R Certificates are entitled to
receive distributions of principal and
interest as described herein; however,
holders of such Certificates may have
tax liabilities with respect to their
Certificates during the early years of
the term of the Trust Fund that
substantially exceed the principal and
interest payable thereon during such
periods. See "Yield and Maturity
Considerations", especially "-Additional
Yield Considerations Applicable Solely
to the Class R Certificates," herein and
"Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Advances ............................ The Master Servicer is required to make
advances (each, an "Advance") of
delinquent principal and interest (net
of related Servicing Fees) on the
Mortgage Loans or, in the case of each
Mortgage Loan that is delinquent in
respect of its Balloon Payment or as to
which the related Mortgaged Property was
acquired through foreclosure, deed in
lieu of foreclosure
<PAGE>
S-7
or otherwise, only of delinquent
interest (net of related Servicing
Fees), in any event under the
circumstances and subject to the
limitations set forth herein. Advances
are intended to maintain a regular flow
of scheduled interest and principal
payments to the Certificateholders,
rather than to guarantee or insure
against losses. Accordingly, Advances
which cannot be reimbursed out of
collections on or in respect of the
related Mortgage Loans ("Nonrecoverable
Advances") will represent a portion of
the losses to be borne by
Certificateholders.
The Master Servicer will be entitled to
interest on any Advances made, and the
Master Servicer and the Special Servicer
will each be entitled to interest on
certain servicing expenses incurred by
it or on its behalf, such interest
accruing at the rate and payable under
the circumstances described herein.
Interest accrued on outstanding Advances
will result in a reduction in amounts
payable on the Certificates. See
"Description of the Certificates-
Advances" and "-Subordination;
Allocation of Collateral Support
Deficit" herein and "Description of the
Certificates-Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements-Certificate Account"
in the Prospectus.
Each Distribution Date Statement
delivered by the Trustee to the
Certificateholders will contain
information relating to the amounts of
Advances made with respect to the
related Distribution Date. See
"Description of the Certificates-Reports
to Certificateholders; Certain Available
Information" herein and "Description of
Certificates-Reports to
Certificateholders" in the Prospectus.
Subordination; Allocation of Collateral
Support Deficit .................. The rights of the holders of the Class B
and Class C Certificates to receive
distributions with respect to the
Mortgage Loans will be subordinate to
the rights of the holders of the Senior
Certificates, and the rights of the
holders of the Class C Certificates to
receive distributions with respect to
the Mortgage Loans will be subordinate
to the rights of the holders of the
Class B Certificates, in each case to
the extent described herein and in the
Prospectus. This subordination is
intended to enhance the likelihood of
timely receipt by the holders of the
Senior Certificates of the full amount
of all Distributable Certificate
Interest payable in respect of such
Certificates on each Distribution Date,
and the ultimate receipt by such holders
of principal in an amount equal to the
entire aggregate Certificate Balance of
the Senior Certificates. Similarly, but
to a lesser degree, this subordination
is also intended to enhance the
likelihood of timely receipt by the
holders of the Class B Certificates of
the full amount of all Distributable
Certificate Interest payable in respect
of such Certificates on each
Distribution Date, and the ultimate
receipt by such holders of principal in
an amount equal to the entire
Certificate Balance of the Class B
Certificates. Such subordination will be
accomplished by the application of the
Available Distribution Amount on each
Distribution Date to distributions on
the respective Classes of Certificates
in the order described herein under
"Description of the Certificates-
Distributions-Priority". No other form
of Credit Support will be available for
the benefit of the holders of the
Offered Certificates.
<PAGE>
S-8
Allocation to the Senior Certificates,
for so long as they are outstanding, of
the entire Unscheduled Principal
Distribution Amount for each
Distribution Date will generally
accelerate the amortization of such
Certificates relative to the actual
amortization of the Mortgage Loans. To
the extent that the Senior Certificates
are amortized faster than the Mortgage
Loans, the percentage interest evidenced
by the Senior Certificates in the Trust
Fund will be decreased (with a
corresponding increase in the interest
in the Trust Fund evidenced by the Class
B and Class C Certificates), thereby
increasing, relative to their respective
Certificate Balances, the subordination
afforded the Senior Certificates by the
Class B and Class C Certificates.
Following retirement of the Class A
Certificates, allocation to the Class B
Certificates, for so long as they are
outstanding, of the entire Unscheduled
Principal Distribution Amount for each
Distribution Date will provide a similar
benefit to such Class of Certificates as
regards the relative amount of
subordination afforded thereto by the
Class C Certificates.
As a result of losses and other
shortfalls experienced with respect to
the Mortgage Loans or otherwise with
respect to the Trust Fund (which may
include shortfalls arising both from
interest accrued on Advances and from
Nonrecoverable Advances), the aggregate
Stated Principal Balance of the Mortgage
Pool expected to be outstanding
immediately following any Distribution
Date may be less than the aggregate
Certificate Balance of the Certificates
immediately following the distributions
on such Distribution Date. Such deficit
(the "Collateral Support Deficit") will
be allocated first to the Class C
Certificates, then to the Class B
Certificates and last to the Class A
Certificates (in reduction of their
Certificate Balances), in each case
until the related Certificate Balance
has been reduced to zero. See
"Description of the Certificates -
Subordination; Allocation of Collateral
Support Deficit" herein.
Optional Termination ................ At its option, on any Distribution Date
on which the remaining aggregate Stated
Principal Balance of the Mortgage Pool
is less than 5% of the Initial Pool
Balance, the Master Servicer or the
Depositor may purchase all of the
Mortgage Loans and REO Properties, and
thereby effect termination of the Trust
Fund and early retirement of the then
outstanding Certificates. See
"Description of the Certificates-
Termination; Retirement of Certificates"
herein and in the Prospectus.
Certain Federal Income
Tax Consequences ............... An election will be made to treat the
Trust Fund as a REMIC for Federal income
tax purposes. Upon the issuance of the
Offered Certificates,
_______________________, counsel to the
Depositor, will deliver its opinion
generally to the effect that, assuming
compliance with all provisions of the
Pooling and Servicing Agreement, for
Federal income tax purposes, the Trust
Fund will qualify as a REMIC under
Sections 860A through 860G of the Code.
For Federal income tax purposes, the
Class A, Class B and Class C
Certificates will be the "regular
interests" in the Trust Fund, and the
Class R Certificates will be the sole
class of "residual interests" in the
Trust Fund.
<PAGE>
S-9
Under the REMIC Regulations, the Class R
Certificates will not be regarded as
having "significant value" for purposes
of applying the rules relating to
"excess inclusions." In addition, the
Class R Certificates may constitute
"noneconomic" residual interests for
purposes of the REMIC Regulations.
Transfers of the Class R Certificates
will be restricted under the Pooling and
Servicing Agreement to United States
Persons in a manner designed to prevent
a transfer of a noneconomic residual
interest from being disregarded under
the REMIC Regulations. See "Certain
Federal Income Tax Consequences-Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein and
"Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners
of REMIC Residual Certificates-Excess
Inclusions" and "-Noneconomic REMIC
Residual Certificates" in the
Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years
of the Trust Fund's term that
significantly exceeds distributions on
the Class R Certificates during such
years, with corresponding tax deductions
or losses deferred until the later years
of the Trust Fund's term. Accordingly,
on a present value basis, the tax
detriments occurring in the earlier
years may substantially exceed the sum
of any tax benefits in the later years.
As a result, the Class R
Certificateholders' after-tax rate of
return may be zero or negative, event if
their pre-tax rate of return is
positive.
See "Yield and Maturity Considerations,"
especially "-Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain
Federal Income Tax Consequences-Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein.
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.
Rating .............................. It is a condition of their issuance that
the Senior Certificates be rated not
lower than "___", and that the Class B
Certificates be rated not lower than
"___", by _______________________
([collectively,] the "Rating
Agenc[ies]"). 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. A security
rating does not address the frequency of
prepayments of Mortgage Loans, or the
corresponding effect on yield to
investors. [The following disclosure is
applicable to Stripped Interest
Certificates, when offered A security
rating does not address the frequency or
likelihood of prepayments (whether
voluntary or involuntary) of Mortgage
Loans, or the possibility that, as a
result of prepayments, investors in the
Class S Certificates may realize a lower
than anticipated yield or may fail to
recover fully their initial investment.]
See "Rating" herein.
ERISA Considerations ................ Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh
plans, and collective investment funds
and separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that
<PAGE>
S-10
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of
Offered Certificates could give rise to
a transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in the
Prospectus.
Legal Investment .................... [The Senior Certificates will constitute
"mortgage related securities" for
purposes of SMMEA, for so long as they
are rated in one of the two highest
ratings categories by one or more
nationally recognized statistical rating
organizations and, as such, are legal
investments for certain entities to the
extent provided in SMMEA. Such
investments, however, will be subject to
general regulatory considerations
governing investment practices under
state and federal law. In addition,
institutions whose investment activities
are subject to review by federal or
state regulatory authorities may be or
may become subject to restrictions,
which may be retroactively imposed by
such regulatory authorities, on the
investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain states
have recently enacted legislation
overriding the legal investment
provisions of SMMEA.]
[The Class B Certificates will not be
"mortgage related securities" within the
meaning of SMMEA. As a result, the
appropriate characterization of the
Class B Certificates under various legal
investment restrictions, and thus the
ability of investors subject to these
restrictions to purchase the Class B
Certificates, may be subject to
significant interpretative
uncertainties.]
Investors should consult their legal
advisors to determine whether and to
what extent the Offered Certificates
constitute legal investments for them.
See "Legal Investment" herein and in the
Prospectus.
<PAGE>
S-11
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among other
things, the following risk factors (as well as the risk factors set forth under
"Risk Factors" in the Prospectus) in connection with an investment therein.
Limited Liquidity. There is currently no secondary market for the Offered
Certificates. The Underwriter has indicated its intention to make a secondary
market in the Offered Certificates, but it is not obligated 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 Offered
Certificates with liquidity of investment or that it will continue for the life
of the Offered Certificates. The Offered Certificates will not be listed on any
securities exchange. See "Risk Factors-Limited Liquidity" in the Prospectus.
Certain Yield Considerations. The yield on any Offered Certificate will
depend on (a) the price at which such Certificate is purchased by an investor
and (b) the rate, timing and amount of distributions on such Certificate. The
rate, timing and amount of distributions on any Offered Certificate will, in
turn, depend on, among other things, (w) the Pass-Through Rate for such
Certificate, (x) the rate and timing of principal payments (including principal
prepayments) and other principal collections on or in respect of the Mortgage
Loans and the extent to which such amounts are to be applied or otherwise result
in a reduction of the Certificate Balance [or Notional Amount] of the Class of
Certificates to which such Certificates belongs, (y) the rate, timing and
severity of losses on or in respect of the Mortgage Loans and the extent to
which such losses result in a reduction of the Certificate Balance [or Notional
Amount] of the Class of Certificates to which such Certificate belongs, and (z)
the timing and severity of any Net Aggregate Prepayment Interest Shortfalls and
the extent to which such shortfalls are allocated in reduction of the
Distributable Certificate Interest payable on the Class of Certificates to which
such Certificate belongs. It is impossible to predict with certainty any of the
factors described in the preceding sentence. Accordingly, investors may find it
difficult to analyze the effect that such factors might have on the yield to
maturity of any Class of Offered Certificates. [The yield to maturity of the
Class S Certificates will be highly sensitive to the rate and timing of
principal payments (including by reason of prepayments, defaults and
liquidations) on or in respect of the Mortgage Loans, and investors in the Class
S Certificates should fully consider the associated risks, including the risk
that an extremely rapid rate of amortization and prepayment of the related
Notional Amount could result in the failure of such investors to recoup their
initial investments.] See "Description of the Mortgage Pool", "Description of
the Certificates--Distributions" and "--Subordination; Allocation of Collateral
Support Deficit" and "Yield and Maturity Considerations" herein. See also "Yield
and Maturity Considerations" in the Prospectus.
Potential Liability to the Trust Fund Relating to a Materially Adverse
Environmental Condition. [An environmental site assessment was performed at
[each][all but ___] of the Mortgaged Properties during the _____ month period
prior to the Cut-off Date. [Note any special environmental problems.]
[Otherwise,] no such environmental assessment revealed any material adverse
environmental condition or circumstance at any Mortgaged Property[, except for
(i) those cases in which the condition or circumstance was remediated or an
escrow for such remediation has been established and (ii) those cases in which
an operations and maintenance plan or periodic monitoring of nearby properties
was recommended, which recommendations are consistent with industrywide
practices].
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property securing a
defaulted Mortgage Loan prior to acquiring title thereto or assuming its
operation. Such prohibition effectively precludes enforcement of the security
for the related Mortgage Note until a satisfactory environmental site assessment
is obtained (or until any required remedial action is thereafter taken), but
will decrease the likelihood that the Trust Fund will become liable for a
material adverse environmental condition at the Mortgaged Property. However,
there can be no assurance that the requirements of the Pooling and Servicing
Agreement will effectively insulate the Trust Fund from potential liability for
a materially adverse environmental condition at any Mortgaged Property. See
"Description of the Pooling Agreements-Realization Upon Defaulted Mortgage
Loans", "Risk Factors-Certain Factors Affecting Delinquency, Foreclosure and
Loss of the Mortgage Loans-Risk of Liability Arising from Environmental
Conditions" and "Certain Legal Aspects of Mortgage Loans-Environmental
Considerations" in the Prospectus.
<PAGE>
S-12
Exposure of the Mortgage Pool to Adverse Economic or other Developments
Based on Geographic Concentration. ______ Mortgage Loans, which represent ____%
of the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in _____________. In general, that concentration increases the exposure
of the Mortgage Pool to any adverse economic or other developments that may
occur in _________. In recent periods, _____________ (along with other regions
of the United States) has experienced a significant downturn in the market value
of real estate.
Increased Risk of Loss Associated With Concentration of Mortgage Loans and
Borrowers. Several of the Mortgage Loans have Cut-off Date Balances that are
substantially higher than the average Cut-off Date Balance. In general,
concentrations in a mortgage pool of loans with larger-than-average balances can
result in losses that are more severe, relative to the size of the pool, than
would be the case if the aggregate balance of the pool were more evenly
distributed. Concentration of borrowers also poses increased risks. For
instance, if a borrower that owns several Mortgaged Properties experiences
financial difficulty at one Mortgaged Property, or at another income-producing
property that it owns, it could attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting Monthly Payments
for an indefinite period on all of the related Mortgage Loans.
Increased Risk of Default Associated with Adjustable Rate Mortgage Loans.
________ of the Mortgage Loans, which represent ____% of the Initial Pool
Balance, are ARM Loans. Increases in the required Monthly Payments on ARM Loans
in excess of those assumed in the original underwriting of such loans may result
in a default rate higher than that on mortgage loans with fixed mortgage rates.
Increased Risk of Default Associated with Balloon Payments. None of the
Mortgage Loans is fully amortizing over its term to maturity. Thus, each
Mortgage Loan will have a substantial payment (that is, a Balloon Payment) due
at its stated maturity unless prepaid prior thereto. Loans with Balloon Payments
involve a greater likelihood of default than self-amortizing loans because the
ability of a borrower to make a Balloon Payment typically will depend upon its
ability either to refinance the loan or to sell the related mortgaged property.
See "Risk Factors-Certain Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans-Increased Risk of Default Associated With Balloon Payments"
in the Prospectus.
Extension Risk Associated With Modification of Mortgage Loans with Balloon
Payments. In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Special Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is reasonably
foreseeable; subject, however, to the limitations described under "Servicing of
the Mortgage Loans-Modifications, Waivers and Amendments" herein. There can be
no assurance, however, that any such extension or modification will increase the
present value of recoveries in a given case. Any delay in collection of a
Balloon Payment that would otherwise be distributable in respect of a Class of
Offered Certificates, whether such delay is due to borrower default or to
modification of the related Mortgage Loan by the Special Servicer, will likely
extend the weighted average life of such Class of Offered Certificates. See
"Yield and Maturity Considerations" herein and in the Prospectus.
Risks Particular to Health Care-Related Facilities. Certain types of Health
Care-Related Facilities (including nursing homes) typically receive a
substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare are subject to statutory
and regulatory changes, retroactive rate adjustments, administrative rulings,
policy interpretations, delays by fiscal intermediaries and government funding
restrictions. Accordingly, there can be no assurance that payments under
government reimbursement programs will be sufficient to fully reimburse the cost
of caring for program beneficiaries. If such payments are insufficient, net
operating income of those Health Care-Related Facilities that receive revenues
from those sources, and consequently the ability of the related borrowers to
meet their obligations under the Mortgage Loans secured thereby, could be
adversely affected.
Health Care-Related Facilities are generally subject to federal and state
laws and licensing requirements that relate to the adequacy of medical care,
distribution of pharmaceuticals, rate setting, equipment, personnel, operating
policies and additions to facilities and services. The failure of an operator to
maintain or renew any required license or regulatory
<PAGE>
S-13
approval could prevent it from continuing operations at a Health Care-Related
Facility or, if applicable, bar it from participation in government
reimbursement programs. Furthermore, under applicable federal and state laws and
regulations, Medicare and Medicaid reimbursements are generally not permitted to
be made to any person other than the provider who actually furnished the related
medical goods and services. Moreover, where licenses or other governmental
approvals are necessary, such are generally personal to the operator of the
facility. Accordingly, in the event of foreclosure of a defaulted Mortgage Loan,
the purchaser at foreclosure would generally not be entitled to obtain
governmental reimbursement payments relating to services furnished at the
facility prior to foreclosure, and might be required to obtain new government
operating licenses or approvals.
Risks Particular to Retail Properties. In addition to risks generally
associated with income producing real estate, mortgage loans secured by liens on
retail properties can also be adversely affected by changes in consumer spending
patterns, local competitive conditions (such as the supply of retail space or
the existence or construction of new competitive shopping centers), growth of
alternative forms of retailing (such as direct mail and video shopping networks
which need little or no retail space) and the public perception of the safety of
customers at shopping centers. In addition, significant tenants at a retail
property play an important part in generating customer traffic and making a
retail property a desirable location for other tenants at such property.
A retail property may also be adversely affected if a significant tenant
ceases operations at such location (which may occur on account of a voluntary
decision not to renew a lease, bankruptcy or insolvency of such tenant, such
tenant's general cessation of business activities or for other reasons). Certain
tenants at retail properties may be entitled to terminate their leases if an
anchor tenant ceases operations at such property. In such cases, there can be no
assurance that any such anchor tenants will continue to occupy space in the
related shopping centers.
Risks Particular to Office Properties. Mortgage loans secured by liens on
office properties can be adversely affected by local competitive conditions,
including the overall supply of office space and the existence of competitive
buildings. For example, office buildings that are not equipped to accommodate
the needs of modern businesses may become functionally obsolete and unable to
attract tenants. Similarly, a property will likely suffer if prospective tenants
consider it less attractive, or less well-located, than nearby office
properties. Accordingly, office properties generally require their owners to
expend significant sums to pay for capital improvements and tenant improvements,
as well as costs related to re-leasing space.
Risks Particular to Multifamily Properties. In the case of multifamily
lending in particular, adverse economic conditions, either local, regional or
national, may limit the amount of rent that can be charged and may result in a
reduction in timely rent payments or a reduction in occupancy levels. Occupancy
and rent levels may also be affected by construction of additional housing
units, local military base closings and national and local politics, including
current or future rent stabilization and rent control laws and agreements.
Certain of the Mortgaged Properties may be subject to rent stabilization or rent
control laws. In addition, the level of mortgage interest rates may encourage
tenants to purchase single-family housing. Further, the cost of operating a
multifamily property may increase, including the costs of utilities and the
costs of required capital expenditures. All of these conditions and events may
increase the possibility that a borrower may be unable to meet its obligation
under its Mortgage Loan.
Risks Relating to Lack of Certificateholder Control Over Trust Fund.
Certificateholders generally do not have a right to vote, except with respect to
required consents to certain amendments to the Pooling and Servicing Agreement.
Furthermore, Certificateholders will generally not have the right to make
decisions with respect to the administration of the Trust Fund. Such decisions
are generally made, subject to the express terms of the Pooling and Servicing
Agreement, by the Master Servicer, the Trustee, the Special Servicer or the
REMIC Administrator, as applicable. Any decision made by one of those parties in
respect of the Trust Fund, even if made in the best interests of the
Certificateholders (as determined by such party in its good faith and reasonable
judgment), may be contrary to the decision that would have been made by the
holders of any particular Class of Offered Certificates and may negatively
affect the interests of such holders.
<PAGE>
S-14
Yield Risk Associated With Changes in Concentrations. If and as payments in
respect of principal (including any principal prepayments, liquidations and the
principal portion of the repurchase prices of any Mortgage Loans repurchased due
to breaches of representations) are received with respect to the Mortgage Loans,
the remaining Mortgage Loans as a group may exhibit increased concentration with
respect to the type of properties, property characteristics, number of
Mortgagors and affiliated Mortgagors and geographic location. Because
unscheduled collections of principal on the Mortgage Loans is payable on the
Class A, Class B and Class C Certificates in sequential order, such Classes that
have a lower sequential priority are relatively more likely to be exposed to any
risks associated with changes in concentrations of loan or property
characteristics.
Subordination of Class B and Class C Certificates. As and to the extent
described herein, the rights of the holders of the Class B and Class C
Certificates to receive distributions of amounts collected or advanced on or in
respect of the Mortgage Loans will be subordinated to those of the holders of
the Senior Certificates and also, in the case of the holders of the Class C
Certificates, also to those of the holders of the Class B Certificates. See
"Description of the Certificates-Distributions-Priority" and "-Subordination;
Allocation of Collateral Support Deficit" herein.
Book-Entry Registration. The Class A Certificates will be initially
represented by one or more certificates registered in the name of Cede & Co., as
the nominee for DTC, and will not be registered in the names of the related
holders of Certificates or their nominees. As a result, holders of Class A
Certificates will not be recognized as "Certificateholders." Hence, those
beneficial owners will be able to exercise the rights of holders of Certificates
only indirectly through DTC and DTC Participants. See "Description of the
Certificates-General" and "-Book-Entry Registration" herein and "Description of
the Certificates-Book-Entry Registration and Definitive Certificates" in the
Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
General
The Trust Fund will consist primarily of ___ conventional, balloon Mortgage
Loans with an Initial Pool Balance of $_______________. Each Mortgage Loan is
evidenced by a promissory note (a "Mortgage Note") and secured by a mortgage,
deed of trust or other similar security instrument (a "Mortgage") that creates a
first mortgage lien on a fee simple estate in real property (a "Mortgaged
Property") operated as a Health Care-Related Facility, a retail property, an
office building or a multifamily rental property. All percentages of the
Mortgage Loans, or of any specified group of Mortgage Loans, referred to herein
without further description are approximate percentages by aggregate Cut-off
Date Balance. The "Cut-off Date Balance" of any Mortgage Loan is the unpaid
principal balance thereof as of the Cut-off Date, after application of all
payments due on or before such date, whether or not received.
The Mortgage Loans are not insured or guaranteed by any governmental entity
or private mortgage insurer. The Depositor has not undertaken any evaluation of
the significance of the recourse provisions of any of a number of the Mortgage
Loans that provide for recourse against the related borrower or another person
in the event of a default. Accordingly, investors should consider all of the
Mortgage Loans to be nonrecourse loans as to which recourse in the case of
default will be limited to the specific property and such other assets, if any,
as were pledged to secure a Mortgage Loan.
On or prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to the Purchase Agreement and will
thereupon assign its interests in the Mortgage Loans, without recourse, to the
Trustee for the benefit of the Certificateholders. See "-The Mortgage Loan
Seller" herein and "Description of the Pooling Agreements-Assignment of Mortgage
Loans; Repurchases" in the Prospectus. For purposes of the Prospectus, the
Mortgage Loan Seller constitutes a "Mortgage Asset Seller".
<PAGE>
S-15
The Mortgage Loans were originated between 19__ and 19__. The Mortgage Loan
Seller originated ____ of the Mortgage Loans, which represent ___% of the
Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof, generally in accordance with the underwriting
criteria described below under "-Underwriting Standards".
Certain Payment Characteristics
___ of the Mortgage Loans, which represent ___% of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The remaining
Mortgage Loans have Due Dates that occur on the ______ (____% of the Mortgage
Loans), _____ (____% of the Mortgage Loans), _____ (____% of the Mortgage
Loans), and _______ (____% of the Mortgage Loans) day of each month.
____________ of the Mortgage Loans, which represent ____% of the Initial
Pool Balance, are ARM Loans. The ARM Loans bear interest at Mortgage Rates that
are subject to adjustment on periodically occurring Interest Rate Adjustment
Dates by adding the related Gross Margin to the applicable value of the related
Index, subject in ______ cases to rounding conventions and lifetime minimum
and/or maximum Mortgage Rates and, in the case of ________ Mortgage Loans, which
represent ____% of the Initial Pool Balance, to periodic minimum and/or maximum
Mortgage Rates. The remaining Mortgage Loans are Fixed Rate Loans. None of the
ARM Loans is convertible into a Fixed Rate Loan.
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates on the
ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment Date,
or may be based on the value of the related Index as most recently published as
of an Interest Rate Adjustment Date or as of a designated date preceding an
Interest Rate Adjustment Date. ____ of the ARM Loans, which represent ___% of
the Initial Pool Balance, provide for Interest Rate Adjustment Dates that occur
monthly; ____ of the ARM Loans, which represent ___% of the Initial Pool
Balance, provide for Interest Rate Adjustment Dates that occur semi-annually;
and the remaining ARM Loans provide for Interest Rate Adjustment Dates that
occur annually.
The Monthly Payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule and
pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date following each related Interest Rate
Adjustment Date. None of the ARM Loans provide for negative amortization.
All of the Mortgage Loans provide for monthly payments of principal based
on amortization schedules significantly longer than the remaining terms of such
Mortgage Loans. Thus, each Mortgage Loan will have a Balloon Payment due at its
stated maturity date, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Prepayment Premiums are payable
to the Master Servicer as additional servicing compensation, to the extent not
otherwise applied to offset Prepayment Interest Shortfalls, and may be waived by
the Master Servicer in accordance with the servicing standard described under
"Servicing of the Mortgage Loans-General" herein.
[The Index]
Describe Index and include 5 year history.
[Delinquent and Nonperforming Mortgage Loans]
[Describe those delinquent and nonperforming Mortgage Loans, if any,
included in the Trust Fund.]
Additional Mortgage Loan Information
<PAGE>
S-16
The following tables set forth the specified characteristics of, in each
case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to rounding.
<PAGE>
S-17
<TABLE>
Mortgage Rates as of the Cut-off Date
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Range of Mortgage Rates(%) Loans Date Balance Date Balance
-------------------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------- --------------------
Total .......................................
============== =================== ====================
Weighted Average
Mortgage Rate (All Mortgage Loans):
______% per annum
Weighted Average
Mortgage Rate (ARM Loans): ____% per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): _____% per annum
</TABLE>
<TABLE>
Gross Margins for the ARM Loans
<CAPTION>
Percent by
Number of Aggregate Cut-off Aggregate Cut-off
Range of Gross Margins(%) ARM Loans Date Balance Date Balance
------------------------- --------- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------- --------------------
Total .......................................
============== =================== ====================
Weighted Average
Gross Margin: ____%
</TABLE>
<PAGE>
S-18
<TABLE>
Frequency of Adjustments to Mortgage Rates and Monthly
Payments for the ARM Loans
<CAPTION>
Monthly
Mortgage Rate Payment Number of Percent by
Adjustment Adjustment Mortgage Aggregate Cut-off Aggregate Cut-off
Frequency Frequency Loans Date Balance Date Balance
--------- --------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
-------------- ------------------ -------------------
Total ...................
============== ================== ===================
</TABLE>
<TABLE>
Maximum Lifetime Mortgage Rates for the ARM Loans
<CAPTION>
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Date Balance
-------------------------- --------- ------------ ------------
<S> <C> <C> <C>
Total .....................................
============== ================== ===================
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- -----------------
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
<TABLE>
Minimum Lifetime Mortgage Rates for the ARM Loans
<CAPTION>
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Date Balance
-------------------------- --------- ------------ ------------
<S> <C> <C> <C>
Total .....................................
============== ================== ===================
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- -----------------
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
<PAGE>
S-19
<TABLE>
Maximum Annual Mortgage Rates for the ARM Loans
<CAPTION>
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Annual Mortgage Rates(%) ARM Loans Date Balance Date Balance
------------------------ --------- ------------ ------------
<S> <C> <C> <C>
Total .....................................
============== ================== ===================
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- -----------------
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
<TABLE>
Minimum Annual Mortgage Rates for the ARM Loans
<CAPTION>
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Annual Mortgage Rates(%) ARM Loans Date Balance Date Balance
------------------------ --------- ------------ ------------
<S> <C> <C> <C>
Total .....................................
============== ================== ===================
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- -----------------
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
<PAGE>
S-20
<TABLE>
Cut-off Date Balances
<CAPTION>
Number of Percent by
Cut-off Date Mortgage Aggregate Cut-off Aggregate Cut-off
Balance Range ($) Loans Date Balance Date Balance
----------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------ -------------------
Total .....................................
============== ================== ===================
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
Average Cut-off Date
Balance (All Mortgage
Loans): $____________
Average Cut-off Date
Balance (ARM Loans): $____________
Average Cut-off Date
Balance (Fixed Rate Loans): $____________
</TABLE>
<TABLE>
Types of Mortgaged Properties
<CAPTION>
Percent by
Number of Aggregate Cut-off Date Aggregate Cut-off
Property Type Mortgage Loans Balance Date Balance
------------- -------------- ------- -------------
<S> <C> <C> <C>
Multifamily ..................................
Retail .......................................
Office .......................................
Health Care-Related Facility .................
[other property types] .......................
Total ..................................
</TABLE>
<PAGE>
S-21
Geographic Distribution of the Mortgaged Properties
<TABLE>
<CAPTION>
Number of Aggregate Cut-off Percent by Aggregate Weighted Average
State Mortgage Loans Date Balance Cut-off Date Balance DSC Ratio
----- -------------- -------------- -------------------- ---------
<S> <C> <C> <C> <C>
Total ...............
</TABLE>
Original Term to Stated Maturity (in Months
<TABLE>
<CAPTION>
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
----------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------------- ---------------------
Total ....................................
============== ========================= =====================
Weighted Average Original
Term to Stated Maturity
(All Mortgage Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): ____ months
</TABLE>
<PAGE>
S-22
Remaining Term to Stated Maturity (in Months)
as of the Cut-off Date
<TABLE>
<CAPTION>
Number of Percent by
Range of Remaining Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
----------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------------- ---------------------
Total ....................................
============== ========================= =====================
Weighted Average Remaining
Term to Stated Maturity
(All Mortgage Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): ___ months
</TABLE>
<PAGE>
S-23
Year of Origination
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
---- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------------- ---------------------
Total ....................................
============== ========================= =====================
</TABLE>
Year of Scheduled Maturity
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
---- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------------- ---------------------
Total ....................................
============== ========================= =====================
</TABLE>
<PAGE>
S-24
The following table sets forth a range of Debt Service Coverage Ratios for
the Mortgage Loans. The "Debt Service Coverage Ratio" set forth in the following
table for any Mortgage Loan is the ratio of (i) Net Operating Income produced by
the related Mortgaged Property for the period (annualized if the period was less
than one year) covered by the most recent operating statement available to the
Depositor to (ii) the amount of the Monthly Payment in effect as of the Cut-off
Date multiplied by 12. "Net Operating Income" is the revenue derived from the
use and operation of a Mortgaged Property (consisting primarily of rental income
and deposit forfeitures), less operating expenses (such as utilities, general
administrative expenses, management fees, advertising, repairs and maintenance),
and further less fixed expenses (such as insurance and real estate taxes). Net
Operating Income generally does not reflect capital expenditures. The following
table was prepared using operating statements obtained from the respective
mortgagors or the related property managers. In each case, the information
contained in such operating statements was unaudited, and the Depositor has made
no attempt to verify its accuracy. In the case of _____ Mortgage Loans (____ ARM
Loans and ____ Fixed Rate Loans), representing __% of the Initial Pool Balance,
operating statements could not be obtained, and accordingly, Debt Service
Coverage Ratios for those Mortgage Loans were not calculated. The last day of
the period (which may not correspond to the end of the calendar year most recent
to the Cut-off Date) covered by each operating statement from which a Debt
Service Coverage Ratio was calculated is set forth in Annex A with respect to
the related Mortgage Loan.
<TABLE>
Debt Service Coverage Ratios(A)
<CAPTION>
Range of Number of Percent by
Debt Service Mortgage Aggregate Cut-off Aggregate Cut-off
Coverage Ratios Loans Date Balance Date Balance
<S> <C> <C> <C>
Not Calculated(B) ............. -------------- --------------------------- -------------------
Total ......................... ============== =========================== ===================
Weighted Average
Debt Service Coverage
Ratio (All Mortgage
Loans): _____x(C)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans): _____x(D)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): _____x(E)
</TABLE>
- -------------------
(A) The Debt Service Coverage Ratios are based on the most recently available
operating statements obtained from the respective mortgagors or the related
property managers.
(B) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(C) This calculation does not include the ________ Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ________ ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(E) This calculation does not include the ________ Fixed Rate Loans as to which
Debt Service Coverage Ratios were not calculated.
<PAGE>
S-25
The following tables set forth the range of LTV Ratios of the Mortgage
Loans at origination and the Cut-off Date. An "LTV Ratio" for any Mortgage Loan,
as of any date of determination, is a fraction, expressed as a percentage, the
numerator of which is the original principal balance of such Mortgage Loan or
the Cut-off Date Balance of such Mortgage Loan, as applicable, and the
denominator of which is the appraised value of the related Mortgaged Property as
determined by an appraisal thereof obtained in connection with the origination
of such Mortgage Loan. Because it is based on the value of a Mortgaged Property
determined as of loan origination, the information set forth in the table below
is not necessarily a reliable measure of the related borrower's current equity
in each Mortgaged Property. In a declining real estate market, the fair market
value of a Mortgaged Property could have decreased from the value determined at
origination, and the current actual loan-to-value ratio of a Mortgage Loan may
be higher than even its LTV Ratio at origination, notwithstanding taking into
account amortization since origination.
<TABLE>
LTV Ratios at Origination
<CAPTION>
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Aggregate Cut-off
LTV Ratios(%) Loans Date Balance Date Balance
------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- --------------------------- -------------------
Total .........................
============== =========================== ===================
Weighted Average Original
LTV Ratio (All Mortgage
Loans): _____%
Weighted Average Original
LTV Ratio (ARM Loans):
_____%
Weighted Average Original
LTV Ratio (Fixed Rate
Loans): _____%
</TABLE>
<PAGE>
S-26
<TABLE>
LTV Ratios at Cut-off Date
<CAPTION>
Number of Percent by
Range of LTV Ratios(%) Mortgage Aggregate Cut-off Aggregate Cut-off
as of Cut-off Date Loans Date Balance Date Balance
------------------ ----- ------------ ------------
<S> <C> <C> <C>
-------------- --------------------------- -------------------
Total .........................
============== =========================== ===================
Weighted Average LTV
Ratio as of Cut-off Date
(All Mortgage Loans):
_____%
Weighted Average LTV
Ratio as of Cut-off Date
(ARM Loans): _____%
Weighted Average LTV
Ratio as of Cut-off Date
(Fixed Rate Loans):
_____%
</TABLE>
<PAGE>
S-27
<TABLE>
Occupancy Rates
<CAPTION>
Number of Percent by
Range of Mortgage Aggregate Cut-off Aggregate Cut-off
Occupancy Rates(A) Loans Date Balance Date Balance
------------------ ----- ------------ ------------
<S> <C> <C> <C>
-------------- --------------------------- -------------------
Total .........................
============== =========================== ===================
Weighted Average Occupancy Rate (All
Mortgage Loans)(A): _____%
Weighted Average Occupancy Rate
(ARM Loans)(A): _____%
Weighted Average Occupancy Rate
(Fixed Rate Loans)(A): _____%
</TABLE>
- ---------------------------------
(A) Physical occupancy rates calculated based on rent rolls provided by the
respective Mortgagors or related property managers as of a date no more
than ___ months prior to the Cut-off Date.
<TABLE>
Prepayment Restrictions in Effect as of the Cut-off Date
<CAPTION>
Weighted Averages
% by Cum. ----------------------------------------------------------------
Aggregate Aggregate % of Indicative
Cut-off Cut-off Initial Stated Remaining Cut-off
Prepayment Number Date Date Pool Mortgage Remaining Amort. Implied Date
Restrictions of Loans Balance Balance Balance Rate Term (Mo.) Term (Mo.) DSCR DSCR LTV
------------ -------- ---------- ---------- ------- -------- ----------- ----------- ---- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Locked Out (A)
Yield Maintenance (B)
Declining Percentage
Premium
____% Premium
____% Premium
No Prepayment
Restrictions
TOTALS
</TABLE>
- ------------------
(A) The weighted average term to the expiration of the lock-out periods is ___
years. _____ of the Mortgage Loans within their lock-out periods are
subject to declining percentage Prepayment Premiums after the expiration of
their lock-out periods; the remaining Mortgage Loans are subject to a yield
maintenance-type Prepayment Premium following such expiration.
(B) All Mortgage Loans subject to yield maintenance-type Prepayment Premiums
remain subject to payment of the Prepayment Premium until at least ___
months prior to maturity.
<PAGE>
S-28
Specified in Annex A to this Prospectus Supplement are the foregoing and
certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage Loans
is contained herein under "-Underwriting Standards" and "-Representations and
Warranties; Repurchases" and in the Prospectus under "Description of the Trust
Funds-Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans".
[Delinquencies. As of the Cut-off Date, [no] Mortgage Loan was more than 30
days delinquent in respect of any Monthly Payment.]
The Mortgage Loan Seller
General. [The Mortgage Loans Seller [, a wholly-owned subsidiary of
__________,] is a _________________ organized in 19___ under the laws of
__________________. As of December 31, 199_, the Mortgage Loan Seller had a net
worth of approximately $_________________, and currently holds and services for
its own account a total residential and commercial mortgage loan portfolio of
approximately $__________________, of which approximately $__________________
constitutes multifamily mortgage loans.]
The information set forth herein concerning the Mortgage Loan Seller and
its underwriting standards has been provided by the Mortgage Loan Seller, and
neither the Depositor nor the Underwriter makes any representation or warranty
as to the accuracy or completeness of such information.
Underwriting Standards
[All of the Mortgage Loans were originated or acquired by the Mortgage Loan
Seller, generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
The Depositor believes that the Mortgage Loans selected for inclusion in
the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so selected
on any basis which would have a material adverse effect on the
Certificateholders.]
Representations and Warranties; Repurchases
In the Purchase Agreement, the Mortgage Loan Seller has represented and
warranted with respect to each Mortgage Loan, as of [the Delivery Date], or as
of such other date specifically provided in the representation and warranty,
among other things, that:
[Specify significant representations and warranties.]
If the Mortgage Loan Seller has been notified of a material breach of any
of the foregoing representations and warranties as described in the Prospectus
and if the Mortgage Loan Seller cannot cure such breach within a period of 90
days following its receipt of such notice, then the Mortgage Loan Seller will be
obligated pursuant to the Purchase Agreement (the relevant rights under which
will be assigned, together with its interests in the Mortgage Loans, by the
Depositor to the Trustee) to repurchase the affected Mortgage Loan within such
90-day period at a price (the "Purchase Price") equal to the sum of (i) the
unpaid principal balance of such Mortgage Loan, (ii) unpaid accrued interest on
such Mortgage Loan at the Mortgage Rate from the date to which interest was last
paid to the Due Date in the Due Period in which the purchase is to occur, and
(iii) certain servicing expenses that are reimbursable to the Master Servicer
and the Special Servicer.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. The Mortgage Loan Seller will be the sole Warranting Party in respect of
the Mortgage Loans, and none of the Depositor,
<PAGE>
S-29
the Master Servicer or any of their affiliates [(other than the Mortgage Loan
Seller)] will be obligated to repurchase any affected Mortgage Loan in
connection with a breach of the Mortgage Loan Seller's representations and
warranties if the Mortgage Loan Seller defaults on its obligation to do so.
However, the Depositor will not include any Mortgage Loan in the Mortgage Pool
if anything has come to the Depositor's attention prior to the Closing Date that
would cause it to believe that the representations and warranties made by the
Mortgage Loan Seller regarding such Mortgage Loan will not be correct in all
material respects. See "Description of the Pooling Agreements-Representations
and Warranties; Repurchases" in the Prospectus.
Changes in Mortgage Pool Characteristics
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for the
scheduled principal payments due on or before the Cut-off Date. Prior to the
issuance of the Offered Certificates, a Mortgage Loan may be removed from the
Mortgage Pool if the Depositor deems such removal necessary or appropriate or if
it is prepaid. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Offered Certificates, unless
including such Mortgage Loans would materially alter the characteristics of the
Mortgage Pool as described herein. The Depositor believes that the information
set forth herein will be representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Offered Certificates are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date and
will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph, such
removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
General
Each of the Master Servicer and the Special Servicer will be required to
service and administer the Mortgage Loans for which it is responsible, either
directly or through sub-servicers, on behalf of the Trustee and in the best
interests of and for the benefit of the Certificateholders (as determined by the
Master Servicer or the Special Servicer, as the case may be, in its good faith
and reasonable judgment), in accordance with applicable law, the terms of the
Pooling and Servicing Agreement, the terms of the respective Mortgage Loans and,
to the extent consistent with the foregoing, in the same manner as would prudent
institutional mortgage lenders and loan servicers servicing mortgage loans
comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are located, and with a view to the maximization of timely and
complete recovery of principal and interest, but without regard to: (i) any
relationship that the Master Servicer or the Special Servicer, as the case may
be, or any affiliate thereof, may have with the related mortgagor; (ii) the
ownership of any Certificate by the Master Servicer or the Special Servicer, as
the case may be, or any affiliate thereof; (iii) the Master Servicer's or the
Special Servicer's, as the case may be, obligation to make advances, whether in
respect of delinquent payments of principal and/or interest or to cover certain
servicing expenses; and (iv) the Master Servicer's or the Special Servicer's, as
the case may be, right to receive compensation for its services under the
Pooling and Servicing Agreement or with respect to any particular transaction.
Except as otherwise described under "-Inspections; Collection of Operating
Information" below, the Master Servicer initially will be responsible for the
servicing and administration of the entire Mortgage Pool. With respect to any
Mortgage Loan (i) which has a Balloon Payment which is past due or any other
payment which is more than [60] days past due, (ii) as to which the borrower has
entered into or consented to bankruptcy, appointment of a receiver or
conservator or a similar insolvency proceeding, or the borrower has become the
subject of a decree or order for such a
<PAGE>
S-30
proceeding which shall have remained in force undischarged or unstayed for a
period of [60] days, (iii) as to which the Master Servicer shall have received
notice of the foreclosure or proposed foreclosure of any other lien on the
Mortgaged Property, or (iv) as to which, in the judgment of the Master Servicer,
a payment default has occurred or is imminent and is not likely to be cured by
the borrower within [60] days, and prior to acceleration of amounts due under
the related Mortgage Note or commencement of any foreclosure or similar
proceedings, the Master Servicer will transfer its servicing responsibilities to
the Special Servicer, but will continue to receive payments on such Mortgage
Loan (including amounts collected by the Special Servicer), to make certain
calculations with respect to such Mortgage Loan and to make remittances and
prepare certain reports to the Certificateholders with respect to such Mortgage
Loan. If the related Mortgaged Property is acquired in respect of any such
Mortgage Loan (upon acquisition, an "REO Property"), whether through
foreclosure, deed-in-lieu of foreclosure or otherwise, the Special Servicer will
continue to be responsible for the operation and management thereof. The
Mortgage Loans serviced by the Special Servicer are referred to herein as the
"Specially Serviced Mortgage Loans" and, together with any REO Properties,
constitute the "Specially Serviced Mortgage Assets". The Master Servicer shall
have no responsibility for the performance by the Special Servicer of its duties
under the Pooling and Servicing Agreement.
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing Mortgage Loan for at least [90] days, the Special Servicer
will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below, following the subsection captioned "-The Master Servicer",
is a description of certain pertinent provisions of the Pooling and Servicing
Agreement relating to the servicing of the Mortgage Loans. Reference is also
made to the Prospectus, in particular to the section captioned "Pooling and
Servicing Agreements", for important information in addition to that set forth
herein regarding the terms and conditions of the Pooling and Servicing Agreement
as they relate to the rights and obligations of the Master Servicer thereunder.
The Master Servicer
[__________________________________, a ___________________, will act as
Master Servicer with respect to the Mortgage Pool. Founded in ____ as a
____________, the Master Servicer today furnishes a variety of wholesale banking
services. As of December 31, 19__, the Master Servicer had a net worth of
approximately $__________, and a total mortgage loan servicing portfolio of
approximately $___________, of which approximately $_____________ represented
multifamily mortgage loans.
The offices of the Master Servicer that will be primarily responsible for
servicing and administering the Mortgage Pool are located at
____________________________.
[If and to the extent available and relevant to an investment decision: The
following table sets forth the historical prepayment information with respect to
the Master Servicer's multifamily and commercial mortgage loan servicing
portfolio:
Prepayment Experience of Master Servicer's Multifamily and Commercial Mortgage
Loan Servicing Portfolio
[Table to include relevant information regarding the size of the Master
Servicer's multifamily and commercial mortgage loan servicing portfolio (by
number and/or balance) and the portion of such loans that was subject to
prepayment.]]
The information set forth herein concerning the Master Servicer has been
provided by the Master Servicer, and neither the Depositor nor the Underwriter
makes any representation or warranty as to the accuracy or completeness of such
information.
<PAGE>
S-31
The Special Servicer
[_______________________________, a ____________________, will be
responsible for the servicing and administration of the Specially Serviced
Mortgage Assets. As of December 31, 19___, the Special Servicer had a total
mortgage loan servicing portfolio of approximately $____________, of which
approximately $_____________ represented multifamily mortgage loans.
The Special Servicer has ___ offices in ___ states with a total staff of
____ employees. Its principal executive offices are located at
_________________________.]
The information set forth herein concerning the Special Servicer has been
provided by the Special Servicer, and neither the Depositor nor the Underwriter
makes any representation or warranty as to the accuracy or completeness of such
information.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities will be the Master Servicing Fee. The "Master
Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each Mortgage Loan, will accrue in accordance
with the terms of the related Mortgage Note at a rate equal to ________% per
annum, in the case of Mortgage Loans other than Specially Serviced Mortgage
Loans, and ____% per annum, in the case of Specially Serviced Mortgage Loans,
and will be computed on the basis of the same principal amount and for the same
period respecting which any related interest payment on the related Mortgage
Loan is computed. [As additional servicing compensation, the Master Servicer
will be entitled to retain all Prepayment Premiums, assumption and modification
fees, late charges and penalty interest and, as and to the extent described
below, Prepayment Interest Excesses collected from mortgagors. In addition, the
Master Servicer is authorized but not required to invest or direct the
investment of funds held in the Certificate Account in Permitted Investments,
and the Master Servicer will be entitled to retain any interest or other income
earned on such funds.]
The principal compensation to be paid to the Special Servicer in respect of
its special servicing activities will consist of the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and the Workout
Fee. Like the Master Servicing Fee, the "Special Servicing Fee" will be payable
monthly on a loan-by-loan basis from amounts received in respect of interest on
each Mortgage Loan, will accrue in accordance with the terms of the related
Mortgage Note at a rate equal to _____% per annum, in the case of Mortgage Loans
other than Specially Serviced Mortgage Loans, and ___% per annum, in the case of
Specially Serviced Mortgage Loans, and will be computed on the basis of the same
principal amount and for the same period respecting which any related interest
payment on the related Mortgage Loan is computed. The "Workout Fee" will equal a
specified percentage (varying from ____% to ____% (the "Workout Fee Rate")
depending on the related unpaid principal balance) of, and will be payable from,
all collections and proceeds received in respect of principal of each Mortgage
Loan which is or has been a Specially Serviced Mortgage Loan (including those
for which servicing has been returned to the Master Servicer); provided that, in
the case of Liquidation Proceeds, the otherwise fixed Workout Fee Rate will be
proportionately reduced to reflect the extent to which, if at all, the principal
portion of such Liquidation Proceeds is less than the unpaid principal balance
of the related Mortgage Loan immediately prior to the receipt thereof. As
additional servicing compensation, the Special Servicer will be entitled to
retain all assumption and modification fees received on Mortgage Loans serviced
thereby.
Although the Master Servicer and Special Servicer are each required to
service and administer the Mortgage Pool in accordance with the general
servicing standard described under "-General" above and, accordingly, without
regard to its right to receive compensation under the Pooling and Servicing
Agreement, additional servicing compensation in the nature of assumption and
modification fees, Prepayment Premiums and Prepayment Interest Excesses may
under certain circumstances provide the Master Servicer or the Special Servicer,
as the case may be, with an economic disincentive to comply with such standard.
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[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period (as defined herein) on a date that is prior to its Due
Date in such Due Period, a Prepayment Interest Shortfall may result. If such a
principal prepayment occurs during any Due Period after the Due Date for such
Mortgage Loan in such Due Period, the amount of interest (net of related
Servicing Fees) that accrues on the amount of such principal prepayment may
exceed (such excess, a "Prepayment Interest Excess") the corresponding amount of
interest accruing on the Certificates. As to any Due Period, to the extent
Prepayment Interest Excesses collected for all Mortgage Loans are greater than
Prepayment Interest Shortfalls incurred, such excess will be paid to the Master
Servicer as additional servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates-Advances", the Master Servicer will be entitled to receive interest
on Advances, and the Master Servicer and the Special Servicer will be entitled
to receive interest on reimbursable servicing expenses, such interest to be
paid, contemporaneously with the reimbursement of the related Advance or
servicing expense, out of any other collections on the Mortgage Loans.]
The Master Servicer generally will be required to pay all expenses incurred
by it in connection with its servicing activities under the Pooling and
Servicing Agreement, and will not be entitled to reimbursement therefor except
as expressly provided in the Pooling and Servicing Agreement. However, the
Master Servicer will be permitted to pay certain of such expenses directly out
of the Certificate Account and at times without regard to the relationship
between the expense and the funds from which it is being paid. In connection
therewith, the Master Servicer will be responsible for all fees of any
sub-servicers, other than management fees earned in connection with the
operation of an REO Property, which management fees the Master Servicer will be
authorized to pay out of revenues received from such property (thereby reducing
the portion of such revenues that would otherwise be available for distribution
to Certificateholders). See "Description of the Certificates-Distributions-
Method, Timing and Amount" herein and "Description of the Pooling
Agreements-Certificate Account" and "-Servicing Compensation and Payment of
Expenses" in the Prospectus.
Modifications, Waivers and Amendments
The Master Servicer or the Special Servicer may, consistent with its normal
servicing practices, agree to modify, waive or amend any term of any Mortgage
Loan, without the consent of the Trustee or any Certificateholder, subject,
however, to each of the following limitations, conditions and restrictions:
(a) with limited exception, the Master Servicer and the Special
Servicer may not agree to any modification, waiver or amendment that will
(i) affect the amount or timing of any scheduled payments of principal or
interest on the Mortgage Loan or (ii) in its judgment, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely
payment of amounts due thereon; unless, in any such case, in the Master
Servicer's or the Special Servicer's judgment, as the case may be, a
material default on the Mortgage Loan has occurred or a payment default is
reasonably foreseeable, and such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation.
(b) [describe additional limitations to permitted modification
standards]
The Master Servicer and the Special Servicer will notify the Trustee of any
modification, waiver or amendment of any term of any Mortgage Loan, and must
deliver to the Trustee or the related Custodian, for deposit in the related
Mortgage File, an original counterpart of the agreement related to such
modification, waiver or amendment, promptly (and in any event within [10]
business days) following the execution thereof. Copies of each agreement whereby
any such modification, waiver or amendment of any term of any Mortgage Loan is
effected are to be available for review during normal business hours at the
offices of the [Trustee]. See "Description of the Certificates-Reports to
Certificateholders; Certain Available Information" herein.
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S-33
Inspections; Collection of Operating Information
The Special Servicer will perform physical inspections of each Mortgaged
Property at such times and in such manner as are consistent with the Special
Servicer's normal servicing procedures, but in any event (i) at least once per
calendar year, commencing in the calendar year _______, and (ii), if any
scheduled payment becomes more than 60 days delinquent on the related Mortgage
Loan, as soon as practicable thereafter. The Special Servicer will prepare a
written report of each such inspection describing the condition of the Mortgaged
Property and specifying the existence of any material vacancies in the Mortgaged
Property, of any sale, transfer or abandonment of the Mortgaged Property, of any
material change in the condition or value of the Mortgaged Property, or of any
waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to deliver
such statements, the Special Servicer is also required to collect and review the
annual operating statements of the related Mortgaged Property. [Most] of the
Mortgages obligate the related borrower to deliver annual property operating
statements. However, there can be no assurance that any operating statements
required to be delivered will in fact be delivered, nor is the Special Servicer
likely to have any practical means of compelling such delivery in the case of an
otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to above
are to be available for review by Certificateholders during normal business
hours at the offices of the [Trustee]. See "Description of the
Certificates-Reports to Certificateholders; Certain Available Information"
herein.
Additional Obligations of the Master Servicer with Respect to ARM Loans
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is not
published or is otherwise unavailable, then the Master Servicer is required to
select a comparable alternative index over which it has no direct control, that
is readily verifiable and that is acceptable under the terms of the related
Mortgage Note. If the Mortgage Rate or the Monthly Payment with respect to any
ARM Loan is not properly adjusted by the Master Servicer pursuant to the terms
of such Mortgage Loan and applicable law, the Master Servicer is required to
deposit in the Certificate Account on or prior to the Due Date of the affected
Monthly Payment, an amount equal to the excess, if any, of (i) the amount that
would have been received from the borrower if the Mortgage Rate or Monthly
Payment had been properly adjusted, over (ii) the amount of such improperly
adjusted Monthly Payment, subject to reimbursement only out of such amounts as
are recovered from the borrower in respect of such excess.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all payments
under and proceeds of the Mortgage Loans received after the Cut-off Date
(exclusive of payments of principal and interest due on or before the Cut-off
Date); (ii) any REO Property; (iii) such funds or assets as from time to time
are deposited in the Certificate Account; (iv) the rights of the mortgagee under
all insurance policies with respect to the Mortgage Loans; and (v) certain
rights of the Depositor under the Purchase Agreement relating to Mortgage Loan
document delivery requirements and the representations and warranties of the
Mortgage Loan Seller regarding the Mortgage Loans.
The Certificates will consist of the following four Classes: (i) the Class
A Certificates and the Class R Certificates (collectively, the "Senior
Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. The Class A Certificates will have an initial Certificate Balance
of $____________, which represents ____% of the Initial Pool Balance; the Class
B Certificates will have an initial Certificate Balance of $____________, which
represents ____% of the Initial Pool Balance; the Class C Certificates will have
an initial Certificate Balance of $____________, which represents ___% of the
Initial Pool Balance; and the Class R Certificates will have an initial
Certificate Balance of $100.
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S-34
The Certificate Balance of any Class of Certificates outstanding at any time
represents the maximum amount which the holders thereof are entitled to receive
as distributions allocable to principal from the cash flow on the Mortgage Loans
and the other assets in the Trust Fund. On each Distribution Date, the
Certificate Balance of each Class of Certificates will be reduced by any
distributions of principal actually made on, and any Collateral Support Deficit
actually allocated to, such Class of Certificates on such Distribution Date.
Only the Senior Certificates and the Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C Certificates have
not been registered under the Securities Act of 1933 and are not offered hereby.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its DTC Participants in denominations of $25,000
and integral multiples of $1 in excess thereof. The Class B Certificates will be
issued in fully registered, certificated form in denominations of $100,000 and
integral multiples of $1,000 in excess thereof, with one Class B Certificate
evidencing an additional amount equal to the remainder of the initial
Certificate Balance of such Class. The Class R Certificates will be issued in
registered, certificated form in minimum denominations of 20% Percentage
Interest in such Class. The "Percentage Interest" evidenced by any Offered
Certificate is equal to the initial denomination thereof as of the Delivery
Date, divided by the initial Certificate Balance of the Class to which it
belongs.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The Depositor
has been informed by DTC that DTC's nominee will be Cede & Co. No Class A
Certificate Owner will be entitled to receive a Definitive Class A Certificate
representing its interest in such Class, except as set forth below under
"-Book-Entry Registration of the Class A Certificates-Definitive Class A
Certificates". Unless and until Definitive Class A Certificates are issued, all
references to actions by holders of the Class A Certificates will refer to
actions taken by DTC upon instructions received from Class A Certificate Owners
through DTC Participants, and all references herein to payments, notices,
reports and statements to holders of the Class A Certificates will refer to
payments, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Class A Certificates, for distribution to Class A
Certificate Owners through its DTC Participants in accordance with DTC
procedures. See "Description of the Certificates-Book-Entry Registration and
Definitive Certificates" in the Prospectus.
Until Definitive Class A Certificates are issued, interests in such Class
will be transferred on the book-entry records of DTC and its DTC Participants.
Subject to certain restrictions on the transfer of such Certificates to Plans
(see "ERISA Considerations" herein), the Class B and Class R Certificates may be
transferred or exchanged at the offices of ___________________________ located
at ______________________________________________, without the payment of any
service charges, other than any tax or other governmental charge payable in
connection therewith. ________________________ will initially serve as registrar
(in such capacity, the "Certificate Registrar") for purposes of recording and
otherwise providing for the registration of the Offered Certificates and of
transfers and exchanges of the Class B and, if issued, the Definitive Class A
Certificates.
Book-Entry Registration of the Class A Certificates
General. The Class A Certificates will be registered as one or more global
Certificates held by Cede & Co., as nominee of DTC. Beneficial interests in such
Certificates will be held by investors through the book-entry facilities of DTC.
Except as described below, no Class A Certificate Owner will be entitled to
receive a physical certificate representing its beneficial interest in such
Certificates (a "Definitive Class A Certificate").
Beneficial ownership of a Class A 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 related Class
A Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Class A 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 related Class A Certificate Owner's Financial Intermediary is not a DTC
Participant). Therefore, the related Class A Certificate Owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Class A
Certificate. Beneficial ownership of a Class A Certificate may only be
<PAGE>
S-35
transferred by compliance with the procedures of such Financial Intermediaries
and DTC Participants. Arrangements may be made for clearance and settlement
through the Euroclear System and CEDEL, S.A., if they are DTC Participants.
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 Class A Certificates, whether held
for its own account or as a nominee for another person. In general, beneficial
ownership of Class A Certificates will be subject to the rules, regulations and
procedures governing DTC and DTC Participants as in effect from time to time.
Distributions of principal of and interest 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 Class A
Certificate Owners 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 Class A Certificate Owners that it represents.
Under a book-entry format, Class A Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Trustee to DTC. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a Class A Certificate Owner to pledge to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such Class A Certificates, may be limited due to the lack of physical
certificates for such Class A Certificates. In addition, issuance of the Class A
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.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action permitted
to be taken by a Certificateholder under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose
depository accounts the Class A Certificates are credited. DTC may take
conflicting actions with respect to other Class A Certificates to the extent
that such actions are taken on behalf of Financial Intermediaries whose holdings
include such Class A Certificates.
Definitive Class A Certificates. Definitive Class A Certificates will be
issued to Class A Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only under the limited conditions set forth in the
Prospectus under "Description of the Certificates-Book-Entry Registration and
Definitive Certificates."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates-Book-Entry Registration and
Definitive Certificates," the Trustee is required to notify, through DTC, DTC
Participants who have ownership of Class A Certificates as indicated on the
records of DTC of the availability of Definitive Class A Certificates. Upon
surrender by DTC of the definitive certificates representing the Class A
Certificates and upon receipt of instructions from DTC for re-registration, the
Trustee will reissue the Class A Certificates as Definitive Class A Certificates
issued in the respective principal amounts owned by individual Class A
Certificate Owners, and thereafter the Trustee and the Master Servicer will
recognize the holders of such Definitive Class A Certificates as
Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and Certificates maintained on the
book-entry records thereof, see "Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in the Prospectus.
Distributions
Method, Timing and Amount. Distributions on the Certificates will be made
by the [Trustee], to the extent of available funds, on the 25th day of each
month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in _________ 199__ (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close
<PAGE>
S-36
of business on each Record Date, which will be the last business day of the
month preceding the month in which the related Distribution Date occurs. Each
such distribution will be made by wire transfer in immediately available funds
to the account specified by the Certificateholder at a bank or other entity
having appropriate facilities therefor, if such Certificateholder will have
provided the [Trustee] with wiring instructions [no less than five business days
prior to the related Record Date (which wiring instructions may be in the form
of a standing order applicable to all subsequent distributions) and is the
registered owner of Certificates with an aggregate initial principal amount of
at least $5,000,000], or otherwise by check mailed to such Certificateholder.
The final distribution on any Certificate will be made in like manner, but only
upon presentation and surrender of such Certificate at the location that will be
specified in a notice of the pendency of such final distribution. All
distributions made with respect to a Class of Certificates will be allocated pro
rata among the outstanding Certificates of such Class based on their respective
Percentage Interests.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date (the "Available Distribution Amount") will, in general,
equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans and
any REO Properties that is on deposit in the Certificate Account as of the
related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a Due Date subsequent
to the related Due Period,
(ii) all principal prepayments (together with related payments of
interest thereon and related Prepayment Premiums), Liquidation
Proceeds, Insurance Proceeds, Condemnation Proceeds and other
unscheduled recoveries received subsequent to the related Due
Period, and
(iii) all amounts in the Certificate Account that are due or
reimbursable to any person other than the Certificateholders; and
(b) all Advances made by the Master Servicer with respect to such
Distribution Date. See "Description of the Pooling Agreements-Certificate
Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that begins
on the [second] day of the month preceding the month in which such Distribution
Date occurs and ends on the [first] day of the month in which such Distribution
Date occurs. For purposes of the discussion in the Prospectus, the Due Period is
also the Prepayment Period. The "Determination Date" for each Distribution Date
is the [15th] day of the month in which such Distribution Date occurs or, if any
such [15th] day is not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Certificate
Balances of the Offered Certificates have not been reduced to zero, the
[Trustee] will (except as otherwise described under "-Termination; Retirement of
Certificates" below) apply amounts on deposit in the Certificate Account, to the
extent of the Available Distribution Amount, in the following order of priority:
(1) to distributions of interest to the holders of the Senior
Certificates, pro rata among the respective Classes thereof, in an
amount equal to all Distributable Certificate Interest in respect of
the Senior Certificates for such Distribution Date and, to the extent
not previously paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Senior
Certificates in an amount equal to the sum of (a) the product of (i)
the Senior Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) the entire Unscheduled Principal Distribution Amount for
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S-37
such Distribution Date (but not more than would be necessary to reduce
the aggregate Certificate Balance of the Senior Certificates to zero);
(3) to distributions to the holders of the Class A Certificates, until all
amounts of Collateral Support Deficit previously allocated to the
Class A Certificates, but not previously reimbursed, have been
reimbursed in full;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class B Certificates for such Distribution
Date and, to the extent not previously paid, for all prior
Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of (i)
the Class B Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) if the Certificate Balances of the Senior Certificates have
been reduced to zero, then to the extent not distributed in reduction
of such Certificate Balances on such Distribution Date, the entire
Unscheduled Principal Distribution Amount for such Distribution Date
(but not more than would be necessary to reduce the Certificate
Balance of the Class B Certificates to zero);
(6) to distributions to the holders of the Class B Certificates , until
all amounts of Collateral Support Deficit previously allocated to the
Class B Certificates, but not previously reimbursed, have been
reimbursed in full;
(7) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class C Certificates for such Distribution
Date and, to the extent not previously distributed, for all prior
Distribution Dates;
(8) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(9) to distributions to the holders of the Class C Certificates, until all
amounts of Collateral Support Deficit previously allocated to the
Class C Certificates, but not previously reimbursed, have been
reimbursed in full; and
(10) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance, if any, of the Available
Distribution Amount.
The distributions of principal to the holders of the Senior Certificates as
described in clause (2) above will be paid first to the holders of the Class R
Certificates until the Certificate Balance of such Certificates is reduced to
zero, and then to the holders of the Class A Certificates. Accordingly, it is
expected that the Certificate Balance of the Class R Certificates would be
reduced to zero on the initial Distribution Date and that no other distributions
of interest or principal would thereafter be made on the Class R Certificates
except pursuant to subparagraph (10) immediately above.
Reimbursement of previously allocated Collateral Support Deficit will not
constitute distributions of principal for any purpose and will not result in an
additional reduction in the Certificate Balance of the Class of Certificates in
respect of which any such reimbursement is made.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Certificates for the initial Distribution Date will equal _______% per annum.
With respect to any Distribution Date subsequent to the initial Distribution
Date,
<PAGE>
S-38
the Pass-Through Rate for each Class of Certificates will equal the weighted
average of the applicable Effective Net Mortgage Rates for the Mortgage Loans,
weighted on the basis of their respective Stated Principal Balances immediately
prior to such Distribution Date. For purposes of calculating the Pass-Through
Rate for any Class of Certificates and any Distribution Date, the "applicable
Effective Net Mortgage Rate" for each Mortgage Loan is: (a) if such Mortgage
Loan accrues interest on the basis of a 360-day year consisting of twelve 30-day
months (a "30/360 basis", which is the basis of accrual for interest on the
Certificates), the Net Mortgage Rate in effect for such Mortgage Loan as of the
commencement of the related Due Period; and (b) if such Mortgage Loan does not
accrue interest on a 30/360 basis, the annualized rate at which interest would
have to accrue during the one month period preceding the Due Date for such
Mortgage Loan during the related Due Period on a 30/360 basis in order to
produce the aggregate amount of interest (adjusted to the actual Net Mortgage
Rate) accrued during such period. The "Net Mortgage Rate" for each Mortgage Loan
is equal to the related Mortgage Rate in effect from time to time less the
Servicing Fee Rate.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of Certificates for each Distribution Date
represents that portion of the Accrued Certificate Interest in respect of such
Class of Certificates for such Distribution Date that is net of such Class's
allocable share (calculated as described below) of the aggregate of any
Prepayment Interest Shortfalls resulting from voluntary principal prepayments
made on the Mortgage Loans during the related Due Period that are not offset by
Prepayment Interest Excesses collected during the related Due Period (the
aggregate of such Prepayment Interest Shortfalls that are not so offset or
covered, as to such Distribution Date, the "Net Aggregate Prepayment Interest
Shortfall").
The "Accrued Certificate Interest" in respect of each Class of Certificates
for each Distribution Date is equal to one month's interest at the Pass-Through
Rate applicable to such Class of Certificates for such Distribution Date accrued
on the related Certificate Balance outstanding immediately prior to such
Distribution Date. Accrued Certificate Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of Certificates will equal the
product of (a) such Net Aggregate Prepayment Interest Shortfall, multiplied by
(b) a fraction, the numerator of which is equal to the Accrued Certificate
Interest in respect of such Class of Certificates for such Distribution Date,
and the denominator of which is equal to the Accrued Certificate Interest in
respect of all the Classes of Certificates for such Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments [, net of any related Workout Fees
payable therefrom to the Special Servicer], due during or, if and to the extent
not previously received or advanced and distributed to Certificateholders on a
preceding Distribution Date, prior to the related Due Period, in each case to
the extent paid by the related borrower or advanced by the Master Servicer and
included in the Available Distribution Amount for such Distribution Date. The
Scheduled Principal Distribution Amount from time to time will include all late
payments of principal made by a borrower, including late payments in respect of
a delinquent Balloon Payment, regardless of the timing of such late payments,
except to the extent such late payments are otherwise reimbursable to the Master
Servicer for prior Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution Date
will equal the aggregate of: (a) all voluntary prepayments of principal received
on the Mortgage Loans during the related Due Period [, net of any related
Workout Fees payable therefrom to the Special Servicer]; and (b) any other
collections (exclusive of payments by borrowers) received on the Mortgage Loans
and any REO Properties during the related Due Period, whether in the form of
Liquidation Proceeds, Insurance Proceeds, Condemnation Proceeds, net income from
REO Property or otherwise, that were identified and applied by the Master
Servicer as recoveries of previously unadvanced principal of the related
Mortgage Loan [, net of any related Workout Fees payable therefrom to the
Special Servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as the
"Distributable Principal".
<PAGE>
S-39
The "Ownership Percentage" evidenced by any Class or Classes of
Certificates as of any date of determination will equal a fraction, expressed as
a percentage, the numerator of which is the then Certificate Balance(s) of such
Class(es) of Certificates, and the denominator of which is the then aggregate
Stated Principal Balance of the Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans. The "Stated
Principal Balance" of each Mortgage Loan outstanding at any time represents the
principal balance of such Mortgage Loan ultimately due and payable to the
Certificateholders subject to the Special Servicer's right to receive any
Workout Fee with respect to such Mortgage Loan. The Stated Principal Balance of
each Mortgage Loan will initially equal the Cut-off Date Balance thereof and, on
each Distribution Date, will be reduced by the portion of the Distributable
Principal for such date that is attributable to such Mortgage Loan. The Stated
Principal Balance of a Mortgage Loan may also be reduced in connection with any
forced reduction of the actual unpaid principal balance thereof imposed by a
court presiding over a bankruptcy proceeding wherein the related borrower is the
debtor. See "Certain Legal Aspects of Mortgage Loans-Foreclosure-Bankruptcy
Laws" in the Prospectus. If any Mortgage Loan is paid in full or such Mortgage
Loan (or any Mortgaged Property acquired in respect thereof) is otherwise
liquidated, then, as of the first Distribution Date that follows the end of the
Due Period in which such payment in full or liquidation occurred, and
notwithstanding that a loss may have occurred in connection with any such
liquidation, the Stated Principal Balance of such Mortgage Loan shall be zero.
For purposes of calculating distributions on, and allocations of Collateral
Support Deficit to, the Certificates, as well as for purposes of calculating the
amount of Servicing Fees payable each month, each REO Property will be treated
as if there exists with respect thereto an outstanding mortgage loan (an "REO
Loan"), and all references to "Mortgage Loan", "Mortgage Loans" and "Mortgage
Pool" herein and in the Prospectus, when used in such context, will be deemed to
also be references to or to also include, as the case may be, any "REO Loans".
Each REO Loan will generally be deemed to have the same characteristics as its
actual predecessor Mortgage Loan, including the same adjustable or fixed
Mortgage Rate (and, accordingly, the same Net Mortgage Rate and Effective Net
Mortgage Rate) and the same unpaid principal balance and Stated Principal
Balance. Amounts due on such predecessor Mortgage Loan, including any portion
thereof payable or reimbursable to the Master Servicer, will continue to be
"due" in respect of the REO Loan; and amounts received in respect of the related
REO Property, net of payments to be made, or reimbursement to the Master
Servicer or the Special Servicer for payments previously advanced, in connection
with the operation and management of such property, generally will be applied by
the Master Servicer as if received on the predecessor Mortgage Loan. However,
notwithstanding the terms of the predecessor Mortgage Loan, the Monthly Payment
"due" on an REO Loan will in all cases, for so long as the related Mortgaged
Property is part of the Trust Fund, be deemed to equal one month's interest
thereon at the applicable Mortgage Rate.
Subordination; Allocation of Collateral Support Deficit
The rights of holders of the Class B Certificates and the Class C
Certificates to receive distributions of amounts collected or advanced on the
Mortgage Loans will be subordinated, to the extent described herein, to the
rights of holders of the Senior Certificates; and the rights of holders of the
Class C Certificates to receive distributions of amounts collected or advanced
on the Mortgage Loans will be subordinated, to the extent described herein, to
the rights of holders of the Class B Certificates. This subordination is
intended to enhance the likelihood of timely receipt by the holders of the
Senior Certificates of the full amount of all Distributable Certificate Interest
payable in respect of such Certificates on each Distribution Date, and the
ultimate receipt by such holders of principal in an amount equal to the entire
aggregate Certificate Balance of the Senior Certificates. Similarly, but to a
lesser degree, this subordination is also intended to enhance the likelihood of
timely receipt by the holders of the Class B Certificates of the full amount of
all Distributable Certificate Interest payable in respect of such Certificates
on each Distribution Date, and the ultimate receipt by such holders of principal
in an amount equal to the entire Certificate Balance of the Class B
Certificates. This subordination will be accomplished by the application of the
Available Distribution Amount on each Distribution Date in accordance with the
order of priority described under "-Distributions-Priority" above. No other form
of Credit Support will be available for the benefit of the holders of the
Offered Certificates.
<PAGE>
S-40
Allocation to the Senior Certificates, for so long as they are outstanding,
of the entire Unscheduled Principal Distribution Amount for each Distribution
Date will generally accelerate the amortization of such Certificates relative to
the actual amortization of the Mortgage Loans. To the extent that the Senior
Certificates are amortized faster than the Mortgage Loans, the percentage
interest evidenced by the Senior Certificates in the Trust Fund will be
decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Class B and Class C Certificates), thereby increasing, relative
to their respective Certificate Balances, the subordination afforded the Senior
Certificates by the Class B and Class C Certificates. Following retirement of
the Class A Certificates, allocation to the Class B Certificates, for so long as
they are outstanding, of the entire Unscheduled Principal Distribution Amount
for each Distribution Date will provide a similar benefit to such Class of
Certificates as regards the relative amount of subordination afforded thereto by
the Class C Certificates.
On each Distribution Date, immediately following the distributions to be
made to the Certificateholders on such date, the [Trustee] is to calculate the
amount, if any, by which (i) the aggregate Stated Principal Balance of the
Mortgage Pool expected to be outstanding immediately following such Distribution
Date is less than (ii) the then aggregate Certificate Balance of the REMIC
Regular Certificates (any such deficit, "Collateral Support Deficit"). The
[Trustee] will be required to allocate any such Collateral Support Deficit among
the respective Classes of Certificates as follows: first, to the Class C
Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; second, to the Class B Certificates, until the
remaining Certificate Balance of such Class of Certificates is reduced to zero;
and last, to the Class A Certificates, until the remaining Certificate Balance
of such Class of Certificates has been reduced to zero. Any allocation of
Collateral Support Deficit to a Class of Certificates will be made by reducing
the Certificate Balance thereof by the amount so allocated. Any Collateral
Support Deficit allocated to a Class of REMIC Regular Certificates will be
allocated among the respective Certificates of such Class in proportion to the
Percentage Interests evidenced thereby. In general, Collateral Support Deficit
will result from the occurrence of: (i) losses and other shortfalls on or in
respect of the Mortgage Loans, including as a result of defaults and
delinquencies thereon, Nonrecoverable Advances made in respect thereof and the
payment to the Master Servicer of interest on Advances and certain servicing
expenses; and (ii) certain unanticipated, non-Mortgage Loan specific expenses of
the Trust Fund, including certain reimbursements to the Trustee as described
under "Description of the Pooling Agreements - Certain Matters Regarding the
Trustee" in the Prospectus, certain reimbursements to the Master Servicer and
the Depositor as described under "Description of the Pooling Agreements -
Certain Matters Regarding the Master Servicer and the Depositor" in the
Prospectus and certain federal, state and local taxes, and certain tax-related
expenses, payable out of the Trust Fund as described under "Certain Federal
Income Tax Consequences - REMICs - Prohibited Transactions Tax and Other Taxes "
in the Prospectus. Accordingly, the allocation of Collateral Support Deficit as
described above will constitute an allocation of losses and other shortfalls
experienced by the Trust Fund.
Advances
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability determination
described in the next paragraph, to make advances (each, an "Advance") out of
its own funds or, subject to the replacement thereof as provided in the Pooling
and Servicing Agreement, funds held in the Certificate Account that are not
required to be part of the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of: (i) all Monthly Payments (net of
the related Servicing Fee), other than Balloon Payments, which were due on the
Mortgage Loans during the related Due Period and delinquent as of the related
Determination Date; (ii) in the case of each Mortgage Loan delinquent in respect
of its Balloon Payment as of the related Determination Date, an amount equal to
one month's interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee), but
only to the extent that the related mortgagor has not made a payment sufficient
to cover such amount under any forbearance arrangement or otherwise that has
been included in the Available Distribution Amount for such Distribution Date;
and (iii) in the case of each REO Property, an amount equal to thirty days'
imputed interest with respect thereto at the related Mortgage Rate in effect as
of the commencement of the related Due Period (net of the related Servicing
Fee), but only to the extent that such amount is not covered by any net income
from such REO Property included in the Available Distribution Amount for such
Distribution Date. The Master Servicer's obligations to make Advances in respect
of any Mortgage Loan or REO
<PAGE>
S-41
Property will continue through liquidation of such Mortgage Loan or disposition
of such REO Property, as the case may be.
The Master Servicer will be entitled to recover any Advance made out of its
own funds from any amounts collected in respect of the Mortgage Loan as to which
such Advance was made, whether in the form of late payments, Insurance Proceeds,
Condemnation Proceeds, Liquidation Proceeds or otherwise ("Related Proceeds").
Notwithstanding the foregoing, the Master Servicer will not be obligated to make
any Advance that it determines in its reasonable good faith judgment would, if
made, not be recoverable out of Related Proceeds (a "Nonrecoverable Advance"),
and the Master Servicer will be entitled to recover any Advance that it so
determines to be a Nonrecoverable Advance out of general funds on deposit in the
Certificate Account. Nonrecoverable Advances will represent a portion of the
losses to be borne by the Certificateholders. See "Description of the
Certificates-Advances in Respect of Delinquencies" and "Description of the
Pooling Agreements-Certificate Account" in the Prospectus.
In connection with its recovery of any Advance or reimbursable servicing
expense, each of the Master Servicer and the Special Servicer will be entitled
to be paid, out of any amounts then on deposit in the Certificate Account,
interest at ____% per annum (the "Reimbursement Rate") accrued on the amount of
such Advance or expense from the date made to but not including the date of
reimbursement.
To the extent not offset or covered by amounts otherwise payable on the
Class C Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Class B Certificates; and to the extent not
offset or covered by amounts otherwise payable on the Class B and Class C
Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Senior Certificates. To the extent that any
holder of an Offered Certificate must bear the cost of the Master Servicer's
and/or Special Servicer's Advances, the benefits of such Advances to such holder
will be contingent on the ability of such holder to reinvest the amounts
received as a result of such Advances at a rate of return equal to or greater
than the Reimbursement Rate.]
Each Distribution Date Statement delivered by the Trustee to the
Certificateholders will contain information relating to the amounts of Advances
made with respect to the related Distribution Date. See "Description of the
Certificates-Reports to Certificateholders; Certain Available Information"
herein and "Description of Certificates-Reports to Certificateholders" in the
Prospectus.
Reports to Certificateholders; Certain Available Information
On each Distribution Date, the [Trustee] will be required to forward by
mail to each holder of an Offered Certificate a statement (a "Distribution Date
Statement") providing various items of information relating to distributions
made on such date with respect to the relevant Class and the recent status of
the Mortgage Pool. For a more detailed discussion of the particular items of
information to be provided in each Distribution Date Statement, as well as a
discussion of certain annual information reports to be furnished by the
[Trustee] to persons who at any time during the prior calendar year were holders
of the Offered Certificates, see "Description of the Certificates-Reports to
Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [Trustee] make
available at its offices primarily responsible for [administration of the Trust
Fund], during normal business hours, for review by any holder of an Offered
Certificate, originals or copies of, among other things, the following items:
(a) the Pooling and Servicing Agreement and any amendments thereto, (b) all
Distribution Date Statements delivered to holders of the relevant Class of
Offered Certificates since the Delivery Date, (c) all officer's certificates
delivered to the Trustee since the Delivery Date as described under "Description
of the Pooling Agreements-Evidence as to Compliance" in the Prospectus, (d) all
accountants' reports delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements-Evidence as to
Compliance" in the Prospectus, (e) the most recent property inspection report
prepared by or on behalf of the Special Servicer and delivered to the Trustee in
respect of each Mortgaged Property, (f) the most recent annual operating
statements, if any, collected by or on behalf of the Special Servicer and
delivered to the Trustee in respect of each Mortgaged Property, and (g) any and
all modifications, waivers and amendments of the terms of a
<PAGE>
S-42
Mortgage Loan entered into by the Master Servicer or the Special Servicer and
delivered to the Trustee. Copies of any and all of the foregoing items will be
available from the [Trustee] upon request; however, the [Trustee] will be
permitted to require payment of a sum sufficient to cover the reasonable costs
and expenses of providing such copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and DTC
Participants. Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Financial Intermediaries and Class A
Certificate Owners, and by Financial Intermediaries to Class A Certificate
Owners, will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time. The Master
Servicer, the Special Servicer, the Trustee, the Depositor, the REMIC
Administrator and the Certificate Registrar are required to recognize as
Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee for
DTC.
Voting Rights
At all times during the term of the Pooling and Servicing Agreement, the
voting rights for the series offered hereby (the "Voting Rights") shall be
allocated among the respective Classes of Certificateholders in proportion to
the Certificate Balances of their Certificates. Voting Rights allocated to a
Class of Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
Termination; Retirement of Certificates
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in respect
thereof) or other liquidation of the last Mortgage Loan or REO Property subject
thereto, and (ii) the purchase of all of the assets of the Trust Fund by the
Master Servicer or the Depositor. Written notice of termination of the Pooling
and Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at the office of the Certificate Registrar or other location
specified in such notice of termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (a) the sum of (i) the aggregate Purchase Price of all the
Mortgage Loans (exclusive of REO Loans) then included in the Trust Fund and (ii)
the aggregate fair market value of all REO Properties then included in the Trust
Fund (which fair market value for any REO Property may be less than the Purchase
Price for the corresponding REO Loan), as determined by an appraiser mutually
agreed upon by the Master Servicer and the Trustee, over (b) the aggregate of
amounts payable or reimbursable to the Master Servicer under the Pooling and
Servicing Agreement. Such purchase will effect early retirement of the then
outstanding Offered Certificates, but the right of the Master Servicer or the
Depositor to effect such termination is subject to the requirement that the then
aggregate Stated Principal Balance of the Mortgage Pool be less than 5% of the
Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer or the Depositor, as the case may be, for the Mortgage Loans and other
assets in the Trust Fund (if the Trust Fund is to be terminated as a result of
the purchase described in the preceding paragraph), together with all other
amounts on deposit in the Certificate Account and not otherwise payable to a
person other than the Certificateholders (see "Description of the Pooling
Agreements-Certificate Account" in the Prospectus), will be applied generally as
described above under "-Distributions-Priority", except that the distributions
of principal described thereunder will, in the case of each Class of
Certificates, be made, subject to available funds, in an amount equal to the
related Certificate Balance then outstanding.
The Trustee
____________, a _____________________, will act as Trustee on behalf of the
Certificateholders. [The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee.] The offices of the Trustee primarily
<PAGE>
S-43
responsible for the administration of the Trust Fund are located at
_____________________________. See "Description of the Pooling Agreements-the
Trustee", "-Duties of the Trustee", "-Certain Matters Regarding the Trustee" and
"-Resignation and Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
Yield Considerations
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the rate
and timing of payments of principal on such Certificate; and (iii) the aggregate
amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will equal the weighted average
of the applicable Effective Net Mortgage Rates. Accordingly, the yield on the
Offered Certificates will be sensitive to (x) adjustments to the Mortgage Rates
on the ARM Loans and (y) changes in the relative composition of the Mortgage
Pool as a result of scheduled amortization, voluntary prepayments and
involuntary liquidations of the Mortgage Loans. See "Description of the Mortgage
Pool" herein and "-Yield Considerations-Rate and Timing of Principal Payments"
below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by the
rate and timing of principal payments on the Mortgage Loans (including principal
prepayments on the Mortgage Loans resulting from both voluntary prepayments by
the mortgagors and involuntary liquidations). The rate and timing of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules thereof, the dates on which Balloon Payments are due and the rate and
timing of principal prepayments and other unscheduled collections thereon
(including for this purpose, collections made in connection with liquidations of
Mortgage Loans due to defaults, casualties or condemnations affecting the
Mortgaged Properties, or purchases of Mortgage Loans out of the Trust Fund).
Prepayments and, assuming the respective stated maturity dates therefor have not
occurred, liquidations and purchases of the Mortgage Loans, will result in
distributions on the Offered Certificates of amounts that would otherwise be
distributed over the remaining terms of the Mortgage Loans. Defaults on the
Mortgage Loans, particularly at or near their stated maturity dates, may result
in significant delays in payments of principal on the Mortgage Loans (and,
accordingly, on the Offered Certificates) while work-outs are negotiated or
foreclosures are completed. See "Servicing of the Mortgage Loans-Modifications,
Waivers and Amendments" herein and "Description of the Pooling
Agreements-Realization Upon Defaulted Mortgage Loans" and "Certain Legal Aspects
of Mortgage Loans-Foreclosure" in the Prospectus. Because the rate of principal
payments on the Mortgage Loans will depend on future events and a variety of
factors (as described below), no assurance can be given as to such rate or the
rate of principal prepayments in particular. The Depositor is not aware of any
relevant publicly available or authoritative statistics with respect to the
historical prepayment experience of a large group of mortgage loans comparable
to the Mortgage Loans.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which such Certificates are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans are in turn distributed
on such Certificates. An investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on such Certificate could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments on such Certificate could result in an
actual yield to such investor that is lower than the anticipated yield. In
general, the earlier a payment of principal is made on an Offered Certificate
purchased at a discount or premium, the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal payments on such investor's Offered Certificates occurring at a rate
higher (or lower) than the rate anticipated by the investor during any
particular period would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
<PAGE>
S-44
Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net Aggregate
Prepayment Interest Shortfalls, generally be borne: first, by the holders of the
Class C Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; second, by the holders of the Class B
Certificates, to the extent of amounts otherwise distributable in respect of
their Certificates; and last, by the holders of the Senior Certificates. As more
fully described herein under "Description of the
Certificates-Distributions-Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective Classes
of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by a
number of factors, including, without limitation, prevailing interest rates, the
terms of the Mortgage Loans (for example, Prepayment Premiums, adjustable
Mortgage Rates and amortization terms that require Balloon Payments), the
demographics and relative economic vitality of the areas in which the Mortgaged
Properties are located and the general supply and demand for rental properties,
retail shopping space, office space or beds in a Health Care-Related Facility,
as the case may be, in such areas, the quality of management of the Mortgaged
Properties, the servicing of the Mortgage Loans, possible changes in tax laws
and other opportunities for investment. See "Risk Factors" and "Description of
the Mortgage Pool" herein and "Risk Factors" and "Yield and Maturity
Considerations-Yield and Prepayment Considerations" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Although most of the Mortgage Loans are ARM Loans, adjustments to the
Mortgage Rates thereon will generally be limited by lifetime and/or periodic
caps and floors and, in each case, will be based on the related Index (which may
not rise and fall consistently with mortgage interest rates then available) plus
the related Gross Margin (which may be different from margins then offered on
adjustable rate mortgage loans). See "Description of the Mortgage Pool-Certain
Payment Characteristics" and "-The Index" herein. As a result, the Mortgage
Rates on the ARM Loans at any time may not be comparable to prevailing market
interest rates. In addition, as prevailing market interest rates decline, and
without regard to whether the Mortgage Rates on the ARM Loans decline in a
manner consistent therewith, related borrowers may have an increased incentive
to refinance for purposes of either (i) converting to a fixed rate loan and
thereby "locking in" such rate, or (ii) taking advantage of a different index,
margin or rate cap or floor on another adjustable rate mortgage loan. The
Mortgage Loans may be prepaid at any time and, in ____ cases (approximately
_____% of the Initial Pool Balance), may be prepaid in whole or in part without
payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by Federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to which
a default will have occurred as of any date or as to the overall rate of
prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until a date that is scheduled to be at least
_____ days and as many as ______ days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of the
Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming such
prices did not account for such delay).
<PAGE>
S-45
Unpaid Distributable Certificate Interest. As described under "Description
of the Certificates-Distributions-Priority" herein, if the portion of the
Available Distribution Amount distributable in respect of interest on any Class
of Offered Certificates on any Distribution Date is less than the Distributable
Certificate Interest then payable for such Class, the shortfall will be
distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
Weighted Average Life
The weighted average life of an Offered Certificate refers to the average
amount of time that will elapse from the date of its issuance until each dollar
allocable to principal of such Certificate is distributed to the investor. The
weighted average life of an Offered Certificate will be influenced by, among
other things, the rate at which principal on the Mortgage Loans is paid or
otherwise collected, which may be in the form of scheduled amortization,
voluntary prepayments, Insurance Proceeds, Condemnation Proceeds and Liquidation
Proceeds.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the ["Constant Prepayment
Rate" or "CPR" model. The CPR model represents an assumed constant annual rate
of prepayment each month, expressed as a per annum percentage of the then
scheduled principal balance of the pool of mortgage loans. As used in each of
the following tables, the column headed "0%" assumes that none of the Mortgage
Loans is prepaid before maturity. The columns headed "___%", "___%", "___%" and
"___%" assume that prepayments on the Mortgage Loans are made at those levels of
CPR. There is no assurance, however, that prepayments of the Mortgage Loans will
conform to any level of CPR, and no representation is made that the Mortgage
Loans will prepay at the levels of CPR shown or at any other prepayment rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each of the Class A Certificates and the Class B Certificates that
would be outstanding after each of the dates shown at various CPRs and the
corresponding weighted average life of each such Class of Certificates. The
tables have been prepared on the basis of the following assumptions, among
others: (i) scheduled monthly payments of principal and interest on the Mortgage
Loans, in each case prior to any prepayment of the loan, will be timely received
(with no defaults) and will be distributed on the 25th day of each month
commencing in ________ 199___; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan, until
its next Interest Rate Adjustment Date, when a new Mortgage Rate that is to
remain in effect to maturity will be calculated reflecting the value of the
related Index as of ________, 199__, subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 30/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the Cut-off
Date will continue to be due (a) in the case of each Fixed Rate Loan, on each
Due Date until maturity and (b) in the case of each ARM Loan, until its next
Payment Adjustment Date, when a new payment that is to be due on each Due Date
until maturity will be calculated reflecting the appropriate Mortgage Rate and
remaining amortization term; (v) any principal prepayments on the Mortgage Loans
will be received on their respective Due Dates at the respective levels of CPR
set forth in the tables, and there will be no Net Aggregate Prepayment Interest
Shortfalls in connection therewith; and (vi) the Mortgage Loan Seller will not
be required to repurchase any Mortgage Loan, and neither the Master Servicer nor
the Depositor will exercise its option to purchase all the Mortgage Loans and
thereby cause an early termination of the Trust Fund. To the extent that the
Mortgage Loans have characteristics that differ from those assumed in preparing
the tables set forth below, the Class A Certificates or the Class B Certificates
may mature earlier or later than indicated by the tables. It is highly unlikely
that the Mortgage Loans will prepay at any constant rate until maturity or that
all the Mortgage Loans will prepay at the same rate. In addition, variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentages of initial Certificate Balances
(and weighted average lives) shown in the following tables. Such variations may
occur even if the average prepayment experience of the Mortgage Loans were to
equal any of the specified CPR percentages. Investors are urged to conduct their
own analyses of the rates at which the Mortgage Loans may be expected to prepay.
Based on the foregoing assumptions, the following table indicates the resulting
weighted average lives of the Class A Certificates and sets forth the percentage
of
<PAGE>
S-46
the initial Certificate Balance of the Class A Certificates that would be
outstanding after each of the dates shown at the indicated CPRs.
<TABLE>
Percent of the Initial Certificate Balance of the
Class A Certificates at the Respective CPRs
Set Forth Below:
<CAPTION>
Date 0% % % % %
- ---- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
Delivery Date ........................................... 100.0 100.0 100.0 100.0 100.0
_________ 25, 1997 ......................................
_________ 25, 1998 ......................................
_________ 25, 1999 ......................................
_________ 25, 2000 ......................................
_________ 25, 2001 ......................................
_________ 25, 2002 ......................................
_________ 25, 2003 ......................................
_________ 25, 2004 ......................................
_________ 25, 2005 ......................................
Weighted Average Life (years)(A) ........................
</TABLE>
- ----
(A) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the number
of years from the date of issuance of the Class A Certificates to the
related Distribution Date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the reductions in the principal balance of
such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth the
percentage of the initial Certificate Balance of the Class B Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
<TABLE>
Percent of the Initial Certificate Balance of the
Class B Certificates at the Respective CPRs
Set Forth Below:
<CAPTION>
Date 0% % % % %
- ---- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
Delivery Date ........................................... 100.0 100.0 100.0 100.0 100.0
_________ 25, 1997 ......................................
_________ 25, 1998 ......................................
_________ 25, 1999 ......................................
_________ 25, 2000 ......................................
_________ 25, 2001 ......................................
_________ 25, 2002 ......................................
_________ 25, 2003 ......................................
_________ 25, 2004 ......................................
_________ 25, 2005 ......................................
Weighted Average Life (years)(A) ........................
</TABLE>
<PAGE>
S-47
- --------------------
(A) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the number
of years from the date of issuance of the Class B Certificates to the
related Distribution Date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the reductions in the principal balance of
such Class B Certificate.
[The following disclosure is applicable to Stripped Interest Certificates,
when offered...
Yield Sensitivity of the Class S Certificates
The yield to maturity of the Class S Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the Mortgage
Loans, which may fluctuate significantly from time to time. A rapid rate of
principal payments will have a material negative effect on the yield to maturity
of the Class S Certificates. There can be no assurance that the Mortgage Loans
will prepay at any particular rate. Prospective investors in the Class S
Certificates should fully consider the associated risks, including the risk that
such investors may not fully recover their initial investment.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class S Certificates to various constant rates of prepayment on
the Mortgage Loans by projecting the monthly aggregate payments of interest on
the Class S Certificates and computing the corresponding pre-tax yields to
maturity on a corporate bond equivalent basis, based on the assumptions
described in the third paragraph under the heading "--Weighted Average Life"
above, including the assumptions regarding the characteristics and performance
of the Mortgage Loans which differ from the actual characteristics and
performance thereof and assuming the aggregate purchase price set forth below.
Any differences between such assumptions and the actual characteristics and
performance of the Mortgage Loans and of the Class S Certificates may result in
yields being different from those shown in such table. Discrepancies between
assumed and actual characteristics and performance underscore the hypothetical
nature of the table, which is provided only to give a general sense of the
sensitivity of yields in varying prepayment scenarios.
<TABLE>
Pre-Tax Yield to Maturity of the Class S Certificates
at the Following CPRs
<CAPTION>
Assumed Purchase Price 0% % % % % %
- ---------------------- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
$________________ ............................. ____% ____% ____% ____% ____% ____%
</TABLE>
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class S Certificates, would cause
the discounted present value of such assumed stream of cash flows to equal the
assumed purchase price listed in the table. Accrued interest is included in the
assumed purchase price and is used in computing the corporate bond equivalent
yields shown. These yields 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 S Certificates, and thus do not reflect the return on
any investment in the Class S Certificates when any reinvestment rates other
than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Class S
Certificates is likely to differ from those shown in the tables, even if all of
the Mortgage Loans prepay at the indicated CPRs over any given time period or
over the entire life of the Certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class S Certificates will conform to
the yields described herein. Investors are urged to make their investment
decisions based
<PAGE>
S-48
on the determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Class S Certificates should fully consider the risk
that a rapid rate of prepayments on the Mortgage Loans could result in the
failure of such investors to fully recover their investments.]
Additional Yield Considerations Applicable Solely to the Class R Certificates
The Class R Certificateholders' after-tax rate of return on the Class R
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Class R Certificates. Holders of Class R
Certificates may have tax liabilities with respect to their Certificates during
the early years of the Trust Fund's term that substantially exceed any
distributions payable thereon during any such period. In addition, holders of
Class R Certificates 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 the Class R
Certificates may be negative or may otherwise be significantly adversely
affected. The timing and amount of taxable income attributable to the Class R
Certificates will depend on, among other things, the timing and amounts of
prepayments and losses experienced with respect to the Mortgage Pool.
The Class R Certificateholders should consult their tax advisors as to the
effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Class R Certificates on after-tax rates of
return on such Certificates. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and Class C Certificates will evidence
"regular interests" in such REMIC and (ii) the Class R Certificates will be the
sole class of "residual interests" in such REMIC, each within the meaning of the
REMIC Provisions in effect on the date hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Trust Fund
will be classified as a grantor trust under Subpart E, part I of subchapter J of
the Code, and not as an association taxable as a corporation or as a
partnership.]
The __________ Certificates [may] [will] [will not] be treated as having
been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of __%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Original
Issue Discount" in the Prospectus.
The ___________________ Certificates may be treated for Federal income tax
purposes as having been issued at a premium. Whether any holder of [either] such
Class of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Premium" in
the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest
<PAGE>
S-49
described in Section 856(c)(3)(B) of the Code. Moreover, the Offered
Certificates will be "qualified mortgages" within the meaning of Section
860(A)(3) of the Code. See "Certain Federal Income Tax
Consequences-REMICs-Characterization of Investments in REMIC Certificates" in
the Prospectus.
________________________, a _______________, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences-REMICs-Reporting and Other Administrative
Matters" and "Description of the Pooling Agreements-Certain Matters Regarding
the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "-Events of Default" and "-Rights Upon Event of Default" in the
Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences-REMICs" in the Prospectus.
Special Tax Considerations Applicable to REMIC Residual Certificates
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests to
United States persons. Pursuant to the Pooling and Servicing Agreement, the
Class R Certificates may not be transferred to non-United States persons. See
"Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating to
"excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Class R Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences-REMICs-Taxation of
Owners of REMIC Residual Certificates-Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if "a significant purpose of the transfer was
to impede the assessment or collection of tax." Based on the REMIC Regulations,
the Class R Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Class R Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Class R Certificates. All transfers of the Class R
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Class R Certificates
constitute noneconomic residual interests. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Residual
Certificates-Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Certificateholders from the Trust Fund with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the Trust Fund's term as a result of their ownership of the
Class R Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Class R Certificate (or possibly later
under the "wash sale" rules of Section
<PAGE>
S-50
1091 of the Code) may cause the Class R Certificateholders' after-tax rate of
return to be zero or negative even if the Class R Certificateholders' pre-tax
rate of return is positive. That is, on a present value basis, the Class R
Certificateholders' resulting tax liabilities could substantially exceed the sum
of any tax benefits and the amount of any cash distributions on the Class R
Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage Interest
in the Class R Certificates shall, by its acceptance of such Certificates, agree
to irrevocably appoint the Master Servicer as its agent to perform all of the
duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations-Additional Yield Considerations Applicable Solely to the Class R
Certificates" herein and "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated _____________, 199_ (the "Underwriting Agreement"), ______________________
(the "Underwriter") has agreed to purchase and the Depositor has agreed to sell
to the Underwriter each class of the Offered Certificates. It is expected that
delivery of the Class A Certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that the delivery of
the Class B and Class R Certificates will be made at the offices of the
Underwriter, _____________________, on or about _____________, 199_ against
payment therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of its Certificates is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
Depositor from the sale of the Offered Certificates, before deducting expenses
payable by the Depositor, will be approximately ____% of the aggregate
Certificate Balance of the Offered Certificates plus accrued interest thereon
from the Cut-off Date. The Underwriter may effect such transactions by selling
its Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
Underwriter and any dealers that participate with such Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Depositor, against certain civil liabilities under the Securities Act of
1933, as amended, or contribute to payments required to be made in respect
thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the Prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the Offered
Certificates and
<PAGE>
S-51
the status of the applicable form of credit enhancement. Except as described
herein under "Description of the Certificates--Reports to Certificateholders;
Certain Available Information", there can be no assurance that any additional
information regarding the Offered Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis. The limited nature of such information regarding
the Offered Certificates may adversely affect the liquidity of the Offered
Certificates, even if a secondary market for the Offered Certificates becomes
available.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made at
negotiated prices determined at the time of sale.]
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Underwriter by ________________. Certain federal income tax matters and
other matters will be passed upon for the Depositor by Thacher Proffitt & Wood.
RATING
It is a condition to issuance that the Senior Certificates be rated not
lower than "__", and the Class B Certificates be rated not lower than "__", by
____________________________________.
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood or
frequency of prepayments (whether voluntary or involuntary) on the Mortgage
Loans, [The following disclosure is applicable to Stripped Interest
Certificates, when offered... or the possibility that as a result of prepayments
investors in the Class S Certificates may realize a lower than anticipated yield
or may fail to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any Class
thereof and, if so, what such rating would be. A rating assigned to any Class of
Offered Certificates by a rating agency that has not been requested by the
Depositor to do so may be lower than the rating assigned thereto by
___________________________.
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. 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.
LEGAL INVESTMENT
[As long as the Senior Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, the Senior Certificates will constitute "mortgage related
securities" within the meaning of SMMEA, and as such 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 whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Under
<PAGE>
S-52
SMMEA, however, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA.]
[The Class B Certificates will not be "mortgage related securities" for
purposes of SMMEA. As a result, the appropriate characterization of the Class B
Certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase the Class B Certificates,
is subject to significant interpretive uncertainties.]
The Depositor makes no representation as to the proper characterization of
any class of Offered Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase 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 or 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.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh plans
and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, including insurance company general
accounts, that is subject to ERISA, or Section 4975 of the Code (each, a "Plan")
should review with its legal advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction that is prohibited or is not
otherwise permitted either under ERISA or Section 4975 of the Code or whether
there exists any statutory or administrative exemption applicable thereto.
[The U.S. Department of Labor issued to [Underwriter] an individual
prohibited transaction exemption, Prohibited Transaction Exemption _____ (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code
and Section 501(i) of ERISA, certain transactions, among others, relating to the
servicing and operation of mortgage pools, such as the Mortgage Pool, and the
purchase, sale and holding of mortgage pass-through certificates, such as the
Class A Certificates, underwritten by an Underwriter (as hereinafter defined),
provided that certain conditions set forth in the Exemption are satisfied. For
purposes of this Section "ERISA Considerations", the term "Underwriter" shall
include (a) [Underwriter], (b) any person directly or indirectly, through one or
more intermediaries, controlling, controlled by or under common control with
[Underwriter], and (c) any member of the underwriting syndicate or selling group
of which a person described in (a) or (b) is a manager or co-manager with
respect to the 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 A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the 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
A Certificates must not be subordinated to the rights and interests evidenced by
the other certificates of the same trust. Third, the Class A Certificates at the
time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by Standard & Poor's Corporation ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit
Rating Co. ("Duff & Phelps") or Fitch Investors Service, Inc. ("Fitch"). Fourth,
the Trustee cannot be an affiliate of any other member of the "Restricted
Group", which consists of any Underwriter, the Depositor, the Trustee, the
Master Servicer, the Special Servicer, any sub-servicer, and any mortgagor with
respect to Mortgage Loans constituting more than 5% of the aggregate unamortized
principal balance of the Mortgage Loans as of the date of initial issuance of
<PAGE>
S-53
the Class A Certificates. Fifth, the sum of all payments made to and retained by
the Underwriter must represent not more than reasonable compensation for
underwriting the 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
obligations; and the sum of all payments made to and retained by the Master
Servicer, the Special Servicer and any sub-servicer 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 A Certificates are not subordinated to any other Class of
Certificates, the second general condition set forth above is satisfied with
respect to such Certificates. It is a condition of the issuance of the Class A
Certificates that they be rated not lower than "__" by
_______________________________________________________. As of the Delivery
Date, the fourth general condition set forth above will be satisfied with
respect to the Class A Certificates. A fiduciary of a Plan contemplating
purchasing a Class A Certificate in the secondary market must make its own
determination that, at the time of such purchase, the Class A Certificates
continue to satisfy the third and fourth general conditions set forth above. A
fiduciary of a Plan contemplating purchasing a Class A Certificate, whether in
the initial issuance of such Certificates or in the secondary market, must make
its own determination that the first, fifth and sixth general conditions set
forth above will be satisfied with respect to such Class A Certificate.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates in such other
investment pools must have been rated in one of the three highest categories of
Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least one year prior
to the Plan's acquisition of Class A Certificates; and (iii) certificates in
such other investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of Class A
Certificates.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1) (A) through (D) of the Code) in connection
with (i) the direct or indirect sale, exchange or transfer of Class A
Certificates in the initial issuance of Certificates between the Depositor or an
Underwriter and a Plan when the Depositor, the Underwriter, the Trustee, the
Master Servicer, the Special Servicer, a Sub-Servicer or a mortgagor is a Party
in Interest with respect to the investing Plan, (ii) the direct or indirect
acquisition or disposition in the secondary market of the Class A Certificates
by a Plan and (iii) the holding of Class A Certificates by a Plan. However, no
exemption is provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2)
and 407 of ERISA for the acquisition or holding of a Class A Certificate on
behalf of an "Excluded Plan" by any person who has discretionary authority or
renders investment advice with respect to the assets of such Excluded Plan. For
purposes hereof, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Certificates between
the Depositor or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in such Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the Mortgage Loans or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Class A Certificates by a Plan and (3) the holding of Class A Certificates by a
Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Mortgage Pool.
<PAGE>
S-54
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Offered Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A Certificates constitute "certificates" for
purposes of the Exemption and (ii) the specific and general conditions and the
other requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider the availability
of any other prohibited transaction exemptions. See "ERISA Considerations" in
the Prospectus. A purchaser of a Class A Certificate should be aware, however,
that even if the conditions specified in one or more exemptions are satisfied,
the scope of relief provided by an exemption may not cover all acts which might
be construed as prohibited transactions.
Because the characteristics of the Class B Certificates [and the Class R
Certificates] do not meet the requirements of the Exemption, the purchase or
holding of such Certificates by a Plan may result in prohibited transactions or
the imposition of excise taxes or civil penalties. As a result, no transfer of a
Class B Certificate [or Class R Certificate] or any interest therein may be made
to a Plan or to any person who is directly or indirectly purchasing such
Certificate or interest therein on behalf of, as named fiduciary of, as trustee
of, or with assets of a Plan, unless the prospective transferee provides the
Certificate Registrar with a certification of facts and an opinion of counsel
which establish to the satisfaction of the Certificate Registrar that such
transfer will not result in a violation of Section 406 of ERISA or Section 4975
of the Code or cause the Master Servicer, the Special Servicer or the Trustee to
be deemed a fiduciary of such Plan or result in the imposition of an excise tax
under Section 4975 of the Code. See "ERISA Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase an Offered Certificate 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.
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus Supplement and
the Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Depositor or by the
Underwriter. This Prospectus Supplement and the Prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby to anyone in any jurisdiction in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make any such offer or solicitation. Neither the delivery of this Prospectus
Supplement and the Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this Prospectus Supplement or the
Prospectus.
TABLE OF CONTENTS
Page
Prospectus Supplement
Summary ...............................................
Risk Factors ..........................................
Description of the Mortgage Pool ......................
Servicing of the Mortgage Loans .......................
Description of the Certificates .......................
Yield and Maturity Considerations .....................
Certain Federal Income Tax Consequences ...............
Method of Distribution ................................
Legal Matters .........................................
Rating ................................................
Legal Investment ......................................
ERISA Considerations ..................................
Index of Principal Definitions ........................
Prospectus
Prospectus Supplement .................................
Available Information .................................
Incorporation of Certain Information by Reference .....
Summary of Prospectus .................................
Risk Factors ..........................................
Description of the Trust Funds ........................
Yield and Maturity Considerations .....................
The Depositor .........................................
Description of the Certificates .......................
Description of the Pooling Agreements .................
Description of Credit Support .........................
Certain Legal Aspects of Mortgage Loans ...............
Certain Federal Income Tax Consequences ...............
State Tax and Other Considerations ....................
ERISA Considerations ..................................
Legal Investment ......................................
Use of Proceeds .......................................
Method of Distribution ................................
Legal Matters .........................................
Financial Information .................................
Rating ................................................
Index of Principal Definitions ........................
DEUTSCHE MORTGAGE & ASSET RECEIVING
CORPORATION
$___________
Mortgage Pass-Through
Certificates
Series 199_-_
Class A Certificates Variable Rate $___________
Class B Certificates Variable Rate $___________
Class R Certificates Variable Rate $ 100
-----------
PROSPECTUS SUPPLEMENT
-----------
[UNDERWRITER]
Dated __________, 199_
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
---------------------------------------------
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
30/360 basis ...............................................................S-38
Accrued Certificate Interest ...............................................S-38
Advance ...............................................................S-6, S-40
ARM Loans ...................................................................S-2
Available Distribution Amount ..............................................S-36
Balloon Payment .............................................................S-3
CEDEL ......................................................................S-14
Certificate Balance ..........................................................ii
Certificate Registrar ......................................................S-34
Certificates ..................................................................i
Class .........................................................................i
Class A Certificate Owner ...................................................S-1
Class B Available Distribution Amount .......................................S-5
Class S Certificates ........................................................iii
Collateral Support Deficit ............................................S-8, S-40
Constant Prepayment Rate ...................................................S-45
CPR ........................................................................S-45
Cut-off Date .................................................................ii
Cut-off Date Balance .......................................................S-14
Debt Service Coverage Ratio ................................................S-24
Definitive Class A Certificate ........................................S-1, S-34
Delivery Date ................................................................ii
Depositor ...................................................................S-1
Determination Date .........................................................S-36
Distributable Certificate Interest .........................................S-38
Distributable Principal ....................................................S-38
Distribution Date ......................................................ii, S-35
Distribution Date Statement ................................................S-41
Due Date ....................................................................S-2
Due Period .................................................................S-36
Effective Net Mortgage Rate ................................................S-38
ERISA ......................................................................S-10
ERISA Considerations .......................................................S-52
Euroclear ..................................................................S-14
Financial Intermediary .....................................................S-34
Fixed Rate Loans ............................................................S-3
Form 8-K ...................................................................S-29
Gross Margin ................................................................S-2
Index .......................................................................S-2
Initial Pool Balance .........................................................ii
Interest Rate Adjustment Date ...............................................S-2
LTV Ratio ..................................................................S-25
Master Servicer .............................................................S-1
Master Servicing Fee .......................................................S-31
Monthly Payments ............................................................S-2
Mortgage ...................................................................S-14
Mortgage Loan Seller ........................................................S-1
Mortgage Loans ...............................................................ii
Mortgage Note ..............................................................S-14
Mortgage Pool ................................................................ii
Mortgage Rate ...............................................................S-2
Mortgaged Property ....................................................S-2, S-14
Net Aggregate Prepayment Interest Shortfall ................................S-38
Net Mortgage Rate ...........................................................S-4
Net Operating Income .......................................................S-24
Nonrecoverable Advance .....................................................S-41
Offered Certificates ....................................................i, S-34
Ownership Percentage .......................................................S-39
Pass-Through Rate ............................................................ii
Payment Adjustment Date .....................................................S-3
Percentage Interest ........................................................S-34
Plan .......................................................................S-52
Pooling and Servicing Agreement .............................................S-3
Prepayment Interest Excess .................................................S-32
Prepayment Premiums ........................................................S-15
Purchase Agreement ..........................................................S-2
Purchase Price .............................................................S-28
Reimbursement Rate .........................................................S-41
Related Proceeds ...........................................................S-41
REMIC Administrator .........................................................S-1
REMIC Regular Certificates ...................................................ii
REO Loan ...................................................................S-39
REO Property .........................................................S-30, S-33
Senior Certificates .....................................................i, S-33
Servicing Fees .............................................................S-31
Special Servicer ............................................................S-1
Special Servicing Fee ......................................................S-31
Specially Serviced Mortgage Assets .........................................S-30
Specially Serviced Mortgage Loans ..........................................S-30
Stated Principal Balance ...................................................S-39
Trust Fund ...................................................................ii
Trustee .....................................................................S-1
Underwriter .............................................................i, S-50
Underwriting Agreement .....................................................S-50
Voting Rights ..............................................................S-42
Workout Fee ................................................................S-31
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus supplement and the prospectus to which it relates
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED _______, 199_
[Version 3 - Restaurant Concentration]
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 199_)
$------------------------
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
Depositor
Mortgage Pass-Through Certificates, Series 199__-__
$_____________ Variable Rate Class A Certificates
$_____________ Variable Rate Class B Certificates
$ 100 Variable Rate Class R Certificates
-----------
The Series 199__-__ Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following four classes (each, a "Class"): (i) the Class A
Certificates and Class R Certificates (collectively, the "Senior Certificates");
(ii) the Class B Certificates; and (iii) the Class C Certificates. Only the
Senior Certificates and the Class B Certificates (collectively, the "Offered
Certificates") are offered hereby.
It is a condition of their issuance that the Senior Certificates be rated
not lower than ____, and that the Class B Certificates be rated not lower than
______, by ___________________.
-----------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG
OR ANY OF THEIR AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE DEPOSITOR, DEUTSCHE BANK AG
OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-----------
Prospective investors should review the information appearing under the
caption "Risk Factors" beginning on page S-___ herein and page __ in the
Prospectus before purchasing any Offered Certificate.
See "Index of Principal Definitions" in the Prospectus for location of
meanings of capitalized terms used but not defined herein. See "Index of
Principal Definitions" herein for location of meanings of those other
capitalized terms used herein.
There is currently no secondary market for the Offered Certificates.
_____________________ (the "Underwriter") intends to make a secondary market in
the Offered Certificates, but is not obligated to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop or,
if it does develop, that it will continue. See "Risk Factors-Limited Liquidity"
herein. The Offered Certificates will not be listed on any securities exchange.
The Offered Certificates will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the
[UNDERWRITER]
________________, 199__
<PAGE>
ii
(cover continued)
Depositor estimated to be approximately $_____________, will be ______% of the
initial aggregate Certificate Balance of the Offered Certificates[, plus accrued
interest on the Offered Certificates from the Cut-off Date]. The Offered
Certificates are offered by the Underwriter subject to prior sale, when, as and
if delivered to and accepted by the Underwriter and subject to certain other
conditions. It is expected that the Class A Certificates will be delivered in
book-entry form through the Same-Day Funds Settlement System of DTC and that the
Class B and Class R Certificates will be delivered at the offices of the
Underwriter, _________________________ _________________________________, on or
about _____________, 199__ (the "Delivery Date"), against payment therefor in
immediately available funds.
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be established by the
Depositor, that will consist primarily of a segregated pool (the "Mortgage
Pool") of ____ conventional, fixed- and adjustable-rate, multifamily or
commercial, balloon mortgage loans (the "Mortgage Loans"). Each Mortgage Loan is
secured by a first mortgage lien on a fee simple estate in real property
operated as a restaurant, retail property, office building or multifamily rental
property. As of ____________, 199___ (the "Cut-off Date"), the Mortgage Loans
had an aggregate principal balance (the "Initial Pool Balance") of
$___________________, after application of all payments of principal due on or
before such date, whether or not received. Certain characteristics of the
Mortgage Loans are described herein under "Description of the Mortgage Pool".
The rights of the holders of the Class B and Class C Certificates to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the holders of the Senior Certificates, and the rights of the
holders of the Class C Certificates to receive distributions with respect to the
Mortgage Loans will be subordinate to the rights of the holders of the Class B
Certificates, in each case to the extent described herein and in the Prospectus.
The Class A Certificates will be represented initially by certificates
registered in the name of Cede & Co., as nominee of DTC, as described herein.
The interests of the beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive certificates will be available for the Class A Certificates only
under the limited circumstances described herein and in the Prospectus. See
"Description of the Certificates-Book-Entry Registration of the Class A
Certificates" herein and "Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in the Prospectus.
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. The Class A Certificates, the Class B Certificates and the
Class C Certificates (collectively, the "REMIC Regular Certificates") will
constitute "regular interests", and the Class R Certificates will constitute the
sole class of "residual interests", in the Trust Fund. See "Certain Federal
Income Tax Consequences" herein and in the Prospectus. Transfer of the Class R
Certificates will be prohibited to any non-United States person, and will be
subject to certain additional transfer restrictions described herein under
"Certain Federal Income Tax Consequences-Special Tax Considerations Applicable
to REMIC Residual Certificates" and in the Prospectus under "Certain Federal
Income Tax Consequences-REMICs-Tax and Restrictions on Transfers of REMIC
Residual Certificates to Certain Organizations".
Distributions on the Certificates will be made, to the extent of available
funds, on the 25th day of each month or, if any such day is not a business day,
then on the next business day, beginning in _____________ 199____ (each, a
"Distribution Date"). As described herein, interest distributions on each Class
of Offered Certificates will be made on each Distribution Date based on the
variable pass-through rate (the "Pass-Through Rate") then applicable to such
Class and the stated principal amount (the "Certificate Balance") of such Class
outstanding immediately prior to such Distribution Date. The Pass-Through Rate
for each Class of Offered Certificates applicable to the first Distribution Date
will be _________% per annum. Subsequent to the initial Distribution Date, the
Pass-Through Rate for each Class of Offered Certificates will equal from time to
time the weighted average of, subject to certain adjustments described herein,
the Net Mortgage Rates (as defined herein) on the Mortgage Loans. Principal
distributions on each Class of Offered Certificates will be made in the amounts
and in accordance with the priorities described herein. See "Description of the
Certificates-Distributions" herein.
<PAGE>
iii
(cover continued)
The yield to maturity on each Class of Offered Certificates will depend on,
among other things, changes in its respective Pass-Through Rate and the rate and
timing of principal payments (including by reason of prepayments, defaults and
liquidations) on the Mortgage Loans. See "Yield and Maturity Considerations"
herein and "Yield and Maturity Considerations" and "Risk Factors-Effect of
Prepayments on Average Life of Certificates" in the Prospectus. [The following
disclosure is applicable to Stripped Interest Certificates ("Class S
Certificates"), when offered... The yield to maturity on the Class S
Certificates will be extremely sensitive to the rate and timing of principal
payments (including by reasons of prepayments, defaults and liquidations) on the
Mortgage Loans, which may fluctuate significantly from time to time. A rate of
principal payments on the Mortgage Loans that is more rapid than expected by
investors will have a material negative effect on the yield to maturity of the
Class S Certificates. Investors in the Class S Certificates should consider the
associated risks, including the risk that a rapid rate of principal payments on
the Mortgage Loans could result in the failure of investors in such Certificates
to recover fully their initial investments. See "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" and "Risk
Factors-Effect of Prepayments on Average Life of Certificates" in the
Prospectus.]
[inside front cover]
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING OFFERED
PURSUANT TO ITS PROSPECTUS DATED ____________________, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT 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.
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. An Index of Principal Definitions is included at the end of both
this Prospectus Supplement and the Prospectus. Terms that are used but not
defined in this Prospectus Supplement will have the meanings specified in the
Prospectus.
Title of Certificates............... Mortgage Pass-Through Certificates,
Series 199__-__.
Depositor........................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware Corporation. See
"The Depositor" in the Prospectus. The
Offered Certificates are not insured or
guaranteed by the Depositor, Deutsche
Bank AG or any of their affiliates.
Master Servicer..................... ____________________. See "Servicing of
the Mortgage Loans-The Master Servicer"
herein.
Special Servicer.................... _____________________. See "Servicing of
the Mortgage Loans-The Special Servicer"
herein.
Trustee ........................... _____________________. See "Description
of the Certificates-The Trustee" herein.
REMIC Administrator................. _____________________. See "Certain
Federal Income Tax
Consequences-REMICs-Reporting and Other
Administrative Matters" herein and
"Description of the Pooling
Agreements-Events of Default" and
"-Rights Upon Event of Default" in the
Prospectus.
Mortgage Loan Seller................ ________________________. See
"Description of the Mortgage Pool-The
Mortgage Loan Seller" herein.
Cut-off Date........................ ___________________, 199__.
Delivery Date....................... On or about ___________________, 199__.
Registration; Denominations......... The Class A Certificates will be issued,
maintained and transferred on the
book-entry records of DTC in
denominations of $25,000 and integral
multiples of $1 in excess thereof. The
Class B Certificates will be issued in
fully registered, certificated form in
denominations of $100,000 and in
integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to
the remainder of the initial Certificate
Balance of such Class. The Class R
Certificates will be issued in
registered, certificated form in minimum
denominations of 20% percentage interest
in such Class.
The Class A Certificates will be
represented by one or more global
Certificates registered in the name of
Cede & Co., as nominee of DTC. No person
acquiring an interest in the Class A
Certificates (any such person, a "Class
A Certificate Owner") will be entitled
to receive a Class A Certificate in
fully registered, certificated form (a
"Definitive Class A Certificate"),
except under the limited circumstances
described herein and
<PAGE>
S-2
in the Prospectus. See "Description of
the Certificates-Book-Entry Registration
of the Class A Certificates" herein and
"Description of the
Certificates-Book-Entry Registration and
Definitive Certificates" in the
Prospectus.
The Mortgage Pool................... The Mortgage Pool will consist of _____
conventional, balloon Mortgage Loans
with an Initial Pool Balance of
$_________________. On or prior to the
Delivery Date, the Depositor will
acquire the Mortgage Loans from the
Mortgage Loan Seller pursuant to a
Purchase Agreement, dated [the date
hereof], between the Depositor and the
Mortgage Loan Seller (the "Purchase
Agreement"). In the Purchase Agreement,
the Mortgage Loan Seller has made
certain representations and warranties
to the Depositor regarding the
characteristics and quality of the
Mortgage Loans and, as more particularly
described herein, has agreed to cure any
material breach thereof or repurchase
the affected Mortgage Loan. In
connection with the assignment of its
interests in the Mortgage Loans to the
Trustee, the Depositor will also assign
its rights under the Purchase Agreement
insofar as they relate to or arise out
of the Mortgage Loan Seller's
representations and warranties regarding
the Mortgage Loans. See "Description of
the Mortgage Pool-Representations and
Warranties; Repurchases" herein.
Each Mortgage Loan is secured by a first
mortgage lien on a fee simple estate in
real property (as to such Mortgage Loan,
the "Mortgaged Property") operated as a
restaurant (__ Mortgage Loans which
represent ____% of the Initial Pool
Balance), a retail property (__ Mortgage
Loans which represent ___% of the
Initial Pool Balance), an office
building (__ Mortgage Loans which
represent ____% of the Initial Pool
Balance) or a multifamily rental
property (__ Mortgage Loans which
represent __% of the Initial Pool
Balance). ________ of the Mortgage
Loans, which represent _____% of the
Initial Pool Balance, are secured by
liens on Mortgaged Properties located in
_______________. The remaining Mortgaged
Properties are located throughout
___________ other states. See
"Description of the Mortgage
Pool-Additional Mortgage Loan
Information" and "Risk Factors-Risks
Associated With Multifamily Properties"
and "-Risks Associated with ___________
Properties" and "Description of the
Mortgage Pool-Additional Mortgage Loan
Information" herein. ___________ of the
Mortgage Loans, which represent ______%
of the Initial Pool Balance, provide for
scheduled payments of principal and/or
interest ("Monthly Payments") to be due
on the first day of each month; the
remainder of the Mortgage Loans provide
for Monthly Payments to be due on the
____, _____, _____ or _____ day of each
month (the date in any month on which a
Monthly Payment on a Mortgage Loan is
first due, the "Due Date"). The
annualized rate at which interest
accrues (the "Mortgage Rate") on ____ of
the Mortgage Loans (the "ARM Loans"),
which represent _____% of the Initial
Pool Balance, is subject to adjustment
on specified Due Dates (each such date
of adjustment, an "Interest Rate
Adjustment Date") by adding a fixed
number of basis points (a "Gross
Margin") to the value of a base index
(an "Index"), subject, in ______ cases,
to lifetime maximum and/or minimum
Mortgage Rates, and in _____ cases, to
periodic maximum and/or minimum Mortgage
Rates, in each case as
<PAGE>
S-3
described herein; and the remaining
Mortgage Loans (the "Fixed Rate Loans")
bear interest at fixed Mortgage Rates.
____ of the ARM Loans, which represent
___% of the Initial Pool Balance,
provide ____ for Interest Rate
Adjustment Dates that occur monthly,
while the remainder of the ARM Loans
provide for adjustments of the Mortgage
Rate to occur semi-annually or annually.
____ [Identify Mortgage Loan Index] See
"Description of the Mortgage
Pool-Certain Payment Characteristics"
herein.
The amount of the Monthly Payment on all
of the ARM Loans is subject to
adjustment on specified Due Dates (each
such date, a "Payment Adjustment Date")
to an amount that would amortize the
outstanding principal balance of the
Mortgage Loan over its then remaining
amortization schedule and pay interest
at the then applicable Mortgage Rate.
The ARM Loans provide for Payment
Adjustment Dates that occur on the Due
Date following each related Interest
Rate Adjustment Date.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly
longer than the remaining terms of such
Mortgage Loans, thereby leaving
substantial principal amounts due and
payable (each such payment, together
with the corresponding interest payment,
a "Balloon Payment") on their respective
maturity dates, unless prepaid prior
thereto.
Description of the Certificates..... The Certificates will be issued pursuant
to a Pooling and Servicing Agreement, to
be dated as of the Cut-off Date, among
the Depositor, the Master Servicer, the
Special Servicer, the Trustee and the
REMIC Administrator (the "Pooling and
Servicing Agreement"), and will
represent in the aggregate the entire
beneficial ownership interest in the
Trust Fund, which will consist of the
Mortgage Pool and certain related
assets.
The aggregate Certificate Balance of the
Certificates as of the Delivery Date
will equal the Initial Pool Balance.
Each Class of Offered Certificates will
have the initial Certificate Balance set
forth on the cover page, and the Class C
Certificates will have an initial
Certificate Balance of $____________.
See "Description of the
Certificates-General" herein.
The Pass-Through Rate applicable to each
Class of Certificates for the initial
Distribution Date will equal _____% per
annum. With respect to any Distribution
Date subsequent to the initial
Distribution Date, the Pass-Through Rate
for each Class of Certificates will
equal the weighted average of the
applicable Effective Net Mortgage Rates
for the Mortgage Loans, weighted on the
basis of their respective Stated
Principal Balances (as described herein)
immediately prior to such Distribution
Date. For purposes of calculating the
Pass-Through Rate for any Class of
Certificates and any Distribution Date,
the "applicable Effective Net Mortgage
Rate" for each Mortgage Loan is an
annualized rate equal to the Mortgage
Rate in effect for such Mortgage Loan as
of the [second] day of the most recently
ended calendar month, (a) reduced by ___
basis points (the Mortgage Rate, as so
reduced, the "Net Mortgage Rate"), and
<PAGE>
S-4
(b) if the accrual of interest on such
Mortgage Loan is computed other than on
the basis of a 360-day year consisting
of twelve 30-day months (which is the
basis of accrual ____ for interest on
_______ the Certificates), then adjusted
to reflect that difference in
computation. See "Description of the
Certificates-Distributions-Pass-Through
Rates" and "-Distributions-Certain
Calculations with Respect to Individual
Mortgage Loans" herein.
Interest Distributions
on the Senior Certificates........ On each Distribution Date, to the extent
of the Available Distribution Amount,
holders of each Class of Senior
Certificates will be entitled to receive
distributions of interest in an amount
equal to all Distributable Certificate
Interest with respect to such
Certificates for such Distribution Date
and, to the extent not previously paid,
for all prior Distribution Dates. See
"Description of the
Certificates-Distributions" herein.
The "Distributable Certificate Interest"
in respect of any Class of Certificates
for any Distribution Date will equal one
month's interest at the then-applicable
Pass-Through Rate accrued on the
Certificate Balance of such Class of
Certificates immediately prior to such
Distribution Date, reduced (to not less
than zero) by such Class of
Certificates' allocable share (in each
case, calculated as described herein) of
any Net Aggregate Prepayment Interest
Shortfall (also as described herein) for
such Distribution Date. See "Description
of the Certificates-Distributions-
Distributable Certificate Interest"
herein.
The "Available Distribution Amount" for
any Distribution Date is, as described
herein under "Description of the
Certificates-Distributions", the total
of all payments or other collections (or
available advances) on or in respect of
the Mortgage Loans that are available
for distribution on the Certificates on
such date.
Principal Distributions on
the Senior Certificates........... On each Distribution Date, to the extent
of the Available Distribution Amount
remaining after the distributions of
interest to be made on the Senior
Certificates on such date, holders of
the Senior Certificates will be entitled
to distributions of principal (until the
Certificate Balances of such Classes of
Certificates are reduced to zero) in an
aggregate amount equal to the sum of (a)
such holders' pro rata share of the
Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) the
entire Unscheduled Principal
Distribution Amount for such
Distribution Date. Distributions of
principal on the Senior Certificates
will be paid first to the holders of the
Class R Certificates until the
Certificate Balance of such Certificates
is reduced to zero, and then to the
holders of the Class A Certificates. See
"Description of the
Certificates-Distributions-Scheduled
Principal Distribution Amount and
Unscheduled Principal Distribution
Amount" herein.
Interest Distributions on
the Class B Certificates.......... On each Distribution Date, to the extent
of the Available Distribution Amount
remaining after all distributions to be
made on the Senior Certificates on such
date (such remaining portion, the "Class
B Available
<PAGE>
S-5
Distribution Amount"), holders of the
Class B Certificates will be entitled to
receive distributions of interest in an
amount equal to all Distributable
Certificate Interest with respect to
such Certificates for such Distribution
Date and, to the extent not previously
paid, for all prior Distribution Dates.
See "Description of the
Certificates-Distributions" herein.
Principal Distributions on
the Class B Certificates.......... On each Distribution Date, to the extent
of the Class B Available Distribution
Amount remaining after the distributions
of interest to be made on the Class B
Certificates on such date, holders of
the Class B Certificates will be
entitled to distributions of principal
(until the Certificate Balance of such
Class of Certificates is reduced to
zero) in an amount equal to the sum of
(a) such holders' pro rata share of the
Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) if
the Certificate Balances of the Senior
Certificates have been reduced to zero,
then to the extent not distributed in
reduction of such Certificate Balances
on such Distribution Date, the entire
Unscheduled Principal Distribution
Amount for such Distribution Date. See
"Description of the
Certificates-Distributions" herein.
Certain Yield and Prepayment
Considerations.................... The yield on the Offered Certificates of
any class will depend on, among other
things, the Pass-Through Rate for such
Certificates. The yield on any Offered
Certificate that is purchased at a
discount or premium will also be
affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) on the Mortgage Loans and
(ii) the extent to which such principal
payments are applied on any Distribution
Date in reduction of the Certificate
Balance of the Class to which such
Certificate belongs. See "Description of
the Certificates-Distributions-Priority"
and "-Distributions-Scheduled Principal
Distribution Amount and Unscheduled
Principal Distribution Amount" herein.
An investor that purchases an Offered
Certificate at a discount should
consider the risk that a slower than
anticipated rate of principal payments
on such Certificate will result in an
actual yield that is lower than such
investor's expected yield. An investor
that purchases any Offered Certificate
at a premium should consider the risk
that a faster than anticipated rate of
principal payments on such Certificate
will result in an actual yield that is
lower than such investor's expected
yield. Insofar as an investor's initial
investment in any Offered Certificate is
repaid, there can be no assurance that
such amounts can be reinvested in a
comparable alternative investment with a
comparable yield.
The actual rate of prepayment of
principal on the Mortgage Loans cannot
be predicted. The Mortgage Loans may be
prepaid at any time, subject, in the
case of ____ Mortgage Loans, to payment
of a Prepayment Premium. 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
<PAGE>
S-6
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 expected
weighted average life of the Certificate
may not be realized. For a discussion of
certain factors affecting prepayment of
the Mortgage Loans, including the effect
of Prepayment Premiums, see "Yield and
Maturity Considerations" herein. In
deciding whether to purchase any Offered
Certificates, an investor should make an
independent decision as to the
appropriate prepayment assumptions to be
used.
[The structure of the Offered
Certificates causes the yield of certain
Classes to be particularly sensitive to
changes in the rates of prepayment of
the Mortgage Loans and other factors, as
follows:]
[Allocation to the Senior Certificates,
for so long as they are outstanding, of
the entire Unscheduled Principal
Distribution Amount for each
Distribution Date will generally
accelerate the amortization of such
Certificates relative to the actual
amortization of the Mortgage Loans.
Following retirement of the Class A
Certificates, the Unscheduled Principal
Distribution Amount for each
Distribution Date will be allocated to
the Class B Certificates.]
[The following disclosure is applicable
to Stripped Interest Certificates, when
offered... The Stripped Interest
Certificates. The Class S Certificates
are interest-only Certificates and are
not entitled to any distributions in
respect of principal. The yield to
maturity of the Class S Certificates
will be especially sensitive to the
prepayment, repurchase and default
experience on the Mortgage Loans, which
may fluctuate significantly from time to
time. A rate of principal payments that
is more rapid than expected by investors
will have a material negative effect on
the yield to maturity of the Class S
Certificates. See "Yield and Maturity
Considerations-Yield Sensitivity of the
Class S Certificates" herein.]
Class R Certificates: Holders of the
Class R Certificates are entitled to
receive distributions of principal and
interest as described herein; however,
holders of such Certificates may have
tax liabilities with respect to their
Certificates during the early years of
the term of the Trust Fund that
substantially exceed the principal and
interest payable thereon during such
periods. See "Yield and Maturity
Considerations", especially "-Additional
Yield Considerations Applicable Solely
to the Class R Certificates," herein and
"Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Advances............................ The Master Servicer is required to make
advances (each, an "Advance") of
delinquent principal and interest (net
of related Servicing Fees) on the
Mortgage Loans or, in the case of each
Mortgage Loan that is delinquent in
respect of its Balloon Payment or as to
which the related Mortgaged Property was
acquired through foreclosure, deed in
lieu of foreclosure or otherwise, only
of delinquent interest (net of related
Servicing Fees),
<PAGE>
S-7
in any event under the circumstances and
subject to the limitations set forth
herein. Advances are intended to
maintain a regular flow of scheduled
interest and principal payments to the
Certificateholders, rather than to
guarantee or insure against losses.
Accordingly, Advances which cannot be
reimbursed out of collections on or in
respect of the related Mortgage Loans
("Nonrecoverable Advances") will
represent a portion of the losses to be
borne by Certificateholders.
The Master Servicer will be entitled to
interest on any Advances made, and the
Master Servicer and the Special Servicer
will each be entitled to interest on
certain servicing expenses incurred by
it or on its behalf, such interest
accruing at the rate and payable under
the circumstances described herein.
Interest accrued on outstanding Advances
will result in a reduction in amounts
payable on the Certificates. See
"Description of the
Certificates-Advances" and
"-Subordination; Allocation of
Collateral Support Deficit" herein and
"Description of the
Certificates-Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements-Certificate Account"
in the Prospectus.
Each Distribution Date Statement
delivered by the Trustee to the
Certificateholders will contain
information relating to the amounts of
Advances made with respect to the
related Distribution Date. See
"Description of the Certificates-Reports
to Certificateholders; Certain Available
Information" herein and "Description of
Certificates-Reports to
Certificateholders" in the Prospectus.
Subordination; Allocation of Collateral
Support Deficit.................. The rights of the holders of the Class B
and Class C Certificates to receive
distributions with respect to the
Mortgage Loans will be subordinate to
the rights of the holders of the Senior
Certificates, and the rights of the
holders of the Class C Certificates to
receive distributions with respect to
the Mortgage Loans will be subordinate
to the rights of the holders of the
Class B Certificates, in each case to
the extent described herein and in the
Prospectus. This subordination is
intended to enhance the likelihood of
timely receipt by the holders of the
Senior Certificates of the full amount
of all Distributable Certificate
Interest payable in respect of such
Certificates on each Distribution Date,
and the ultimate receipt by such holders
of principal in an amount equal to the
entire aggregate Certificate Balance of
the Senior Certificates. Similarly, but
to a lesser degree, this subordination
is also intended to enhance the
likelihood of timely receipt by the
holders of the Class B Certificates of
the full amount of all Distributable
Certificate Interest payable in respect
of such Certificates on each
Distribution Date, and the ultimate
receipt by such holders of principal in
an amount equal to the entire
Certificate Balance of the Class B
Certificates. Such subordination will be
accomplished by the application of the
Available Distribution Amount on each
Distribution Date to distributions on
the respective Classes of Certificates
in the order described herein under
"Description of the
Certificates-Distributions-Priority". No
other form of Credit Support will be
available for the benefit of the holders
of the Offered Certificates.
<PAGE>
S-8
Allocation to the Senior Certificates,
for so long as they are outstanding, of
the entire Unscheduled Principal
Distribution Amount for each
Distribution Date will generally
accelerate the amortization of such
Certificates relative to the actual
amortization of the Mortgage Loans. To
the extent that the Senior Certificates
are amortized faster than the Mortgage
Loans, the percentage interest evidenced
by the Senior Certificates in the Trust
Fund will be decreased (with a
corresponding increase in the interest
in the Trust Fund evidenced by the Class
B and Class C Certificates), thereby
increasing, relative to their respective
Certificate Balances, the subordination
afforded the Senior Certificates by the
Class B and Class C Certificates.
Following retirement of the Class A
Certificates, allocation to the Class B
Certificates, for so long as they are
outstanding, of the entire Unscheduled
Principal Distribution Amount for each
Distribution Date will provide a similar
benefit to such Class of Certificates as
regards the relative amount of
subordination afforded thereto by the
Class C Certificates.
As a result of losses and other
shortfalls experienced with respect to
the Mortgage Loans or otherwise with
respect to the Trust Fund (which may
include shortfalls arising both from
interest accrued on Advances and from
Nonrecoverable Advances), the aggregate
Stated Principal Balance of the Mortgage
Pool expected to be outstanding
immediately following any Distribution
Date may be less than the aggregate
Certificate Balance of the Certificates
immediately following the distributions
on such Distribution Date. Such deficit
(the "Collateral Support Deficit") will
be allocated first to the Class C
Certificates, then to the Class B
Certificates and last to the Class A
Certificates (in reduction of their
Certificate Balances), in each case
until the related Certificate Balance
has been reduced to zero. See
"Description of the Certificates -
Subordination; Allocation of Collateral
Support Deficit" herein.
Optional Termination................ At its option, on any Distribution Date
on which the remaining aggregate Stated
Principal Balance of the Mortgage Pool
is less than 5% of the Initial Pool
Balance, the Master Servicer or the
Depositor may purchase all of the
Mortgage Loans and REO Properties, and
thereby effect termination of the Trust
Fund and early retirement of the then
outstanding Certificates. See
"Description of the
Certificates-Termination; Retirement of
Certificates" herein and in the
Prospectus.
Certain Federal Income
Tax Consequences............... An election will be made to treat the
Trust Fund as a REMIC for Federal income
tax purposes. Upon the issuance of the
Offered Certificates, ________________,
counsel to the Depositor, will deliver
its opinion generally to the effect
that, assuming compliance with all
provisions of the Pooling and Servicing
Agreement, for Federal income tax
purposes, the Trust Fund will qualify as
a REMIC under Sections 860A through 860G
of the Code. For Federal income tax
purposes, the Class A, Class B and Class
C Certificates will be the "regular
interests" in the Trust Fund, and the
Class R Certificates will be the sole
class of "residual interests" in the
Trust Fund.
<PAGE>
S-9
Under the REMIC Regulations, the Class R
Certificates will not be regarded as
having "significant value" for purposes
of applying the rules relating to
"excess inclusions." In addition, the
Class R Certificates may constitute
"noneconomic" residual interests for
purposes of the REMIC Regulations.
Transfers of the Class R Certificates
will be restricted under the Pooling and
Servicing Agreement to United States
Persons in a manner designed to prevent
a transfer of a noneconomic residual
interest from being disregarded under
the REMIC Regulations. See "Certain
Federal Income Tax Consequences-Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein and
"Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners
of REMIC Residual Certificates-Excess
Inclusions" and "-Noneconomic REMIC
Residual Certificates" in the
Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years
of the Trust Fund's term that
significantly exceeds distributions on
the Class R Certificates during such
years, with corresponding tax deductions
or losses deferred until the later years
of the Trust Fund's term. Accordingly,
on a present value basis, the tax
detriments occurring in the earlier
years may substantially exceed the sum
of any tax benefits in the later years.
As a result, the Class R
Certificateholders' after-tax rate of
return may be zero or negative, event if
their pre-tax rate of return is
positive.
See "Yield and Maturity Considerations,"
especially "-Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain
Federal Income Tax Consequences-Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein.
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.
Rating ........................... It is a condition of their issuance that
the Senior Certificates be rated not
lower than "___", and that the Class B
Certificates be rated not lower than
"___", by _______________________
([collectively,] the "Rating
Agenc[ies]"). 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. A security
rating does not address the frequency of
prepayments of Mortgage Loans, or the
corresponding effect on yield to
investors. [The following disclosure is
applicable to Stripped Interest
Certificates, when offered... A security
rating does not address the frequency or
likelihood of prepayments (whether
voluntary or involuntary) of Mortgage
Loans, or the possibility that, as a
result of prepayments, investors in the
Class S Certificates may realize a lower
than anticipated yield or may fail to
recover fully their initial investment.]
See "Rating" herein.
ERISA Considerations................ Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh
plans, and collective investment funds
and separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that
<PAGE>
S-10
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of
Offered Certificates could give rise to
a transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in the
Prospectus.
Legal Investment.................... [The Senior Certificates will constitute
"mortgage related securities" for
purposes of SMMEA, for so long as they
are rated in one of the two highest
ratings categories by one or more
nationally recognized statistical rating
organizations and, as such, are legal
investments for certain entities to the
extent provided in SMMEA. Such
investments, however, will be subject to
general regulatory considerations
governing investment practices under
state and federal law. In addition,
institutions whose investment activities
are subject to review by federal or
state regulatory authorities may be or
may become subject to restrictions,
which may be retroactively imposed by
such regulatory authorities, on the
investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain states
have recently enacted legislation
overriding the legal investment
provisions of SMMEA.]
[The Class B Certificates will not be
"mortgage related securities" within the
meaning of SMMEA. As a result, the
appropriate characterization of the
Class B Certificates under various legal
investment restrictions, and thus the
ability of investors subject to these
restrictions to purchase the Class B
Certificates, may be subject to
significant interpretative
uncertainties.]
Investors should consult their legal
advisors to determine whether and to
what extent the Offered Certificates
constitute legal investments for them.
See "Legal Investment" herein and in the
Prospectus.
<PAGE>
S-11
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among other
things, the following risk factors (as well as the risk factors set forth under
"Risk Factors" in the Prospectus) in connection with an investment therein.
Limited Liquidity. There is currently no secondary market for the Offered
Certificates. The Underwriter has indicated its intention to make a secondary
market in the Offered Certificates, but it is not obligated 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 Offered
Certificates with liquidity of investment or that it will continue for the life
of the Offered Certificates. The Offered Certificates will not be listed on any
securities exchange. See "Risk Factors-Limited Liquidity" in the Prospectus.
Certain Yield Considerations. The yield on any Offered Certificate will
depend on (a) the price at which such Certificate is purchased by an investor
and (b) the rate, timing and amount of distributions on such Certificate. The
rate, timing and amount of distributions on any Offered Certificate will, in
turn, depend on, among other things, (w) the Pass-Through Rate for such
Certificate, (x) the rate and timing of principal payments (including principal
prepayments) and other principal collections on or in respect of the Mortgage
Loans and the extent to which such amounts are to be applied or otherwise result
in a reduction of the Certificate Balance [or Notional Amount] of the Class of
Certificates to which such Certificates belongs, (y) the rate, timing and
severity of losses on or in respect of the Mortgage Loans and the extent to
which such losses result in a reduction of the Certificate Balance [or Notional
Amount] of the Class of Certificates to which such Certificate belongs, and (z)
the timing and severity of any Net Aggregate Prepayment Interest Shortfalls and
the extent to which such shortfalls are allocated in reduction of the
Distributable Certificate Interest payable on the Class of Certificates to which
such Certificate belongs. It is impossible to predict with certainty any of the
factors described in the preceding sentence. Accordingly, investors may find it
difficult to analyze the effect that such factors might have on the yield to
maturity of any Class of Offered Certificates. [The yield to maturity of the
Class S Certificates will be highly sensitive to the rate and timing of
principal payments (including by reason of prepayments, defaults and
liquidations) on or in respect of the Mortgage Loans, and investors in the Class
S Certificates should fully consider the associated risks, including the risk
that an extremely rapid rate of amortization and prepayment of the related
Notional Amount could result in the failure of such investors to recoup their
initial investments.] See "Description of the Mortgage Pool", "Description of
the Certificates--Distributions" and "--Subordination; Allocation of Collateral
Support Deficit" and "Yield and Maturity Considerations" herein. See also "Yield
and Maturity Considerations" in the Prospectus.
Potential Liability to the Trust Fund Relating to a Materially Adverse
Environmental Condition. [An environmental site assessment was performed at
[each][all but ___] of the Mortgaged Properties during the _____ month period
prior to the Cut-off Date. [Note any special environmental problems.]
[Otherwise,] no such environmental assessment revealed any material adverse
environmental condition or circumstance at any Mortgaged Property[, except for
(i) those cases in which the condition or circumstance was remediated or an
escrow for such remediation has been established and (ii) those cases in which
an operations and maintenance plan or periodic monitoring of nearby properties
was recommended, which recommendations are consistent with industrywide
practices].
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property securing a
defaulted Mortgage Loan prior to acquiring title thereto or assuming its
operation. Such prohibition effectively precludes enforcement of the security
for the related Mortgage Note until a satisfactory environmental site assessment
is obtained (or until any required remedial action is thereafter taken), but
will decrease the likelihood that the Trust Fund will become liable for a
material adverse environmental condition at the Mortgaged Property. However,
there can be no assurance that the requirements of the Pooling and Servicing
Agreement will effectively insulate the Trust Fund from potential liability for
a materially adverse environmental condition at any Mortgaged Property. See
"Description of the Pooling Agreements-Realization Upon Defaulted Mortgage
Loans", "Risk Factors-Certain Factors Affecting Delinquency, Foreclosure and
Loss of the Mortgage Loans-Risk of Liability Arising from Environmental
Conditions" and "Certain Legal Aspects of Mortgage Loans-Environmental
Considerations" in the Prospectus.
<PAGE>
S-12
Exposure of the Mortgage Pool to Adverse Economic or other Developments
Based on Geographic Concentration. ______ Mortgage Loans, which represent ____%
of the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in _____________. In general, that concentration increases the exposure
of the Mortgage Pool to any adverse economic or other developments that may
occur in _________. In recent periods, _____________ (along with other regions
of the United States) has experienced a significant downturn in the market value
of real estate.
Increased Risk of Loss Associated With Concentration of Mortgage Loans and
Borrowers. Several of the Mortgage Loans have Cut-off Date Balances that are
substantially higher than the average Cut-off Date Balance. In general,
concentrations in a mortgage pool of loans with larger-than-average balances can
result in losses that are more severe, relative to the size of the pool, than
would be the case if the aggregate balance of the pool were more evenly
distributed. Concentration of borrowers also poses increased risks. For
instance, if a borrower that owns several Mortgaged Properties experiences
financial difficulty at one Mortgaged Property, or at another income-producing
property that it owns, it could attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting Monthly Payments
for an indefinite period on all of the related Mortgage Loans.
Increased Risk of Default Associated with Adjustable Rate Mortgage Loans.
________ of the Mortgage Loans, which represent ____% of the Initial Pool
Balance, are ARM Loans. Increases in the required Monthly Payments on ARM Loans
in excess of those assumed in the original underwriting of such loans may result
in a default rate higher than that on mortgage loans with fixed mortgage rates.
Increased Risk of Default Associated with Balloon Payments. None of the
Mortgage Loans is fully amortizing over its term to maturity. Thus, each
Mortgage Loan will have a substantial payment (that is, a Balloon Payment) due
at its stated maturity unless prepaid prior thereto. Loans with Balloon Payments
involve a greater likelihood of default than self-amortizing loans because the
ability of a borrower to make a Balloon Payment typically will depend upon its
ability either to refinance the loan or to sell the related mortgaged property.
See "Risk Factors-Certain Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans-Increased Risk of Default Associated With Balloon Payments"
in the Prospectus.
Extension Risk Associated With Modification of Mortgage Loans with Balloon
Payments. In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Special Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is reasonably
foreseeable; subject, however, to the limitations described under "Servicing of
the Mortgage Loans-Modifications, Waivers and Amendments" herein. There can be
no assurance, however, that any such extension or modification will increase the
present value of recoveries in a given case. Any delay in collection of a
Balloon Payment that would otherwise be distributable in respect of a Class of
Offered Certificates, whether such delay is due to borrower default or to
modification of the related Mortgage Loan by the Special Servicer, will likely
extend the weighted average life of such Class of Offered Certificates. See
"Yield and Maturity Considerations" herein and in the Prospectus.
Risks Particular to Restaurant Properties. Repayment of a mortgage loan
made on the security of a restaurant is dependent primarily on the success of
the restaurant. Various factors may affect the economic viability of
restaurants, including but not limited to competition from other restaurants;
perceptions by prospective customers of the safety, convenience, services and
attractiveness of the restaurant; the cost, quality and availability of food
products; changes in demographics, consumer habits and traffic patterns; the
ability to provide or contract for capable management and adequate maintenance;
and retroactive changes to building codes and other legal requirements.
Additional factors that can affect the success of a restaurant that is part of a
regionally or nationally-known chain of restaurants include actions and
omissions of any franchisor (including management practices that adversely
affect the nature of the business or that require the franchisee to expend sums
for renovation, refurbishment or expansion); the ability of a franchisor to
provide support in the way of advertising and arrangements with providers of
products and services; and the bankruptcy or business discontinuation of any
such franchisor.
<PAGE>
S-13
Risks Particular to Retail Properties. In addition to risks generally
associated with income producing real estate, mortgage loans secured by liens on
retail properties can also be adversely affected by changes in consumer spending
patterns, local competitive conditions (such as the supply of retail space or
the existence or construction of new competitive shopping centers), growth of
alternative forms of retailing (such as direct mail and video shopping networks
which need little or no retail space) and the public perception of the safety of
customers at shopping centers. In addition, significant tenants at a retail
property play an important part in generating customer traffic and making a
retail property a desirable location for other tenants at such property.
A retail property may also be adversely affected if a significant tenant
ceases operations at such location (which may occur on account of a voluntary
decision not to renew a lease, bankruptcy or insolvency of such tenant, such
tenant's general cessation of business activities or for other reasons). Certain
tenants at retail properties may be entitled to terminate their leases if an
anchor tenant ceases operations at such property. In such cases, there can be no
assurance that any such anchor tenants will continue to occupy space in the
related shopping centers.
Risks Particular to Office Properties. Mortgage loans secured by liens on
office properties can be adversely affected by local competitive conditions,
including the overall supply of office space and the existence of competitive
buildings. For example, office buildings that are not equipped to accommodate
the needs of modern businesses may become functionally obsolete and unable to
attract tenants. Similarly, a property will likely suffer if prospective tenants
consider it less attractive, or less well-located, than nearby office
properties. Accordingly, office properties generally require their owners to
expend significant sums to pay for capital improvements and tenant improvements,
as well as costs related to re-leasing space.
Risks Particular to Multifamily Properties. In the case of multifamily
lending in particular, adverse economic conditions, either local, regional or
national, may limit the amount of rent that can be charged and may result in a
reduction in timely rent payments or a reduction in occupancy levels. Occupancy
and rent levels may also be affected by construction of additional housing
units, local military base closings and national and local politics, including
current or future rent stabilization and rent control laws and agreements.
Certain of the Mortgaged Properties may be subject to rent stabilization or rent
control laws. In addition, the level of mortgage interest rates may encourage
tenants to purchase single-family housing. Further, the cost of operating a
multifamily property may increase, including the costs of utilities and the
costs of required capital expenditures. All of these conditions and events may
increase the possibility that a borrower may be unable to meet its obligation
under its Mortgage Loan.
Risks Relating to Lack of Certificateholder Control Over Trust Fund.
Certificateholders generally do not have a right to vote, except with respect to
required consents to certain amendments to the Pooling and Servicing Agreement.
Furthermore, Certificateholders will generally not have the right to make
decisions with respect to the administration of the Trust Fund. Such decisions
are generally made, subject to the express terms of the Pooling and Servicing
Agreement, by the Master Servicer, the Trustee, the Special Servicer or the
REMIC Administrator, as applicable. Any decision made by one of those parties in
respect of the Trust Fund, even if made in the best interests of the
Certificateholders (as determined by such party in its good faith and reasonable
judgment), may be contrary to the decision that would have been made by the
holders of any particular Class of Offered Certificates and may negatively
affect the interests of such holders.
Yield Risk Associated With Changes in Concentrations. If and as payments in
respect of principal (including any principal prepayments, liquidations and the
principal portion of the repurchase prices of any Mortgage Loans repurchased due
to breaches of representations) are received with respect to the Mortgage Loans,
the remaining Mortgage Loans as a group may exhibit increased concentration with
respect to the type of properties, property characteristics, number of
Mortgagors and affiliated Mortgagors and geographic location. Because
unscheduled collections of principal on the Mortgage Loans is payable on the
Class A, Class B and Class C Certificates in sequential order, such Classes that
have a lower sequential priority are relatively more likely to be exposed to any
risks associated with changes in concentrations of loan or property
characteristics.
<PAGE>
S-14
Subordination of Class B and Class C Certificates. As and to the extent
described herein, the rights of the holders of the Class B and Class C
Certificates to receive distributions of amounts collected or advanced on or in
respect of the Mortgage Loans will be subordinated to those of the holders of
the Senior Certificates and also, in the case of the holders of the Class C
Certificates, also to those of the holders of the Class B Certificates. See
"Description of the Certificates-Distributions-Priority" and "-Subordination;
Allocation of Collateral Support Deficit" herein.
Book-Entry Registration. The Class A Certificates will be initially
represented by one or more certificates registered in the name of Cede & Co., as
the nominee for DTC, and will not be registered in the names of the related
holders of Certificates or their nominees. As a result, holders of Class A
Certificates will not be recognized as "Certificateholders." Hence, those
beneficial owners will be able to exercise the rights of holders of Certificates
only indirectly through DTC and DTC Participants. See "Description of the
Certificates-General" and "-Book-Entry Registration" herein and "Description of
the Certificates-Book-Entry Registration and Definitive Certificates" in the
Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
General
The Trust Fund will consist primarily of ___ conventional, balloon Mortgage
Loans with an Initial Pool Balance of $_______________. Each Mortgage Loan is
evidenced by a promissory note (a "Mortgage Note") and secured by a mortgage,
deed of trust or other similar security instrument (a "Mortgage") that creates a
first mortgage lien on a fee simple estate in real property (a "Mortgaged
Property") operated as a restaurant, a retail property, an office building or a
multifamily rental property. All percentages of the Mortgage Loans, or of any
specified group of Mortgage Loans, referred to herein without further
description are approximate percentages by aggregate Cut-off Date Balance. The
"Cut-off Date Balance" of any Mortgage Loan is the unpaid principal balance
thereof as of the Cut-off Date, after application of all payments due on or
before such date, whether or not received.
The Mortgage Loans are not insured or guaranteed by any governmental entity
or private mortgage insurer. The Depositor has not undertaken any evaluation of
the significance of the recourse provisions of any of a number of the Mortgage
Loans that provide for recourse against the related borrower or another person
in the event of a default. Accordingly, investors should consider all of the
Mortgage Loans to be nonrecourse loans as to which recourse in the case of
default will be limited to the specific property and such other assets, if any,
as were pledged to secure a Mortgage Loan.
On or prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to the Purchase Agreement and will
thereupon assign its interests in the Mortgage Loans, without recourse, to the
Trustee for the benefit of the Certificateholders. See "-The Mortgage Loan
Seller" herein and "Description of the Pooling Agreements-Assignment of Mortgage
Loans; Repurchases" in the Prospectus. For purposes of the Prospectus, the
Mortgage Loan Seller constitutes a "Mortgage Asset Seller".
The Mortgage Loans were originated between 19__ and 19__. The Mortgage Loan
Seller originated ____ of the Mortgage Loans, which represent ___% of the
Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof, generally in accordance with the underwriting
criteria described below under "-Underwriting Standards".
Certain Payment Characteristics
___ of the Mortgage Loans, which represent ___% of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The remaining
Mortgage Loans have Due Dates that occur on the ______ (____% of the Mortgage
Loans), _____ (____% of the Mortgage Loans), _____ (____% of the Mortgage
Loans), and _______ (____% of the Mortgage Loans) day of each month.
<PAGE>
S-15
____________ of the Mortgage Loans, which represent ____% of the Initial
Pool Balance, are ARM Loans. The ARM Loans bear interest at Mortgage Rates that
are subject to adjustment on periodically occurring Interest Rate Adjustment
Dates by adding the related Gross Margin to the applicable value of the related
Index, subject in ______ cases to rounding conventions and lifetime minimum
and/or maximum Mortgage Rates and, in the case of ________ Mortgage Loans, which
represent ____% of the Initial Pool Balance, to periodic minimum and/or maximum
Mortgage Rates. The remaining Mortgage Loans are Fixed Rate Loans. None of the
ARM Loans is convertible into a Fixed Rate Loan.
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates on the
ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment Date,
or may be based on the value of the related Index as most recently published as
of an Interest Rate Adjustment Date or as of a designated date preceding an
Interest Rate Adjustment Date. ____ of the ARM Loans, which represent ___% of
the Initial Pool Balance, provide for Interest Rate Adjustment Dates that occur
monthly; ____ of the ARM Loans, which represent ___% of the Initial Pool
Balance, provide for Interest Rate Adjustment Dates that occur semi-annually;
and the remaining ARM Loans provide for Interest Rate Adjustment Dates that
occur annually.
The Monthly Payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule and
pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date following each related Interest Rate
Adjustment Date. None of the ARM Loans provide for negative amortization.
All of the Mortgage Loans provide for monthly payments of principal based
on amortization schedules significantly longer than the remaining terms of such
Mortgage Loans. Thus, each Mortgage Loan will have a Balloon Payment due at its
stated maturity date, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Prepayment Premiums are payable
to the Master Servicer as additional servicing compensation, to the extent not
otherwise applied to offset Prepayment Interest Shortfalls, and may be waived by
the Master Servicer in accordance with the servicing standard described under
"Servicing of the Mortgage Loans-General" herein.
[The Index]
Describe Index and include 5 year history.
[Delinquent and Nonperforming Mortgage Loans]
[Describe those delinquent and nonperforming Mortgage Loans, if any,
included in the Trust Fund.]
Additional Mortgage Loan Information
The following tables set forth the specified characteristics of, in each
case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to rounding.
<PAGE>
S-16
Mortgage Rates as of the Cut-off Date
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Range of Mortgage Rates(%) Loans Date Balance Date Balance
-------------------------- ----- ------------ ------------
<S> <C> <C> <C>
Total............................ -------------- ------------------- --------------------
============== =================== ====================
</TABLE>
Weighted Average
Mortgage Rate (All Mortgage Loans):
______% per annum
Weighted Average
Mortgage Rate (ARM Loans): ____% per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): _____% per annum
Gross Margins for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Number of Aggregate Cut-off Aggregate Cut-off
Range of Gross Margins(%) ARM Loans Date Balance Date Balance
------------------------- --------- ------------ ------------
<S> <C> <C> <C>
Total............................ -------------- ------------------ -------------------
============== ================== ===================
</TABLE>
Weighted Average
Gross Margin: ____%
<PAGE>
S-17
Frequency of Adjustments to Mortgage Rates and Monthly Payments for the ARM
Loans
<TABLE>
<CAPTION>
Monthly
Mortgage Rate Payment Number of Percent by
Adjustment Adjustment Mortgage Aggregate Cut-off Aggregate Cut-off
Frequency Frequency Loans Date Balance Date Balance
--------- --------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total.............. -------------- ------------------ -------------------
============== ================== ===================
</TABLE>
Maximum Lifetime Mortgage Rates for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Date Balance
-------------------------- --------- ------------ ------------
<S> <C> <C> <C>
Total............................ ============== ================== ===================
</TABLE>
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
- -----------------
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
Minimum Lifetime Mortgage Rates for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Date Balance
-------------------------- --------- ------------ ------------
<S> <C> <C> <C>
Total............................
============== ================== ===================
Weighted Average Minimum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- -----------------
(A) This calculation does not include the __________ ARM Loans without minimum
lifetime Mortgage Rates.
<PAGE>
S-18
Maximum Annual Mortgage Rates for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Annual Mortgage Rates(%) ARM Loans Date Balance Date Balance
------------------------ --------- ------------ ------------
<S> <C> <C> <C>
Total............................
============== ================== ===================
</TABLE>
Weighted Average Maximum Annual
Mortgage Rate (ARM Loans): _____% per annum (A)
- -----------------
(A) This calculation does not include the __________ ARM Loans without maximum
annual Mortgage Rates.
Minimum Annual Mortgage Rates for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Annual Mortgage Rates(%) ARM Loans Date Balance Date Balance
------------------------ --------- ------------ ------------
<S> <C> <C> <C>
Total............................
============== ================== ===================
</TABLE>
Weighted Average Minimum Annual
Mortgage Rate (ARM Loans): _____% per annum (A)
- -----------------
(A) This calculation does not include the __________ ARM Loans without minimum
annual Mortgage Rates.
<PAGE>
S-19
Cut-off Date Balances
<TABLE>
<CAPTION>
Number of Percent by
Cut-off Date Mortgage Aggregate Cut-off Aggregate Cut-off
Balance Range ($) Loans Date Balance Date Balance
----------------- ----- ------------ ------------
<S> <C> <C> <C>
-------------- ------------------ -------------------
Total...............................
============== ================== ===================
</TABLE>
Average Cut-off Date
Balance (All Mortgage
Loans): $____________
Average Cut-off Date
Balance (ARM Loans): $____________
Average Cut-off Date
Balance (Fixed Rate Loans): $____________
Types of Mortgaged Properties
<TABLE>
<CAPTION>
Percent by
Number of Aggregate Cut-off Date Aggregate Cut-off
Property Type Mortgage Loans Balance Date Balance
------------- -------------- ------- -------------
<S> <C> <C> <C>
Multifamily.........................
Retail..............................
Office..............................
Restaurant..........................
[other property types]..............
Total.........................
</TABLE>
<PAGE>
S-20
Geographic Distribution of the Mortgaged Properties
<TABLE>
<CAPTION>
Number of Aggregate Cut-off Percent by Aggregate Weighted Average
State Mortgage Loans Date Balance Cut-off Date Balance DSC Ratio
----- -------------- -------------- -------------------- ---------
<S> <C> <C> <C> <C>
Total..................
</TABLE>
Original Term to Stated Maturity (in Months)
<TABLE>
<CAPTION>
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
----------------- ----- ------------ ------------
<S> <C> <C> <C>
Total...............................
-------------- ------------------------- ---------------------
============== ========================= =====================
</TABLE>
Weighted Average Original
Term to Stated Maturity
(All Mortgage Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): ____ months
<PAGE>
S-21
Remaining Term to Stated Maturity (in Months)
as of the Cut-off Date
<TABLE>
<CAPTION>
Number of Percent by
Range of Remaining Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
------------------ --------- ----------------- ------------------
<S> <C> <C> <C>
Total...............................
-------------- ------------------------- -------------------
============== ========================= ===================
</TABLE>
Weighted Average Remaining
Term to Stated Maturity
(All Mortgage Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): ___ months
<PAGE>
S-22
Year of Origination
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
---- ----- ------------ ------------
<S> <C> <C> <C>
Total...............................
-------------- ------------------------- -------------------
============== ========================= ===================
</TABLE>
Year of Scheduled Maturity
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
---- ----- ------------ ------------
<S> <C> <C> <C>
Total.....................
--------------------- ------------------ -------------------
===================== ================== ===================
</TABLE>
<PAGE>
S-23
The following table sets forth a range of Debt Service Coverage Ratios for
the Mortgage Loans. The "Debt Service Coverage Ratio" set forth in the following
table for any Mortgage Loan is the ratio of (i) Net Operating Income produced by
the related Mortgaged Property for the period (annualized if the period was less
than one year) covered by the most recent operating statement available to the
Depositor to (ii) the amount of the Monthly Payment in effect as of the Cut-off
Date multiplied by 12. "Net Operating Income" is the revenue derived from the
use and operation of a Mortgaged Property (consisting primarily of rental income
and deposit forfeitures), less operating expenses (such as utilities, general
administrative expenses, management fees, advertising, repairs and maintenance),
and further less fixed expenses (such as insurance and real estate taxes). Net
Operating Income generally does not reflect capital expenditures. The following
table was prepared using operating statements obtained from the respective
mortgagors or the related property managers. In each case, the information
contained in such operating statements was unaudited, and the Depositor has made
no attempt to verify its accuracy. In the case of _____ Mortgage Loans (____ ARM
Loans and ____ Fixed Rate Loans), representing __% of the Initial Pool Balance,
operating statements could not be obtained, and accordingly, Debt Service
Coverage Ratios for those Mortgage Loans were not calculated. The last day of
the period (which may not correspond to the end of the calendar year most recent
to the Cut-off Date) covered by each operating statement from which a Debt
Service Coverage Ratio was calculated is set forth in Annex A with respect to
the related Mortgage Loan.
Debt Service Coverage Ratios(A)
<TABLE>
<CAPTION>
Range of Number of Percent by
Debt Service Mortgage Aggregate Cut-off Aggregate Cut-off
Coverage Ratios Loans Date Balance Date Balance
--------------- ----- ------------ ------------
<S> <C> <C> <C>
Not Calculated(B)..............
-------------- --------------------------- -------------------
Total..........................
============== =========================== ===================
</TABLE>
Weighted Average
Debt Service Coverage
Ratio (All Mortgage
Loans): _____x(C)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans): _____x(D)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): _____x(E)
- -------------------
(A) The Debt Service Coverage Ratios are based on the most recently available
operating statements obtained from the respective mortgagors or the related
property managers.
(B) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(C) This calculation does not include the ________ Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ________ ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(E) This calculation does not include the ________ Fixed Rate Loans as to which
Debt Service Coverage Ratios were not calculated.
<PAGE>
S-24
The following tables set forth the range of LTV Ratios of the Mortgage
Loans at origination and the Cut-off Date. An "LTV Ratio" for any Mortgage Loan,
as of any date of determination, is a fraction, expressed as a percentage, the
numerator of which is the original principal balance of such Mortgage Loan or
the Cut-off Date Balance of such Mortgage Loan, as applicable, and the
denominator of which is the appraised value of the related Mortgaged Property as
determined by an appraisal thereof obtained in connection with the origination
of such Mortgage Loan. Because it is based on the value of a Mortgaged Property
determined as of loan origination, the information set forth in the table below
is not necessarily a reliable measure of the related borrower's current equity
in each Mortgaged Property. In a declining real estate market, the fair market
value of a Mortgaged Property could have decreased from the value determined at
origination, and the current actual loan-to-value ratio of a Mortgage Loan may
be higher than even its LTV Ratio at origination, notwithstanding taking into
account amortization since origination.
LTV Ratios at Origination
<TABLE>
<CAPTION>
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Aggregate Cut-off
LTV Ratios(%) Loans Date Balance Date Balance
------------- ----- ------------ ------------
<S> <C> <C> <C>
Total..............
--------------------- ------------------ ------------------
===================== ================== ==================
</TABLE>
Weighted Average Original
LTV Ratio (All Mortgage
Loans): _____%
Weighted Average Original
LTV Ratio (ARM Loans):
-----%
Weighted Average Original
LTV Ratio (Fixed Rate
Loans): _____%
<PAGE>
S-25
LTV Ratios at Cut-off Date
<TABLE>
<CAPTION>
Number of Percent by
Range of LTV Ratios(%) Mortgage Aggregate Cut-off Aggregate Cut-off
as of Cut-off Date Loans Date Balance Date Balance
------------------ ----- ------------ ------------
<S> <C> <C> <C>
Total...............
--------------------- ------------------ ------------------
===================== ================== ==================
</TABLE>
Weighted Average LTV
Ratio as of Cut-off Date
(All Mortgage Loans):
-----%
Weighted Average LTV
Ratio as of Cut-off Date
(ARM Loans): _____%
Weighted Average LTV
Ratio as of Cut-off Date
(Fixed Rate Loans):
-----%
<PAGE>
S-26
Occupancy Rates
<TABLE>
<CAPTION>
Number of Percent by
Range of Mortgage Aggregate Cut-off Aggregate Cut-off
Occupancy Rates(A) Loans Date Balance Date Balance
------------------ ----- ------------ ------------
--------------------- ------------------ -------------------
<S> <C> <C> <C>
Total.............................
===================== ================== ===================
</TABLE>
Weighted Average Occupancy Rate (All
Mortgage Loans)(A): _____%
Weighted Average Occupancy Rate
(ARM Loans)(A): _____%
Weighted Average Occupancy Rate
(Fixed Rate Loans)(A): _____%
- ----------
(A) Physical occupancy rates calculated based on rent rolls provided by the
respective Mortgagors or related property managers as of a date no more
than ___ months prior to the Cut-off Date.
Prepayment Restrictions in Effect as of the Cut-off Date
<TABLE>
<CAPTION>
% by Cum.
Aggregate Aggregate % of
Cut-off Cut-off Initial
Prepayment Number Date Date Pool
Restrictions of Loans Balance Balance Balance
------------ -------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Locked Out (A)
Yield Maintenance (B)
Declining Percentage Premium
____% Premium
____% Premium
No Prepayment Restrictions
TOTALS
</TABLE>
<TABLE>
<CAPTION>
Weighted Averages
----------------------------------------------------------------------------
Indicative
Stated Remaining Cut-off
Prepayment Mortgage Remaining Amort. Implied Date
Restrictions Rate Term (Mo.) Term (Mo.) DSCR DSCR LTV
------------ -------- ----------- ----------- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Locked Out (A)
Yield Maintenance (B)
Declining Percentage Premium
____% Premium
____% Premium
No Prepayment Restrictions
TOTALS
</TABLE>
- ----------
(A) The weighted average term to the expiration of the lock-out periods is ___
years. _____ of the Mortgage Loans within their lock-out periods are
subject to declining percentage Prepayment Premiums after the expiration of
their lock-out periods; the remaining Mortgage Loans are subject to a yield
maintenance-type Prepayment Premium following such expiration.
(B) All Mortgage Loans subject to yield maintenance-type Prepayment Premiums
remain subject to payment of the Prepayment Premium until at least ___
months prior to maturity.
<PAGE>
S-27
Specified in Annex A to this Prospectus Supplement are the foregoing and
certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage Loans
is contained herein under "-Underwriting Standards" and "-Representations and
Warranties; Repurchases" and in the Prospectus under "Description of the Trust
Funds-Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans".
[Delinquencies. As of the Cut-off Date, [no] Mortgage Loan was more than 30
days delinquent in respect of any Monthly Payment.]
The Mortgage Loan Seller
General. [The Mortgage Loans Seller [, a wholly-owned subsidiary of
__________,] is a _________________ organized in 19___ under the laws of
__________________. As of December 31, 199_, the Mortgage Loan Seller had a net
worth of approximately $_________________, and currently holds and services for
its own account a total residential and commercial mortgage loan portfolio of
approximately $__________________, of which approximately $__________________
constitutes multifamily mortgage loans.]
The information set forth herein concerning the Mortgage Loan Seller and
its underwriting standards has been provided by the Mortgage Loan Seller, and
neither the Depositor nor the Underwriter makes any representation or warranty
as to the accuracy or completeness of such information.
Underwriting Standards
[All of the Mortgage Loans were originated or acquired by the Mortgage Loan
Seller, generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
The Depositor believes that the Mortgage Loans selected for inclusion in
the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so selected
on any basis which would have a material adverse effect on the
Certificateholders.]
Representations and Warranties; Repurchases
In the Purchase Agreement, the Mortgage Loan Seller has represented and
warranted with respect to each Mortgage Loan, as of [the Delivery Date], or as
of such other date specifically provided in the representation and warranty,
among other things, that:
[Specify significant representations and warranties.]
If the Mortgage Loan Seller has been notified of a material breach of any
of the foregoing representations and warranties as described in the Prospectus
and if the Mortgage Loan Seller cannot cure such breach within a period of 90
days following its receipt of such notice, then the Mortgage Loan Seller will be
obligated pursuant to the Purchase Agreement (the relevant rights under which
will be assigned, together with its interests in the Mortgage Loans, by the
Depositor to the Trustee) to repurchase the affected Mortgage Loan within such
90-day period at a price (the "Purchase Price") equal to the sum of (i) the
unpaid principal balance of such Mortgage Loan, (ii) unpaid accrued interest on
such Mortgage Loan at the Mortgage Rate from the date to which interest was last
paid to the Due Date in the Due Period in which the purchase is to occur, and
(iii) certain servicing expenses that are reimbursable to the Master Servicer
and the Special Servicer.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. The Mortgage Loan Seller will be the sole Warranting Party in respect of
the Mortgage Loans, and none of the Depositor,
<PAGE>
S-28
the Master Servicer or any of their affiliates [(other than the Mortgage Loan
Seller)] will be obligated to repurchase any affected Mortgage Loan in
connection with a breach of the Mortgage Loan Seller's representations and
warranties if the Mortgage Loan Seller defaults on its obligation to do so.
However, the Depositor will not include any Mortgage Loan in the Mortgage Pool
if anything has come to the Depositor's attention prior to the Closing Date that
would cause it to believe that the representations and warranties made by the
Mortgage Loan Seller regarding such Mortgage Loan will not be correct in all
material respects. See "Description of the Pooling Agreements-Representations
and Warranties; Repurchases" in the Prospectus.
Changes in Mortgage Pool Characteristics
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for the
scheduled principal payments due on or before the Cut-off Date. Prior to the
issuance of the Offered Certificates, a Mortgage Loan may be removed from the
Mortgage Pool if the Depositor deems such removal necessary or appropriate or if
it is prepaid. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Offered Certificates, unless
including such Mortgage Loans would materially alter the characteristics of the
Mortgage Pool as described herein. The Depositor believes that the information
set forth herein will be representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Offered Certificates are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date and
will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph, such
removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
General
Each of the Master Servicer and the Special Servicer will be required to
service and administer the Mortgage Loans for which it is responsible, either
directly or through sub-servicers, on behalf of the Trustee and in the best
interests of and for the benefit of the Certificateholders (as determined by the
Master Servicer or the Special Servicer, as the case may be, in its good faith
and reasonable judgment), in accordance with applicable law, the terms of the
Pooling and Servicing Agreement, the terms of the respective Mortgage Loans and,
to the extent consistent with the foregoing, in the same manner as would prudent
institutional mortgage lenders and loan servicers servicing mortgage loans
comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are located, and with a view to the maximization of timely and
complete recovery of principal and interest, but without regard to: (i) any
relationship that the Master Servicer or the Special Servicer, as the case may
be, or any affiliate thereof, may have with the related mortgagor; (ii) the
ownership of any Certificate by the Master Servicer or the Special Servicer, as
the case may be, or any affiliate thereof; (iii) the Master Servicer's or the
Special Servicer's, as the case may be, obligation to make advances, whether in
respect of delinquent payments of principal and/or interest or to cover certain
servicing expenses; and (iv) the Master Servicer's or the Special Servicer's, as
the case may be, right to receive compensation for its services under the
Pooling and Servicing Agreement or with respect to any particular transaction.
Except as otherwise described under "-Inspections; Collection of Operating
Information" below, the Master Servicer initially will be responsible for the
servicing and administration of the entire Mortgage Pool. With respect to any
Mortgage Loan (i) which has a Balloon Payment which is past due or any other
payment which is more than [60] days past due, (ii) as to which the borrower has
entered into or consented to bankruptcy, appointment of a receiver or
conservator or a similar insolvency proceeding, or the borrower has become the
subject of a decree or order for such a
<PAGE>
S-29
proceeding which shall have remained in force undischarged or unstayed for a
period of [60] days, (iii) as to which the Master Servicer shall have received
notice of the foreclosure or proposed foreclosure of any other lien on the
Mortgaged Property, or (iv) as to which, in the judgment of the Master Servicer,
a payment default has occurred or is imminent and is not likely to be cured by
the borrower within [60] days, and prior to acceleration of amounts due under
the related Mortgage Note or commencement of any foreclosure or similar
proceedings, the Master Servicer will transfer its servicing responsibilities to
the Special Servicer, but will continue to receive payments on such Mortgage
Loan (including amounts collected by the Special Servicer), to make certain
calculations with respect to such Mortgage Loan and to make remittances and
prepare certain reports to the Certificateholders with respect to such Mortgage
Loan. If the related Mortgaged Property is acquired in respect of any such
Mortgage Loan (upon acquisition, an "REO Property"), whether through
foreclosure, deed-in-lieu of foreclosure or otherwise, the Special Servicer will
continue to be responsible for the operation and management thereof. The
Mortgage Loans serviced by the Special Servicer are referred to herein as the
"Specially Serviced Mortgage Loans" and, together with any REO Properties,
constitute the "Specially Serviced Mortgage Assets". The Master Servicer shall
have no responsibility for the performance by the Special Servicer of its duties
under the Pooling and Servicing Agreement.
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing Mortgage Loan for at least [90] days, the Special Servicer
will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below, following the subsection captioned "-The Master Servicer",
is a description of certain pertinent provisions of the Pooling and Servicing
Agreement relating to the servicing of the Mortgage Loans. Reference is also
made to the Prospectus, in particular to the section captioned "Pooling and
Servicing Agreements", for important information in addition to that set forth
herein regarding the terms and conditions of the Pooling and Servicing Agreement
as they relate to the rights and obligations of the Master Servicer thereunder.
The Master Servicer
[__________________________________, a ___________________, will act as
Master Servicer with respect to the Mortgage Pool. Founded in ____ as a
____________, the Master Servicer today furnishes a variety of wholesale banking
services. As of December 31, 19__, the Master Servicer had a net worth of
approximately $__________, and a total mortgage loan servicing portfolio of
approximately $___________, of which approximately $_____________ represented
multifamily mortgage loans.
The offices of the Master Servicer that will be primarily responsible for
servicing and administering the Mortgage Pool are located at
- ---------------------------.
[If and to the extent available and relevant to an investment decision: The
following table sets forth the historical prepayment information with respect to
the Master Servicer's multifamily and commercial mortgage loan servicing
portfolio:
Prepayment Experience of Master Servicer's Multifamily and Commercial Mortgage
Loan Servicing Portfolio
[Table to include relevant information regarding the size of the Master
Servicer's multifamily and commercial mortgage loan servicing portfolio (by
number and/or balance) and the portion of such loans that was subject to
prepayment.]]
The information set forth herein concerning the Master Servicer has been
provided by the Master Servicer, and neither the Depositor nor the Underwriter
makes any representation or warranty as to the accuracy or completeness of such
information.
<PAGE>
S-30
The Special Servicer
[_______________________________, a ____________________, will be
responsible for the servicing and administration of the Specially Serviced
Mortgage Assets. As of December 31, 19___, the Special Servicer had a total
mortgage loan servicing portfolio of approximately $____________, of which
approximately $_____________ represented multifamily mortgage loans.
The Special Servicer has ___ offices in ___ states with a total staff of
____ employees. Its principal executive offices are located at
_________________________.]
The information set forth herein concerning the Special Servicer has been
provided by the Special Servicer, and neither the Depositor nor the Underwriter
makes any representation or warranty as to the accuracy or completeness of such
information.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities will be the Master Servicing Fee. The "Master
Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each Mortgage Loan, will accrue in accordance
with the terms of the related Mortgage Note at a rate equal to ________% per
annum, in the case of Mortgage Loans other than Specially Serviced Mortgage
Loans, and ____% per annum, in the case of Specially Serviced Mortgage Loans,
and will be computed on the basis of the same principal amount and for the same
period respecting which any related interest payment on the related Mortgage
Loan is computed. [As additional servicing compensation, the Master Servicer
will be entitled to retain all Prepayment Premiums, assumption and modification
fees, late charges and penalty interest and, as and to the extent described
below, Prepayment Interest Excesses collected from mortgagors. In addition, the
Master Servicer is authorized but not required to invest or direct the
investment of funds held in the Certificate Account in Permitted Investments,
and the Master Servicer will be entitled to retain any interest or other income
earned on such funds.]
The principal compensation to be paid to the Special Servicer in respect of
its special servicing activities will consist of the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and the Workout
Fee. Like the Master Servicing Fee, the "Special Servicing Fee" will be payable
monthly on a loan-by-loan basis from amounts received in respect of interest on
each Mortgage Loan, will accrue in accordance with the terms of the related
Mortgage Note at a rate equal to _____% per annum, in the case of Mortgage Loans
other than Specially Serviced Mortgage Loans, and ___% per annum, in the case of
Specially Serviced Mortgage Loans, and will be computed on the basis of the same
principal amount and for the same period respecting which any related interest
payment on the related Mortgage Loan is computed. The "Workout Fee" will equal a
specified percentage (varying from ____% to ____% (the "Workout Fee Rate")
depending on the related unpaid principal balance) of, and will be payable from,
all collections and proceeds received in respect of principal of each Mortgage
Loan which is or has been a Specially Serviced Mortgage Loan (including those
for which servicing has been returned to the Master Servicer); provided that, in
the case of Liquidation Proceeds, the otherwise fixed Workout Fee Rate will be
proportionately reduced to reflect the extent to which, if at all, the principal
portion of such Liquidation Proceeds is less than the unpaid principal balance
of the related Mortgage Loan immediately prior to the receipt thereof. As
additional servicing compensation, the Special Servicer will be entitled to
retain all assumption and modification fees received on Mortgage Loans serviced
thereby.
Although the Master Servicer and Special Servicer are each required to
service and administer the Mortgage Pool in accordance with the general
servicing standard described under "-General" above and, accordingly, without
regard to its right to receive compensation under the Pooling and Servicing
Agreement, additional servicing compensation in the nature of assumption and
modification fees, Prepayment Premiums and Prepayment Interest Excesses may
under certain circumstances provide the Master Servicer or the Special Servicer,
as the case may be, with an economic disincentive to comply with such standard.
<PAGE>
S-31
[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period (as defined herein) on a date that is prior to its Due
Date in such Due Period, a Prepayment Interest Shortfall may result. If such a
principal prepayment occurs during any Due Period after the Due Date for such
Mortgage Loan in such Due Period, the amount of interest (net of related
Servicing Fees) that accrues on the amount of such principal prepayment may
exceed (such excess, a "Prepayment Interest Excess") the corresponding amount of
interest accruing on the Certificates. As to any Due Period, to the extent
Prepayment Interest Excesses collected for all Mortgage Loans are greater than
Prepayment Interest Shortfalls incurred, such excess will be paid to the Master
Servicer as additional servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates-Advances", the Master Servicer will be entitled to receive interest
on Advances, and the Master Servicer and the Special Servicer will be entitled
to receive interest on reimbursable servicing expenses, such interest to be
paid, contemporaneously with the reimbursement of the related Advance or
servicing expense, out of any other collections on the Mortgage Loans.]
The Master Servicer generally will be required to pay all expenses incurred
by it in connection with its servicing activities under the Pooling and
Servicing Agreement, and will not be entitled to reimbursement therefor except
as expressly provided in the Pooling and Servicing Agreement. However, the
Master Servicer will be permitted to pay certain of such expenses directly out
of the Certificate Account and at times without regard to the relationship
between the expense and the funds from which it is being paid. In connection
therewith, the Master Servicer will be responsible for all fees of any
sub-servicers, other than management fees earned in connection with the
operation of an REO Property, which management fees the Master Servicer will be
authorized to pay out of revenues received from such property (thereby reducing
the portion of such revenues that would otherwise be available for distribution
to Certificateholders).See "Description of the
Certificates-Distributions-Method, Timing and Amount" herein and "Description of
the Pooling Agreements-Certificate Account" and "-Servicing Compensation and
Payment of Expenses" in the Prospectus.
Modifications, Waivers and Amendments
The Master Servicer or the Special Servicer may, consistent with its normal
servicing practices, agree to modify, waive or amend any term of any Mortgage
Loan, without the consent of the Trustee or any Certificateholder, subject,
however, to each of the following limitations, conditions and restrictions:
(a) with limited exception, the Master Servicer and the Special
Servicer may not agree to any modification, waiver or amendment that will
(i) affect the amount or timing of any scheduled payments of principal or
interest on the Mortgage Loan or (ii) in its judgment, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely
payment of amounts due thereon; unless, in any such case, in the Master
Servicer's or the Special Servicer's judgment, as the case may be, a
material default on the Mortgage Loan has occurred or a payment default is
reasonably foreseeable, and such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation.
(b) [describe additional limitations to permitted modification
standards]
The Master Servicer and the Special Servicer will notify the Trustee of any
modification, waiver or amendment of any term of any Mortgage Loan, and must
deliver to the Trustee or the related Custodian, for deposit in the related
Mortgage File, an original counterpart of the agreement related to such
modification, waiver or amendment, promptly (and in any event within [10]
business days) following the execution thereof. Copies of each agreement whereby
any such modification, waiver or amendment of any term of any Mortgage Loan is
effected are to be available for review during normal business hours at the
offices of the [Trustee]. See "Description of the Certificates-Reports to
Certificateholders; Certain Available Information" herein.
<PAGE>
S-32
Inspections; Collection of Operating Information
The Special Servicer will perform physical inspections of each Mortgaged
Property at such times and in such manner as are consistent with the Special
Servicer's normal servicing procedures, but in any event (i) at least once per
calendar year, commencing in the calendar year _______, and (ii), if any
scheduled payment becomes more than 60 days delinquent on the related Mortgage
Loan, as soon as practicable thereafter. The Special Servicer will prepare a
written report of each such inspection describing the condition of the Mortgaged
Property and specifying the existence of any material vacancies in the Mortgaged
Property, of any sale, transfer or abandonment of the Mortgaged Property, of any
material change in the condition or value of the Mortgaged Property, or of any
waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to deliver
such statements, the Special Servicer is also required to collect and review the
annual operating statements of the related Mortgaged Property. [Most] of the
Mortgages obligate the related borrower to deliver annual property operating
statements. However, there can be no assurance that any operating statements
required to be delivered will in fact be delivered, nor is the Special Servicer
likely to have any practical means of compelling such delivery in the case of an
otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to above
are to be available for review by Certificateholders during normal business
hours at the offices of the [Trustee]. See "Description of the
Certificates-Reports to Certificateholders; Certain Available Information"
herein.
Additional Obligations of the Master Servicer with Respect to ARM Loans
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is not
published or is otherwise unavailable, then the Master Servicer is required to
select a comparable alternative index over which it has no direct control, that
is readily verifiable and that is acceptable under the terms of the related
Mortgage Note. If the Mortgage Rate or the Monthly Payment with respect to any
ARM Loan is not properly adjusted by the Master Servicer pursuant to the terms
of such Mortgage Loan and applicable law, the Master Servicer is required to
deposit in the Certificate Account on or prior to the Due Date of the affected
Monthly Payment, an amount equal to the excess, if any, of (i) the amount that
would have been received from the borrower if the Mortgage Rate or Monthly
Payment had been properly adjusted, over (ii) the amount of such improperly
adjusted Monthly Payment, subject to reimbursement only out of such amounts as
are recovered from the borrower in respect of such excess.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all payments
under and proceeds of the Mortgage Loans received after the Cut-off Date
(exclusive of payments of principal and interest due on or before the Cut-off
Date); (ii) any REO Property; (iii) such funds or assets as from time to time
are deposited in the Certificate Account; (iv) the rights of the mortgagee under
all insurance policies with respect to the Mortgage Loans; and (v) certain
rights of the Depositor under the Purchase Agreement relating to Mortgage Loan
document delivery requirements and the representations and warranties of the
Mortgage Loan Seller regarding the Mortgage Loans.
The Certificates will consist of the following four Classes: (i) the Class
A Certificates and the Class R Certificates (collectively, the "Senior
Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. The Class A Certificates will have an initial Certificate Balance
of $____________, which represents ____% of the Initial Pool Balance; the Class
B Certificates will have an initial Certificate Balance of $____________, which
represents ____% of the Initial Pool Balance; the Class C Certificates will have
an initial Certificate Balance of $____________, which represents ___% of the
Initial Pool Balance; and the Class R Certificates will have an initial
Certificate Balance of $100.
<PAGE>
S-33
The Certificate Balance of any Class of Certificates outstanding at any time
represents the maximum amount which the holders thereof are entitled to receive
as distributions allocable to principal from the cash flow on the Mortgage Loans
and the other assets in the Trust Fund. On each Distribution Date, the
Certificate Balance of each Class of Certificates will be reduced by any
distributions of principal actually made on, and any Collateral Support Deficit
actually allocated to, such Class of Certificates on such Distribution Date.
Only the Senior Certificates and the Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C Certificates have
not been registered under the Securities Act of 1933 and are not offered hereby.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its DTC Participants in denominations of $25,000
and integral multiples of $1 in excess thereof. The Class B Certificates will be
issued in fully registered, certificated form in denominations of $100,000 and
integral multiples of $1,000 in excess thereof, with one Class B Certificate
evidencing an additional amount equal to the remainder of the initial
Certificate Balance of such Class. The Class R Certificates will be issued in
registered, certificated form in minimum denominations of 20% Percentage
Interest in such Class. The "Percentage Interest" evidenced by any Offered
Certificate is equal to the initial denomination thereof as of the Delivery
Date, divided by the initial Certificate Balance of the Class to which it
belongs.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The Depositor
has been informed by DTC that DTC's nominee will be Cede & Co. No Class A
Certificate Owner will be entitled to receive a Definitive Class A Certificate
representing its interest in such Class, except as set forth below under
"-Book-Entry Registration of the Class A Certificates-Definitive Class A
Certificates". Unless and until Definitive Class A Certificates are issued, all
references to actions by holders of the Class A Certificates will refer to
actions taken by DTC upon instructions received from Class A Certificate Owners
through DTC Participants, and all references herein to payments, notices,
reports and statements to holders of the Class A Certificates will refer to
payments, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Class A Certificates, for distribution to Class A
Certificate Owners through its DTC Participants in accordance with DTC
procedures. See "Description of the Certificates-Book-Entry Registration and
Definitive Certificates" in the Prospectus.
Until Definitive Class A Certificates are issued, interests in such Class
will be transferred on the book-entry records of DTC and its DTC Participants.
Subject to certain restrictions on the transfer of such Certificates to Plans
(see "ERISA Considerations" herein), the Class B and Class R Certificates may be
transferred or exchanged at the offices of ___________________________ located
at ______________________________________________, without the payment of any
service charges, other than any tax or other governmental charge payable in
connection therewith. ________________________ will initially serve as registrar
(in such capacity, the "Certificate Registrar") for purposes of recording and
otherwise providing for the registration of the Offered Certificates and of
transfers and exchanges of the Class B and, if issued, the Definitive Class A
Certificates.
Book-Entry Registration of the Class A Certificates
General. The Class A Certificates will be registered as one or more global
Certificates held by Cede & Co., as nominee of DTC. Beneficial interests in such
Certificates will be held by investors through the book-entry facilities of DTC.
Except as described below, no Class A Certificate Owner will be entitled to
receive a physical certificate representing its beneficial interest in such
Certificates (a "Definitive Class A Certificate").
Beneficial ownership of a Class A 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 related Class
A Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Class A 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 related Class A Certificate Owner's Financial Intermediary is not a DTC
Participant). Therefore, the related Class A Certificate Owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Class A
Certificate. Beneficial ownership of a Class A Certificate may only be
<PAGE>
S-34
transferred by compliance with the procedures of such Financial Intermediaries
and DTC Participants. Arrangements may be made for clearance and settlement
through the Euroclear System and CEDEL, S.A., if they are DTC Participants.
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 Class A Certificates, whether held
for its own account or as a nominee for another person. In general, beneficial
ownership of Class A Certificates will be subject to the rules, regulations and
procedures governing DTC and DTC Participants as in effect from time to time.
Distributions of principal of and interest 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 Class A
Certificate Owners 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 Class A Certificate Owners that it represents.
Under a book-entry format, Class A Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Trustee to DTC. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a Class A Certificate Owner to pledge to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such Class A Certificates, may be limited due to the lack of physical
certificates for such Class A Certificates. In addition, issuance of the Class A
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.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action permitted
to be taken by a Certificateholder under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose
depository accounts the Class A Certificates are credited. DTC may take
conflicting actions with respect to other Class A Certificates to the extent
that such actions are taken on behalf of Financial Intermediaries whose holdings
include such Class A Certificates.
Definitive Class A Certificates. Definitive Class A Certificates will be
issued to Class A Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only under the limited conditions set forth in the
Prospectus under "Description of the Certificates-Book-Entry Registration and
Definitive Certificates."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates-Book-Entry Registration and
Definitive Certificates," the Trustee is required to notify, through DTC, DTC
Participants who have ownership of Class A Certificates as indicated on the
records of DTC of the availability of Definitive Class A Certificates. Upon
surrender by DTC of the definitive certificates representing the Class A
Certificates and upon receipt of instructions from DTC for re-registration, the
Trustee will reissue the Class A Certificates as Definitive Class A Certificates
issued in the respective principal amounts owned by individual Class A
Certificate Owners, and thereafter the Trustee and the Master Servicer will
recognize the holders of such Definitive Class A Certificates as
Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and Certificates maintained on the
book-entry records thereof, see "Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in the Prospectus.
Distributions
Method, Timing and Amount. Distributions on the Certificates will be made
by the [Trustee], to the extent of available funds, on the 25th day of each
month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in _________ 199__ (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close
<PAGE>
S-35
of business on each Record Date, which will be the last business day of the
month preceding the month in which the related Distribution Date occurs. Each
such distribution will be made by wire transfer in immediately available funds
to the account specified by the Certificateholder at a bank or other entity
having appropriate facilities therefor, if such Certificateholder will have
provided the [Trustee] with wiring instructions [no less than five business days
prior to the related Record Date (which wiring instructions may be in the form
of a standing order applicable to all subsequent distributions) and is the
registered owner of Certificates with an aggregate initial principal amount of
at least $5,000,000], or otherwise by check mailed to such Certificateholder.
The final distribution on any Certificate will be made in like manner, but only
upon presentation and surrender of such Certificate at the location that will be
specified in a notice of the pendency of such final distribution. All
distributions made with respect to a Class of Certificates will be allocated pro
rata among the outstanding Certificates of such Class based on their respective
Percentage Interests.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date (the "Available Distribution Amount") will, in general,
equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans and
any REO Properties that is on deposit in the Certificate Account as of the
related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a Due Date
subsequent to the related Due Period,
(ii) all principal prepayments (together with related payments
of interest thereon and related Prepayment Premiums),
Liquidation Proceeds, Insurance Proceeds, Condemnation
Proceeds and other unscheduled recoveries received
subsequent to the related Due Period, and
(iii) all amounts in the Certificate Account that are due or
reimbursable to any person other than the
Certificateholders; and
(b) all Advances made by the Master Servicer with respect to such
Distribution Date. See "Description of the Pooling Agreements-Certificate
Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that begins
on the [second] day of the month preceding the month in which such Distribution
Date occurs and ends on the [first] day of the month in which such Distribution
Date occurs. For purposes of the discussion in the Prospectus, the Due Period is
also the Prepayment Period. The "Determination Date" for each Distribution Date
is the [15th] day of the month in which such Distribution Date occurs or, if any
such [15th] day is not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Certificate
Balances of the Offered Certificates have not been reduced to zero, the
[Trustee] will (except as otherwise described under "-Termination; Retirement of
Certificates" below) apply amounts on deposit in the Certificate Account, to the
extent of the Available Distribution Amount, in the following order of priority:
(1) to distributions of interest to the holders of the Senior
Certificates, pro rata among the respective Classes thereof, in an
amount equal to all Distributable Certificate Interest in respect of
the Senior Certificates for such Distribution Date and, to the extent
not previously paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Senior
Certificates in an amount equal to the sum of (a) the product of (i)
the Senior Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) the entire Unscheduled Principal Distribution Amount for
<PAGE>
S-36
such Distribution Date (but not more than would be necessary to reduce
the aggregate Certificate Balance of the Senior Certificates to zero);
(3) to distributions to the holders of the Class A Certificates, until all
amounts of Collateral Support Deficit previously allocated to the
Class A Certificates, but not previously reimbursed, have been
reimbursed in full;
(4) to distributions of interest to the holders of the Class
B Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class B Certificates for such Distribution
Date and, to the extent not previously paid, for all prior
Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of (i)
the Class B Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) if the Certificate Balances of the Senior Certificates have
been reduced to zero, then to the extent not distributed in reduction
of such Certificate Balances on such Distribution Date, the entire
Unscheduled Principal Distribution Amount for such Distribution Date
(but not more than would be necessary to reduce the Certificate
Balance of the Class B Certificates to zero);
(6) to distributions to the holders of the Class B Certificates , until
all amounts of Collateral Support Deficit previously allocated to the
Class B Certificates, but not previously reimbursed, have been
reimbursed in full;
(7) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class C Certificates for such Distribution
Date and, to the extent not previously distributed, for all prior
Distribution Dates;
(8) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(9) to distributions to the holders of the Class C Certificates, until all
amounts of Collateral Support Deficit previously allocated to the
Class C Certificates, but not previously reimbursed, have been
reimbursed in full; and
(10) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance, if any, of the Available
Distribution Amount.
The distributions of principal to the holders of the Senior Certificates as
described in clause (2) above will be paid first to the holders of the Class R
Certificates until the Certificate Balance of such Certificates is reduced to
zero, and then to the holders of the Class A Certificates. Accordingly, it is
expected that the Certificate Balance of the Class R Certificates would be
reduced to zero on the initial Distribution Date and that no other distributions
of interest or principal would thereafter be made on the Class R Certificates
except pursuant to subparagraph (10) immediately above.
Reimbursement of previously allocated Collateral Support Deficit will not
constitute distributions of principal for any purpose and will not result in an
additional reduction in the Certificate Balance of the Class of Certificates in
respect of which any such reimbursement is made.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Certificates for the initial Distribution Date will equal _______% per annum.
With respect to any Distribution Date subsequent to the initial Distribution
Date,
<PAGE>
S-37
the Pass-Through Rate for each Class of Certificates will equal the weighted
average of the applicable Effective Net Mortgage Rates for the Mortgage Loans,
weighted on the basis of their respective Stated Principal Balances immediately
prior to such Distribution Date. For purposes of calculating the Pass-Through
Rate for any Class of Certificates and any Distribution Date, the "applicable
Effective Net Mortgage Rate" for each Mortgage Loan is: (a) if such Mortgage
Loan accrues interest on the basis of a 360-day year consisting of twelve 30-day
months (a "30/360 basis", which is the basis of accrual for interest on the
Certificates), the Net Mortgage Rate in effect for such Mortgage Loan as of the
commencement of the related Due Period; and (b) if such Mortgage Loan does not
accrue interest on a 30/360 basis, the annualized rate at which interest would
have to accrue during the one month period preceding the Due Date for such
Mortgage Loan during the related Due Period on a 30/360 basis in order to
produce the aggregate amount of interest (adjusted to the actual Net Mortgage
Rate) accrued during such period. The "Net Mortgage Rate" for each Mortgage Loan
is equal to the related Mortgage Rate in effect from time to time less the
Servicing Fee Rate.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of Certificates for each Distribution Date
represents that portion of the Accrued Certificate Interest in respect of such
Class of Certificates for such Distribution Date that is net of such Class's
allocable share (calculated as described below) of the aggregate of any
Prepayment Interest Shortfalls resulting from voluntary principal prepayments
made on the Mortgage Loans during the related Due Period that are not offset by
Prepayment Interest Excesses collected during the related Due Period (the
aggregate of such Prepayment Interest Shortfalls that are not so offset or
covered, as to such Distribution Date, the "Net Aggregate Prepayment Interest
Shortfall").
The "Accrued Certificate Interest" in respect of each Class of Certificates
for each Distribution Date is equal to one month's interest at the Pass-Through
Rate applicable to such Class of Certificates for such Distribution Date accrued
on the related Certificate Balance outstanding immediately prior to such
Distribution Date. Accrued Certificate Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of Certificates will equal the
product of (a) such Net Aggregate Prepayment Interest Shortfall, multiplied by
(b) a fraction, the numerator of which is equal to the Accrued Certificate
Interest in respect of such Class of Certificates for such Distribution Date,
and the denominator of which is equal to the Accrued Certificate Interest in
respect of all the Classes of Certificates for such Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments [, net of any related Workout Fees
payable therefrom to the Special Servicer], due during or, if and to the extent
not previously received or advanced and distributed to Certificateholders on a
preceding Distribution Date, prior to the related Due Period, in each case to
the extent paid by the related borrower or advanced by the Master Servicer and
included in the Available Distribution Amount for such Distribution Date. The
Scheduled Principal Distribution Amount from time to time will include all late
payments of principal made by a borrower, including late payments in respect of
a delinquent Balloon Payment, regardless of the timing of such late payments,
except to the extent such late payments are otherwise reimbursable to the Master
Servicer for prior Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution Date
will equal the aggregate of: (a) all voluntary prepayments of principal received
on the Mortgage Loans during the related Due Period [, net of any related
Workout Fees payable therefrom to the Special Servicer]; and (b) any other
collections (exclusive of payments by borrowers) received on the Mortgage Loans
and any REO Properties during the related Due Period, whether in the form of
Liquidation Proceeds, Insurance Proceeds, Condemnation Proceeds, net income from
REO Property or otherwise, that were identified and applied by the Master
Servicer as recoveries of previously unadvanced principal of the related
Mortgage Loan [, net of any related Workout Fees payable therefrom to the
Special Servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as the
"Distributable Principal".
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The "Ownership Percentage" evidenced by any Class or Classes of
Certificates as of any date of determination will equal a fraction, expressed as
a percentage, the numerator of which is the then Certificate Balance(s) of such
Class(es) of Certificates, and the denominator of which is the then aggregate
Stated Principal Balance of the Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans. The "Stated
Principal Balance" of each Mortgage Loan outstanding at any time represents the
principal balance of such Mortgage Loan ultimately due and payable to the
Certificateholders subject to the Special Servicer's right to receive any
Workout Fee with respect to such Mortgage Loan. The Stated Principal Balance of
each Mortgage Loan will initially equal the Cut-off Date Balance thereof and, on
each Distribution Date, will be reduced by the portion of the Distributable
Principal for such date that is attributable to such Mortgage Loan. The Stated
Principal Balance of a Mortgage Loan may also be reduced in connection with any
forced reduction of the actual unpaid principal balance thereof imposed by a
court presiding over a bankruptcy proceeding wherein the related borrower is the
debtor. See "Certain Legal Aspects of Mortgage Loans-Foreclosure-Bankruptcy
Laws" in the Prospectus. If any Mortgage Loan is paid in full or such Mortgage
Loan (or any Mortgaged Property acquired in respect thereof) is otherwise
liquidated, then, as of the first Distribution Date that follows the end of the
Due Period in which such payment in full or liquidation occurred, and
notwithstanding that a loss may have occurred in connection with any such
liquidation, the Stated Principal Balance of such Mortgage Loan shall be zero.
For purposes of calculating distributions on, and allocations of Collateral
Support Deficit to, the Certificates, as well as for purposes of calculating the
amount of Servicing Fees payable each month, each REO Property will be treated
as if there exists with respect thereto an outstanding mortgage loan (an "REO
Loan"), and all references to "Mortgage Loan", "Mortgage Loans" and "Mortgage
Pool" herein and in the Prospectus, when used in such context, will be deemed to
also be references to or to also include, as the case may be, any "REO Loans".
Each REO Loan will generally be deemed to have the same characteristics as its
actual predecessor Mortgage Loan, including the same adjustable or fixed
Mortgage Rate (and, accordingly, the same Net Mortgage Rate and Effective Net
Mortgage Rate) and the same unpaid principal balance and Stated Principal
Balance. Amounts due on such predecessor Mortgage Loan, including any portion
thereof payable or reimbursable to the Master Servicer, will continue to be
"due" in respect of the REO Loan; and amounts received in respect of the related
REO Property, net of payments to be made, or reimbursement to the Master
Servicer or the Special Servicer for payments previously advanced, in connection
with the operation and management of such property, generally will be applied by
the Master Servicer as if received on the predecessor Mortgage Loan. However,
notwithstanding the terms of the predecessor Mortgage Loan, the Monthly Payment
"due" on an REO Loan will in all cases, for so long as the related Mortgaged
Property is part of the Trust Fund, be deemed to equal one month's interest
thereon at the applicable Mortgage Rate.
Subordination; Allocation of Collateral Support Deficit
The rights of holders of the Class B Certificates and the Class C
Certificates to receive distributions of amounts collected or advanced on the
Mortgage Loans will be subordinated, to the extent described herein, to the
rights of holders of the Senior Certificates; and the rights of holders of the
Class C Certificates to receive distributions of amounts collected or advanced
on the Mortgage Loans will be subordinated, to the extent described herein, to
the rights of holders of the Class B Certificates. This subordination is
intended to enhance the likelihood of timely receipt by the holders of the
Senior Certificates of the full amount of all Distributable Certificate Interest
payable in respect of such Certificates on each Distribution Date, and the
ultimate receipt by such holders of principal in an amount equal to the entire
aggregate Certificate Balance of the Senior Certificates. Similarly, but to a
lesser degree, this subordination is also intended to enhance the likelihood of
timely receipt by the holders of the Class B Certificates of the full amount of
all Distributable Certificate Interest payable in respect of such Certificates
on each Distribution Date, and the ultimate receipt by such holders of principal
in an amount equal to the entire Certificate Balance of the Class B
Certificates. This subordination will be accomplished by the application of the
Available Distribution Amount on each Distribution Date in accordance with the
order of priority described under "-Distributions-Priority" above. No other form
of Credit Support will be available for the benefit of the holders of the
Offered Certificates.
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Allocation to the Senior Certificates, for so long as they are outstanding,
of the entire Unscheduled Principal Distribution Amount for each Distribution
Date will generally accelerate the amortization of such Certificates relative to
the actual amortization of the Mortgage Loans. To the extent that the Senior
Certificates are amortized faster than the Mortgage Loans, the percentage
interest evidenced by the Senior Certificates in the Trust Fund will be
decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Class B and Class C Certificates), thereby increasing, relative
to their respective Certificate Balances, the subordination afforded the Senior
Certificates by the Class B and Class C Certificates. Following retirement of
the Class A Certificates, allocation to the Class B Certificates, for so long as
they are outstanding, of the entire Unscheduled Principal Distribution Amount
for each Distribution Date will provide a similar benefit to such Class of
Certificates as regards the relative amount of subordination afforded thereto by
the Class C Certificates.
On each Distribution Date, immediately following the distributions to be
made to the Certificateholders on such date, the [Trustee] is to calculate the
amount, if any, by which (i) the aggregate Stated Principal Balance of the
Mortgage Pool expected to be outstanding immediately following such Distribution
Date is less than (ii) the then aggregate Certificate Balance of the REMIC
Regular Certificates (any such deficit, "Collateral Support Deficit"). The
[Trustee] will be required to allocate any such Collateral Support Deficit among
the respective Classes of Certificates as follows: first, to the Class C
Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; second, to the Class B Certificates, until the
remaining Certificate Balance of such Class of Certificates is reduced to zero;
and last, to the Class A Certificates, until the remaining Certificate Balance
of such Class of Certificates has been reduced to zero. Any allocation of
Collateral Support Deficit to a Class of Certificates will be made by reducing
the Certificate Balance thereof by the amount so allocated. Any Collateral
Support Deficit allocated to a Class of REMIC Regular Certificates will be
allocated among the respective Certificates of such Class in proportion to the
Percentage Interests evidenced thereby. In general, Collateral Support Deficit
will result from the occurrence of: (i) losses and other shortfalls on or in
respect of the Mortgage Loans, including as a result of defaults and
delinquencies thereon, Nonrecoverable Advances made in respect thereof and the
payment to the Master Servicer of interest on Advances and certain servicing
expenses; and (ii) certain unanticipated, non-Mortgage Loan specific expenses of
the Trust Fund, including certain reimbursements to the Trustee as described
under "Description of the Pooling Agreements - Certain Matters Regarding the
Trustee" in the Prospectus, certain reimbursements to the Master Servicer and
the Depositor as described under "Description of the Pooling Agreements Certain
Matters Regarding the Master Servicer and the Depositor" in the Prospectus and
certain federal, state and local taxes, and certain tax-related expenses,
payable out of the Trust Fund as described under "Certain Federal Income Tax
Consequences - REMICs - Prohibited Transactions Tax and Other Taxes " in the
Prospectus. Accordingly, the allocation of Collateral Support Deficit as
described above will constitute an allocation of losses and other shortfalls
experienced by the Trust Fund.
Advances
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability determination
described in the next paragraph, to make advances (each, an "Advance") out of
its own funds or, subject to the replacement thereof as provided in the Pooling
and Servicing Agreement, funds held in the Certificate Account that are not
required to be part of the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of: (i) all Monthly Payments (net of
the related Servicing Fee), other than Balloon Payments, which were due on the
Mortgage Loans during the related Due Period and delinquent as of the related
Determination Date; (ii) in the case of each Mortgage Loan delinquent in respect
of its Balloon Payment as of the related Determination Date, an amount equal to
one month's interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee), but
only to the extent that the related mortgagor has not made a payment sufficient
to cover such amount under any forbearance arrangement or otherwise that has
been included in the Available Distribution Amount for such Distribution Date;
and (iii) in the case of each REO Property, an amount equal to thirty days'
imputed interest with respect thereto at the related Mortgage Rate in effect as
of the commencement of the related Due Period (net of the related Servicing
Fee), but only to the extent that such amount is not covered by any net income
from such REO Property included in the Available Distribution Amount for such
Distribution Date. The Master Servicer's obligations to make Advances in respect
of any Mortgage Loan or REO
<PAGE>
S-40
Property will continue through liquidation of such Mortgage Loan or disposition
of such REO Property, as the case may be.
The Master Servicer will be entitled to recover any Advance made out of its
own funds from any amounts collected in respect of the Mortgage Loan as to which
such Advance was made, whether in the form of late payments, Insurance Proceeds,
Condemnation Proceeds, Liquidation Proceeds or otherwise ("Related Proceeds").
Notwithstanding the foregoing, the Master Servicer will not be obligated to make
any Advance that it determines in its reasonable good faith judgment would, if
made, not be recoverable out of Related Proceeds (a "Nonrecoverable Advance"),
and the Master Servicer will be entitled to recover any Advance that it so
determines to be a Nonrecoverable Advance out of general funds on deposit in the
Certificate Account. Nonrecoverable Advances will represent a portion of the
losses to be borne by the Certificateholders. See "Description of the
Certificates-Advances in Respect of Delinquencies" and "Description of the
Pooling Agreements-Certificate Account" in the Prospectus.
In connection with its recovery of any Advance or reimbursable servicing
expense, each of the Master Servicer and the Special Servicer will be entitled
to be paid, out of any amounts then on deposit in the Certificate Account,
interest at ____% per annum (the "Reimbursement Rate") accrued on the amount of
such Advance or expense from the date made to but not including the date of
reimbursement.
To the extent not offset or covered by amounts otherwise payable on the
Class C Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Class B Certificates; and to the extent not
offset or covered by amounts otherwise payable on the Class B and Class C
Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Senior Certificates. To the extent that any
holder of an Offered Certificate must bear the cost of the Master Servicer's
and/or Special Servicer's Advances, the benefits of such Advances to such holder
will be contingent on the ability of such holder to reinvest the amounts
received as a result of such Advances at a rate of return equal to or greater
than the Reimbursement Rate.]
Each Distribution Date Statement delivered by the Trustee to the
Certificateholders will contain information relating to the amounts of Advances
made with respect to the related Distribution Date. See "Description of the
Certificates-Reports to Certificateholders; Certain Available Information"
herein and "Description of Certificates-Reports to Certificateholders" in the
Prospectus.
Reports to Certificateholders; Certain Available Information
On each Distribution Date, the [Trustee] will be required to forward by
mail to each holder of an Offered Certificate a statement (a "Distribution Date
Statement") providing various items of information relating to distributions
made on such date with respect to the relevant Class and the recent status of
the Mortgage Pool. For a more detailed discussion of the particular items of
information to be provided in each Distribution Date Statement, as well as a
discussion of certain annual information reports to be furnished by the
[Trustee] to persons who at any time during the prior calendar year were holders
of the Offered Certificates, see "Description of the Certificates-Reports to
Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [Trustee] make
available at its offices primarily responsible for [administration of the Trust
Fund], during normal business hours, for review by any holder of an Offered
Certificate, originals or copies of, among other things, the following items:
(a) the Pooling and Servicing Agreement and any amendments thereto, (b) all
Distribution Date Statements delivered to holders of the relevant Class of
Offered Certificates since the Delivery Date, (c) all officer's certificates
delivered to the Trustee since the Delivery Date as described under "Description
of the Pooling Agreements-Evidence as to Compliance" in the Prospectus, (d) all
accountants' reports delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements-Evidence as to
Compliance" in the Prospectus, (e) the most recent property inspection report
prepared by or on behalf of the Special Servicer and delivered to the Trustee in
respect of each Mortgaged Property, (f) the most recent annual operating
statements, if any, collected by or on behalf of the Special Servicer and
delivered to the Trustee in respect of each Mortgaged Property, and (g) any and
all modifications, waivers and amendments of the terms of a
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S-41
Mortgage Loan entered into by the Master Servicer or the Special Servicer and
delivered to the Trustee. Copies of any and all of the foregoing items will be
available from the [Trustee] upon request; however, the [Trustee] will be
permitted to require payment of a sum sufficient to cover the reasonable costs
and expenses of providing such copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and DTC
Participants. Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Financial Intermediaries and Class A
Certificate Owners, and by Financial Intermediaries to Class A Certificate
Owners, will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time. The Master
Servicer, the Special Servicer, the Trustee, the Depositor, the REMIC
Administrator and the Certificate Registrar are required to recognize as
Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee for
DTC.
Voting Rights
At all times during the term of the Pooling and Servicing Agreement, the
voting rights for the series offered hereby (the "Voting Rights") shall be
allocated among the respective Classes of Certificateholders in proportion to
the Certificate Balances of their Certificates. Voting Rights allocated to a
Class of Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
Termination; Retirement of Certificates
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in respect
thereof) or other liquidation of the last Mortgage Loan or REO Property subject
thereto, and (ii) the purchase of all of the assets of the Trust Fund by the
Master Servicer or the Depositor. Written notice of termination of the Pooling
and Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at the office of the Certificate Registrar or other location
specified in such notice of termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (a) the sum of (i) the aggregate Purchase Price of all the
Mortgage Loans (exclusive of REO Loans) then included in the Trust Fund and (ii)
the aggregate fair market value of all REO Properties then included in the Trust
Fund (which fair market value for any REO Property may be less than the Purchase
Price for the corresponding REO Loan), as determined by an appraiser mutually
agreed upon by the Master Servicer and the Trustee, over (b) the aggregate of
amounts payable or reimbursable to the Master Servicer under the Pooling and
Servicing Agreement. Such purchase will effect early retirement of the then
outstanding Offered Certificates, but the right of the Master Servicer or the
Depositor to effect such termination is subject to the requirement that the then
aggregate Stated Principal Balance of the Mortgage Pool be less than 5% of the
Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer or the Depositor, as the case may be, for the Mortgage Loans and other
assets in the Trust Fund (if the Trust Fund is to be terminated as a result of
the purchase described in the preceding paragraph), together with all other
amounts on deposit in the Certificate Account and not otherwise payable to a
person other than the Certificateholders (see "Description of the Pooling
Agreements-Certificate Account" in the Prospectus), will be applied generally as
described above under "-Distributions-Priority", except that the distributions
of principal described thereunder will, in the case of each Class of
Certificates, be made, subject to available funds, in an amount equal to the
related Certificate Balance then outstanding.
The Trustee
____________, a _____________________, will act as Trustee on behalf of the
Certificateholders. [The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee.] The offices of the Trustee primarily
<PAGE>
S-42
responsible for the administration of the Trust Fund are located at
_____________________________. See "Description of the Pooling Agreements-the
Trustee", "-Duties of the Trustee", "-Certain Matters Regarding the Trustee" and
"-Resignation and Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
Yield Considerations
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the rate
and timing of payments of principal on such Certificate; and (iii) the aggregate
amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will equal the weighted average
of the applicable Effective Net Mortgage Rates. Accordingly, the yield on the
Offered Certificates will be sensitive to (x) adjustments to the Mortgage Rates
on the ARM Loans and (y) changes in the relative composition of the Mortgage
Pool as a result of scheduled amortization, voluntary prepayments and
involuntary liquidations of the Mortgage Loans. See "Description of the Mortgage
Pool" herein and "-Yield Considerations-Rate and Timing of Principal Payments"
below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by the
rate and timing of principal payments on the Mortgage Loans (including principal
prepayments on the Mortgage Loans resulting from both voluntary prepayments by
the mortgagors and involuntary liquidations). The rate and timing of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules thereof, the dates on which Balloon Payments are due and the rate and
timing of principal prepayments and other unscheduled collections thereon
(including for this purpose, collections made in connection with liquidations of
Mortgage Loans due to defaults, casualties or condemnations affecting the
Mortgaged Properties, or purchases of Mortgage Loans out of the Trust Fund).
Prepayments and, assuming the respective stated maturity dates therefor have not
occurred, liquidations and purchases of the Mortgage Loans, will result in
distributions on the Offered Certificates of amounts that would otherwise be
distributed over the remaining terms of the Mortgage Loans. Defaults on the
Mortgage Loans, particularly at or near their stated maturity dates, may result
in significant delays in payments of principal on the Mortgage Loans (and,
accordingly, on the Offered Certificates) while work-outs are negotiated or
foreclosures are completed. See "Servicing of the Mortgage Loans-Modifications,
Waivers and Amendments" ____ herein and ____ "Description of the Pooling
Agreements-Realization Upon Defaulted Mortgage Loans" and "Certain Legal Aspects
of Mortgage Loans-Foreclosure" in the Prospectus. Because the rate of principal
payments on the Mortgage Loans will depend on future events and a variety of
factors (as described below), no assurance can be given as to such rate or the
rate of principal prepayments in particular. The Depositor is not aware of any
relevant publicly available or authoritative statistics with respect to the
historical prepayment experience of a large group of mortgage loans comparable
to the Mortgage Loans.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which such Certificates are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans are in turn distributed
on such Certificates. An investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on such Certificate could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments on such Certificate could result in an
actual yield to such investor that is lower than the anticipated yield. In
general, the earlier a payment of principal is made on an Offered Certificate
purchased at a discount or premium, the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal payments on such investor's Offered Certificates occurring at a rate
higher (or lower) than the rate anticipated by the investor during any
particular period would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
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S-43
Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net Aggregate
Prepayment Interest Shortfalls, generally be borne: first, by the holders of the
Class C Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; second, by the holders of the Class B
Certificates, to the extent of amounts otherwise distributable in respect of
their Certificates; and last, by the holders of the Senior Certificates. As more
fully described herein under "Description of the
Certificates-Distributions-Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective Classes
of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by a
number of factors, including, without limitation, prevailing interest rates, the
terms of the Mortgage Loans (for example, Prepayment Premiums, adjustable
Mortgage Rates and amortization terms that require Balloon Payments), the
demographics and relative economic vitality of the areas in which the Mortgaged
Properties are located and the general supply and demand for rental properties,
food services, retail shopping space or office space, as the case may be, in
such areas, the quality of management of the Mortgaged Properties, the servicing
of the Mortgage Loans, possible changes in tax laws and other opportunities for
investment. See "Risk Factors" and "Description of the Mortgage Pool" herein and
"Risk Factors" and "Yield and Maturity Considerations-Yield and Prepayment
Considerations" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Although most of the Mortgage Loans are ARM Loans, adjustments to the
Mortgage Rates thereon will generally be limited by lifetime and/or periodic
caps and floors and, in each case, will be based on the related Index (which may
not rise and fall consistently with mortgage interest rates then available) plus
the related Gross Margin (which may be different from margins then offered on
adjustable rate mortgage loans). See "Description of the Mortgage Pool-Certain
Payment Characteristics" and "-The Index" herein. As a result, the Mortgage
Rates on the ARM Loans at any time may not be comparable to prevailing market
interest rates. In addition, as prevailing market interest rates decline, and
without regard to whether the Mortgage Rates on the ARM Loans decline in a
manner consistent therewith, related borrowers may have an increased incentive
to refinance for purposes of either (i) converting to a fixed rate loan and
thereby "locking in" such rate, or (ii) taking advantage of a different index,
margin or rate cap or floor on another adjustable rate mortgage loan. The
Mortgage Loans may be prepaid at any time and, in ____ cases (approximately
_____% of the Initial Pool Balance), may be prepaid in whole or in part without
payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by Federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to which
a default will have occurred as of any date or as to the overall rate of
prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until a date that is scheduled to be at least
_____ days and as many as ______ days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of the
Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming such
prices did not account for such delay).
<PAGE>
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Unpaid Distributable Certificate Interest. As described under
"Description of the Certificates-Distributions-Priority" herein, if the portion
of the Available Distribution Amount distributable in respect of interest on any
Class of Offered Certificates on any Distribution Date is less than the
Distributable Certificate Interest then payable for such Class, the shortfall
will be distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
Weighted Average Life
The weighted average life of an Offered Certificate refers to the
average amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of an Offered Certificate will be influenced
by, among other things, the rate at which principal on the Mortgage Loans is
paid or otherwise collected, which may be in the form of scheduled amortization,
voluntary prepayments, Insurance Proceeds, Condemnation Proceeds and Liquidation
Proceeds.
Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this Prospectus Supplement is the ["Constant
Prepayment Rate" or "CPR" model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of the
then scheduled principal balance of the pool of mortgage loans. As used in each
of the following tables, the column headed "0%" assumes that none of the
Mortgage Loans is prepaid before maturity. The columns headed "___%", "___%",
"___%" and "___%" assume that prepayments on the Mortgage Loans are made at
those levels of CPR. There is no assurance, however, that prepayments of the
Mortgage Loans will conform to any level of CPR, and no representation is made
that the Mortgage Loans will prepay at the levels of CPR shown or at any other
prepayment rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each of the Class A Certificates and the Class B Certificates that
would be outstanding after each of the dates shown at various CPRs and the
corresponding weighted average life of each such Class of Certificates. The
tables have been prepared on the basis of the following assumptions, among
others: (i) scheduled monthly payments of principal and interest on the Mortgage
Loans, in each case prior to any prepayment of the loan, will be timely received
(with no defaults) and will be distributed on the 25th day of each month
commencing in ________ 199___; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan, until
its next Interest Rate Adjustment Date, when a new Mortgage Rate that is to
remain in effect to maturity will be calculated reflecting the value of the
related Index as of ________, 199__, subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 30/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the Cut-off
Date will continue to be due (a) in the case of each Fixed Rate Loan, on each
Due Date until maturity and (b) in the case of each ARM Loan, until its next
Payment Adjustment Date, when a new payment that is to be due on each Due Date
until maturity will be calculated reflecting the appropriate Mortgage Rate and
remaining amortization term; (v) any principal prepayments on the Mortgage Loans
will be received on their respective Due Dates at the respective levels of CPR
set forth in the tables, and there will be no Net Aggregate Prepayment Interest
Shortfalls in connection therewith; and (vi) the Mortgage Loan Seller will not
be required to repurchase any Mortgage Loan, and neither the Master Servicer nor
the Depositor will exercise its option to purchase all the Mortgage Loans and
thereby cause an early termination of the Trust Fund. To the extent that the
Mortgage Loans have characteristics that differ from those assumed in preparing
the tables set forth below, the Class A Certificates or the Class B Certificates
may mature earlier or later than indicated by the tables. It is highly unlikely
that the Mortgage Loans will prepay at any constant rate until maturity or that
all the Mortgage Loans will prepay at the same rate. In addition, variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentages of initial Certificate Balances
(and weighted average lives) shown in the following tables. Such variations may
occur even if the average prepayment experience of the Mortgage Loans were to
equal any of the specified CPR percentages. Investors are urged to conduct their
own analyses of the rates at which the Mortgage Loans may be expected to prepay.
Based on the foregoing assumptions, the following table indicates the resulting
weighted average lives of the Class A Certificates and sets forth the percentage
of
<PAGE>
S-45
the initial Certificate Balance of the Class A Certificates that would be
outstanding after each of the dates shown at the indicated CPRs.
Percent of the Initial Certificate Balance of the
Class A Certificates at the Respective CPRs
Set Forth Below:
<TABLE>
<CAPTION>
Date 0% % % % %
- ---- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
Delivery Date................................................ 100.0 100.0 100.0 100.0 100.0
_________ 25, 1997...........................................
_________ 25, 1998...........................................
_________ 25, 1999...........................................
_________ 25, 2000...........................................
_________ 25, 2001...........................................
_________ 25, 2002...........................................
_________ 25, 2003...........................................
_________ 25, 2004...........................................
_________ 25, 2005...........................................
Weighted Average Life (years)(A).............................
</TABLE>
- ----
(A) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the number
of years from the date of issuance of the Class A Certificates to the
related Distribution Date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the reductions in the principal balance of
such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth the
percentage of the initial Certificate Balance of the Class B Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
Percent of the Initial Certificate Balance of the
Class B Certificates at the Respective CPRs
Set Forth Below:
<TABLE>
<CAPTION>
Date 0% % % % %
- ---- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
Delivery Date............................................ 100.0 100.0 100.0 100.0 100.0
_________ 25, 1997.......................................
_________ 25, 1998.......................................
_________ 25, 1999.......................................
_________ 25, 2000.......................................
_________ 25, 2001.......................................
_________ 25, 2002.......................................
_________ 25, 2003.......................................
_________ 25, 2004.......................................
_________ 25, 2005.......................................
Weighted Average Life (years)(A).........................
</TABLE>
<PAGE>
S-46
- ----------
(A) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the number
of years from the date of issuance of the Class B Certificates to the
related Distribution Date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the reductions in the principal balance of
such Class B Certificate.
[The following disclosure is applicable to Stripped Interest Certificates, when
offered...
Yield Sensitivity of the Class S Certificates
The yield to maturity of the Class S Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the Mortgage
Loans, which may fluctuate significantly from time to time. A rapid rate of
principal payments will have a material negative effect on the yield to maturity
of the Class S Certificates. There can be no assurance that the Mortgage Loans
will prepay at any particular rate. Prospective investors in the Class S
Certificates should fully consider the associated risks, including the risk that
such investors may not fully recover their initial investment.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class S Certificates to various constant rates of prepayment on
the Mortgage Loans by projecting the monthly aggregate payments of interest on
the Class S Certificates and computing the corresponding pre-tax yields to
maturity on a corporate bond equivalent basis, based on the assumptions
described in the third paragraph under the heading "--Weighted Average Life"
above, including the assumptions regarding the characteristics and performance
of the Mortgage Loans which differ from the actual characteristics and
performance thereof and assuming the aggregate purchase price set forth below.
Any differences between such assumptions and the actual characteristics and
performance of the Mortgage Loans and of the Class S Certificates may result in
yields being different from those shown in such table. Discrepancies between
assumed and actual characteristics and performance underscore the hypothetical
nature of the table, which is provided only to give a general sense of the
sensitivity of yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Class S Certificates
at the Following CPRs
<TABLE>
<CAPTION>
Assumed Purchase Price 0% % % % % %
- ---------------------- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
$----------------................... ----% ----% ----% ----% ----% ----%
</TABLE>
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class S Certificates, would cause
the discounted present value of such assumed stream of cash flows to equal the
assumed purchase price listed in the table. Accrued interest is included in the
assumed purchase price and is used in computing the corporate bond equivalent
yields shown. These yields 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 S Certificates, and thus do not reflect the return on
any investment in the Class S Certificates when any reinvestment rates other
than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Class S
Certificates is likely to differ from those shown in the tables, even if all of
the Mortgage Loans prepay at the indicated CPRs over any given time period or
over the entire life of the Certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class S Certificates will conform to
the yields described herein. Investors are urged to make their investment
decisions based
<PAGE>
S-47
on the determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Class S Certificates should fully consider the risk
that a rapid rate of prepayments on the Mortgage Loans could result in the
failure of such investors to fully recover their investments.]
Additional Yield Considerations Applicable Solely to the Class R Certificates
The Class R Certificateholders' after-tax rate of return on the Class R
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Class R Certificates. Holders of Class R
Certificates may have tax liabilities with respect to their Certificates during
the early years of the Trust Fund's term that substantially exceed any
distributions payable thereon during any such period. In addition, holders of
Class R Certificates 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 the Class R
Certificates may be negative or may otherwise be significantly adversely
affected. The timing and amount of taxable income attributable to the Class R
Certificates will depend on, among other things, the timing and amounts of
prepayments and losses experienced with respect to the Mortgage Pool.
The Class R Certificateholders should consult their tax advisors as to the
effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Class R Certificates on after-tax rates of
return on such Certificates. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and Class C Certificates will evidence
"regular interests" in such REMIC and (ii) the Class R Certificates will be the
sole class of "residual interests" in such REMIC, each within the meaning of the
REMIC Provisions in effect on the date hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Trust Fund
will be classified as a grantor trust under Subpart E, part I of subchapter J of
the Code, and not as an association taxable as a corporation or as a
partnership.]
The __________ Certificates [may] [will] [will not] be treated as having
been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of __%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Original
Issue Discount" in the Prospectus.
The ___________________ Certificates may be treated for Federal income tax
purposes as having been issued at a premium. Whether any holder of [either] such
Class of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Premium" in
the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest
<PAGE>
S-48
described in Section 856(c)(3)(B) of the Code. Moreover, the Offered
Certificates will be "qualified mortgages" within the meaning of Section
860(A)(3) of the Code. See "Certain Federal Income Tax
Consequences-REMICs-Characterization of Investments in REMIC Certificates" in
the Prospectus.
________________________, a _______________, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences-REMICs-Reporting and Other Administrative
Matters" and "Description of the Pooling Agreements-Certain Matters Regarding
the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "-Events of Default" and "-Rights Upon Event of Default" in the
Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences-REMICs" in the Prospectus.
Special Tax Considerations Applicable to REMIC Residual Certificates
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests to
United States persons. Pursuant to the Pooling and Servicing Agreement, the
Class R Certificates may not be transferred to non-United States persons. See
"Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating to
"excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Class R Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences-REMICs-Taxation of
Owners of REMIC Residual Certificates-Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if "a significant purpose of the transfer was
to impede the assessment or collection of tax." Based on the REMIC Regulations,
the Class R Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Class R Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Class R Certificates. All transfers of the Class R
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Class R Certificates
constitute noneconomic residual interests. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Residual
Certificates-Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Certificateholders from the Trust Fund with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the Trust Fund's term as a result of their ownership of the
Class R Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Class R Certificate (or possibly later
under the "wash sale" rules of Section
<PAGE>
S-49
1091 of the Code) may cause the Class R Certificateholders' after-tax rate of
return to be zero or negative even if the Class R Certificateholders' pre-tax
rate of return is positive. That is, on a present value basis, the Class R
Certificateholders' resulting tax liabilities could substantially exceed the sum
of any tax benefits and the amount of any cash distributions on the Class R
Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage Interest
in the Class R Certificates shall, by its acceptance of such Certificates, agree
to irrevocably appoint the Master Servicer as its agent to perform all of the
duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations-Additional Yield Considerations Applicable Solely to the Class R
Certificates" herein And ______ "Certain ______ Federal ______ Income _____ Tax
Consequences-REMICs-Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated _____________, 199_ (the "Underwriting Agreement"), ______________________
(the "Underwriter") has agreed to purchase and the Depositor has agreed to sell
to the Underwriter each class of the Offered Certificates. It is expected that
delivery of the Class A Certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that the delivery of
the Class B and Class R Certificates will be made at the offices of the
Underwriter, _____________________, on or about _____________, 199_ against
payment therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of its Certificates is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
Depositor from the sale of the Offered Certificates, before deducting expenses
payable by the Depositor, will be approximately ____% of the aggregate
Certificate Balance of the Offered Certificates plus accrued interest thereon
from the Cut-off Date. The Underwriter may effect such transactions by selling
its Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
Underwriter and any dealers that participate with such Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Depositor, against certain civil liabilities under the Securities Act of
1933, as amended, or contribute to payments required to be made in respect
thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the Prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the Offered
Certificates and
<PAGE>
S-50
the status of the applicable form of credit enhancement. Except as described
herein under "Description of the Certificates--Reports to Certificateholders;
Certain Available Information", there can be no assurance that any additional
information regarding the Offered Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis. The limited nature of such information regarding
the Offered Certificates may adversely affect the liquidity of the Offered
Certificates, even if a secondary market for the Offered Certificates becomes
available.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made at
negotiated prices determined at the time of sale.]
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Underwriter by ________________. Certain federal income tax matters and
other matters will be passed upon for the Depositor by Thacher Proffitt & Wood.
RATING
It is a condition to issuance that the Senior Certificates be rated not
lower than "__", and the Class B Certificates be rated not lower than "__", by
___________________________.
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood or
frequency of prepayments (whether voluntary or involuntary) on the Mortgage
Loans, [The following disclosure is applicable to Stripped Interest
Certificates, when offered... or the possibility that as a result of prepayments
investors in the Class S Certificates may realize a lower than anticipated yield
or may fail to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any Class
thereof and, if so, what such rating would be. A rating assigned to any Class of
Offered Certificates by a rating agency that has not been requested by the
Depositor to do so may be lower than the rating assigned thereto by
_________________________.
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. 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.
LEGAL INVESTMENT
[As long as the Senior Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, the Senior Certificates will constitute "mortgage related
securities" within the meaning of SMMEA, and as such 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 whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Under
<PAGE>
S-51
SMMEA, however, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA.]
[The Class B Certificates will not be "mortgage related securities" for
purposes of SMMEA. As a result, the appropriate characterization of the Class B
Certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase the Class B Certificates,
is subject to significant interpretive uncertainties.]
The Depositor makes no representation as to the proper characterization of
any class of Offered Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase 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 or 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.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh plans
and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, including insurance company general
accounts, that is subject to ERISA, or Section 4975 of the Code (each, a "Plan")
should review with its legal advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction that is prohibited or is not
otherwise permitted either under ERISA or Section 4975 of the Code or whether
there exists any statutory or administrative exemption applicable thereto.
[The U.S. Department of Labor issued to [Underwriter] an individual
prohibited transaction exemption, Prohibited Transaction Exemption _____ (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code
and Section 501(i) of ERISA, certain transactions, among others, relating to the
servicing and operation of mortgage pools, such as the Mortgage Pool, and the
purchase, sale and holding of mortgage pass-through certificates, such as the
Class A Certificates, underwritten by an Underwriter (as hereinafter defined),
provided that certain conditions set forth in the Exemption are satisfied. For
purposes of this Section "ERISA Considerations", the term "Underwriter" shall
include (a) [Underwriter], (b) any person directly or indirectly, through one or
more intermediaries, controlling, controlled by or under common control with
[Underwriter], and (c) any member of the underwriting syndicate or selling group
of which a person described in (a) or (b) is a manager or co-manager with
respect to the 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 A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the 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
A Certificates must not be subordinated to the rights and interests evidenced by
the other certificates of the same trust. Third, the Class A Certificates at the
time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by Standard & Poor's Corporation ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit
Rating Co. ("Duff & Phelps") or Fitch Investors Service, Inc. ("Fitch"). Fourth,
the Trustee cannot be an affiliate of any other member of the "Restricted
Group", which consists of any Underwriter, the Depositor, the Trustee, the
Master Servicer, the Special Servicer, any sub-servicer, and any mortgagor with
respect to Mortgage Loans constituting more than 5% of the aggregate unamortized
principal balance of the Mortgage Loans as of the date of initial issuance of
<PAGE>
S-52
the Class A Certificates. Fifth, the sum of all payments made to and retained by
the Underwriter must represent not more than reasonable compensation for
underwriting the 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
obligations; and the sum of all payments made to and retained by the Master
Servicer, the Special Servicer and any sub-servicer 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 A Certificates are not subordinated to any other Class of
Certificates, the second general condition set forth above is satisfied with
respect to such Certificates. It is a condition of the issuance of the Class A
Certificates that they be rated not lower than "__" by
_______________________________________________________. As of the Delivery
Date, the fourth general condition set forth above will be satisfied with
respect to the Class A Certificates. A fiduciary of a Plan contemplating
purchasing a Class A Certificate in the secondary market must make its own
determination that, at the time of such purchase, the Class A Certificates
continue to satisfy the third and fourth general conditions set forth above. A
fiduciary of a Plan contemplating purchasing a Class A Certificate, whether in
the initial issuance of such Certificates or in the secondary market, must make
its own determination that the first, fifth and sixth general conditions set
forth above will be satisfied with respect to such Class A Certificate.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates in such other
investment pools must have been rated in one of the three highest categories of
Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least one year prior
to the Plan's acquisition of Class A Certificates; and (iii) certificates in
such other investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of Class A
Certificates.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1) (A) through (D) of the Code) in connection
with (i) the direct or indirect sale, exchange or transfer of Class A
Certificates in the initial issuance of Certificates between the Depositor or an
Underwriter and a Plan when the Depositor, the Underwriter, the Trustee, the
Master Servicer, the Special Servicer, a Sub-Servicer or a mortgagor is a Party
in Interest with respect to the investing Plan, (ii) the direct or indirect
acquisition or disposition in the secondary market of the Class A Certificates
by a Plan and (iii) the holding of Class A Certificates by a Plan. However, no
exemption is provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2)
and 407 of ERISA for the acquisition or holding of a Class A Certificate on
behalf of an "Excluded Plan" by any person who has discretionary authority or
renders investment advice with respect to the assets of such Excluded Plan. For
purposes hereof, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Certificates between
the Depositor or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in such Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the Mortgage Loans or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Class A Certificates by a Plan and (3) the holding of Class A Certificates by a
Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Mortgage Pool.
<PAGE>
S-53
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Offered Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A Certificates constitute "certificates" for
purposes of the Exemption and (ii) the specific and general conditions and the
other requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider the availability
of any other prohibited transaction exemptions. See "ERISA Considerations" in
the Prospectus. A purchaser of a Class A Certificate should be aware, however,
that even if the conditions specified in one or more exemptions are satisfied,
the scope of relief provided by an exemption may not cover all acts which might
be construed as prohibited transactions.
Because the characteristics of the Class B Certificates [and the Class R
Certificates] do not meet the requirements of the Exemption, the purchase or
holding of such Certificates by a Plan may result in prohibited transactions or
the imposition of excise taxes or civil penalties. As a result, no transfer of a
Class B Certificate [or Class R Certificate] or any interest therein may be made
to a Plan or to any person who is directly or indirectly purchasing such
Certificate or interest therein on behalf of, as named fiduciary of, as trustee
of, or with assets of a Plan, unless the prospective transferee provides the
Certificate Registrar with a certification of facts and an opinion of counsel
which establish to the satisfaction of the Certificate Registrar that such
transfer will not result in a violation of Section 406 of ERISA or Section 4975
of the Code or cause the Master Servicer, the Special Servicer or the Trustee to
be deemed a fiduciary of such Plan or result in the imposition of an excise tax
under Section 4975 of the Code. See "ERISA Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase an Offered Certificate 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.
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus Supplement and
the Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Depositor or by the
Underwriter. This Prospectus Supplement and the Prospectus do not constitute an
offer to sell, or a solicitation of an offer t buy, the securities offered
hereby to anyone in any jurisdiction in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make any such offer or solicitation. Neither the delivery of this Prospectus
Supplement and the Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time o since the date of this Prospectus Supplement or the
Prospectus.
TABLE OF CONTENTS
Page
Prospectus Supplement
Summary................................................
Risk Factors...........................................
Description of the Mortgage Pool.......................
Servicing of the Mortgage Loans........................
Description of the Certificates........................
Yield and Maturity Considerations......................
Certain Federal Income Tax Consequences................
Method of Distribution.................................
Legal Matters..........................................
Rating.................................................
Legal Investment.......................................
ERISA Considerations...................................
Index of Principal Definitions.........................
Prospectus
Prospectus Supplement..................................
Available Information..................................
Incorporation of Certain Information by Reference......
Summary of Prospectus..................................
Risk Factors...........................................
Description of the Trust Funds.........................
Yield and Maturity Considerations......................
The Depositor..........................................
Description of the Certificates........................
Description of the Pooling Agreements..................
Description of Credit Support..........................
Certain Legal Aspects of Mortgage Loans................
Certain Federal Income Tax Consequences................
State Tax and Other Considerations.....................
ERISA Considerations...................................
Legal Investment.......................................
Use of Proceeds........................................
Method of Distribution.................................
Legal Matters..........................................
Financial Information..................................
Rating.................................................
Index of Principal Definitions.........................
DEUTSCHE MORTGAGE & ASSET RECEIVING
CORPORATION
$___________
Mortgage Pass-Through
Certificates
Series 199_-_
Class A Certificates Variable Rate $___________
Class B Certificates Variable Rate $___________
Class R Certificates Variable Rate $ 100
-----------
PROSPECTUS SUPPLEMENT
-----------
[UNDERWRITER]
Dated __________, 199_
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
30/360 basis ..........................................................S-38
Accrued Certificate Interest................................................S-38
Advance .....................................................S-6, S-40
ARM Loans ...........................................................S-2
Available Distribution Amount...............................................S-36
Balloon Payment ...........................................................S-3
CEDEL ..........................................................S-14
Certificate Balance...........................................................ii
Certificate Registrar.......................................................S-34
Certificates .............................................................i
Class .............................................................i
Class A Certificate Owner....................................................S-1
Class B Available Distribution Amount........................................S-5
Class S Certificates.........................................................iii
Collateral Support Deficit.............................................S-8, S-40
Constant Prepayment Rate....................................................S-45
CPR ..........................................................S-45
Cut-off Date ............................................................ii
Cut-off Date Balance........................................................S-14
Debt Service Coverage Ratio.................................................S-24
Definitive Class A Certificate.........................................S-1, S-34
Delivery Date ............................................................ii
Depositor ...........................................................S-1
Determination Date..........................................................S-36
Distributable Certificate Interest..........................................S-38
Distributable Principal.....................................................S-38
Distribution Date ......................................................ii, S-35
Distribution Date Statement.................................................S-41
Due Date ...........................................................S-2
Due Period ..........................................................S-36
Effective Net Mortgage Rate.................................................S-38
ERISA ..........................................................S-10
ERISA Considerations........................................................S-52
Euroclear ..........................................................S-14
Financial Intermediary......................................................S-34
Fixed Rate Loans ...........................................................S-3
Form 8-K ..........................................................S-29
Gross Margin ...........................................................S-2
Index ...........................................................S-2
Initial Pool Balance..........................................................ii
Interest Rate Adjustment Date................................................S-2
LTV Ratio ..........................................................S-25
Master Servicer ...........................................................S-1
Master Servicing Fee........................................................S-31
Monthly Payments ...........................................................S-2
Mortgage ..........................................................S-14
Mortgage Loan Seller.........................................................S-1
Mortgage Loans ............................................................ii
Mortgage Note ..........................................................S-14
Mortgage Pool ............................................................ii
Mortgage Rate ...........................................................S-2
Mortgaged Property.....................................................S-2, S-14
Net Aggregate Prepayment Interest Shortfall.................................S-38
Net Mortgage Rate ...........................................................S-4
Net Operating Income........................................................S-24
Nonrecoverable Advance......................................................S-41
Offered Certificates.....................................................i, S-34
Ownership Percentage........................................................S-39
Pass-Through Rate ............................................................ii
Payment Adjustment Date......................................................S-3
Percentage Interest.........................................................S-34
Plan ..........................................................S-52
Pooling and Servicing Agreement..............................................S-3
Prepayment Interest Excess..................................................S-32
Prepayment Premiums.........................................................S-15
Purchase Agreement...........................................................S-2
Purchase Price ..........................................................S-28
Reimbursement Rate..........................................................S-41
Related Proceeds ..........................................................S-41
REMIC Administrator..........................................................S-1
REMIC Regular Certificates....................................................ii
REO Loan ..........................................................S-39
REO Property ....................................................S-30, S-33
Senior Certificates......................................................i, S-33
Servicing Fees ..........................................................S-31
Special Servicer ...........................................................S-1
Special Servicing Fee.......................................................S-31
Specially Serviced Mortgage Assets..........................................S-30
Specially Serviced Mortgage Loans...........................................S-30
Stated Principal Balance....................................................S-39
Trust Fund ............................................................ii
Trustee ...........................................................S-1
Underwriter .......................................................i, S-50
Underwriting Agreement......................................................S-50
Voting Rights ..........................................................S-42
Workout Fee ..........................................................S-31
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus supplement and the prospectus to which it relates
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED _______, 199_
[Version 4 - Health Care and
Restaurant Concentration]
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 199_)
$__________________________
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
Depositor
Mortgage Pass-Through Certificates, Series 199__-__
$_____________ Variable Rate Class A Certificates
$_____________ Variable Rate Class B Certificates
$100 Variable Rate Class R Certificates
-----------
The Series 199__-__ Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following four classes (each, a "Class"): (i) the Class A
Certificates and Class R Certificates (collectively, the "Senior Certificates");
(ii) the Class B Certificates; and (iii) the Class C Certificates. Only the
Senior Certificates and the Class B Certificates (collectively, the "Offered
Certificates") are offered hereby.
It is a condition of their issuance that the Senior Certificates be rated
not lower than ____, and that the Class B Certificates be rated not lower than
______, by ___________________.
-----------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG
OR ANY OF THEIR AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE DEPOSITOR, DEUTSCHE BANK AG
OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-----------
Prospective investors should review the information appearing under the
caption "Risk Factors" beginning on page S-___ herein and page __ in the
Prospectus before purchasing any Offered Certificate.
See "Index of Principal Definitions" in the Prospectus for location of
meanings of capitalized terms used but not defined herein. See "Index of
Principal Definitions" herein for location of meanings of those other
capitalized terms used herein.
There is currently no secondary market for the Offered Certificates.
_____________________ (the "Underwriter") intends to make a secondary market in
the Offered Certificates, but is not obligated to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop or,
if it does develop, that it will continue. See "Risk Factors-Limited Liquidity"
herein. The Offered Certificates will not be listed on any securities exchange.
The Offered Certificates will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the
[UNDERWRITER]
________________, 199__
<PAGE>
ii
(cover continued)
Depositor estimated to be approximately $_____________, will be ______% of the
initial aggregate Certificate Balance of the Offered Certificates[, plus accrued
interest on the Offered Certificates from the Cut-off Date]. The Offered
Certificates are offered by the Underwriter subject to prior sale, when, as and
if delivered to and accepted by the Underwriter and subject to certain other
conditions. It is expected that the Class A Certificates will be delivered in
book-entry form through the Same-Day Funds Settlement System of DTC and that the
Class B and Class R Certificates will be delivered at the offices of the
Underwriter, _________________________ _________________________________, on or
about _____________, 199__ (the "Delivery Date"), against payment therefor in
immediately available funds.
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be established by the
Depositor, that will consist primarily of a segregated pool (the "Mortgage
Pool") of ____ conventional, fixed- and adjustable-rate, multifamily or
commercial, balloon mortgage loans (the "Mortgage Loans"). Each Mortgage Loan is
secured by a first mortgage lien on a fee simple estate in real property
operated as a restaurant, Health Care-Related Facility (as defined in the
Prospectus), retail property, office building or multifamily rental property. As
of ____________, 199___ (the "Cut-off Date"), the Mortgage Loans had an
aggregate principal balance (the "Initial Pool Balance") of
$___________________, after application of all payments of principal due on or
before such date, whether or not received. Certain characteristics of the
Mortgage Loans are described herein under "Description of the Mortgage Pool".
The rights of the holders of the Class B and Class C Certificates to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the holders of the Senior Certificates, and the rights of the
holders of the Class C Certificates to receive distributions with respect to the
Mortgage Loans will be subordinate to the rights of the holders of the Class B
Certificates, in each case to the extent described herein and in the Prospectus.
The Class A Certificates will be represented initially by certificates
registered in the name of Cede & Co., as nominee of DTC, as described herein.
The interests of the beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive certificates will be available for the Class A Certificates only
under the limited circumstances described herein and in the Prospectus. See
"Description of the Certificates-Book-Entry Registration of the Class A
Certificates" herein and "Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in the Prospectus.
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. The Class A Certificates, the Class B Certificates and the
Class C Certificates (collectively, the "REMIC Regular Certificates") will
constitute "regular interests", and the Class R Certificates will constitute the
sole class of "residual interests", in the Trust Fund. See "Certain Federal
Income Tax Consequences" herein and in the Prospectus. Transfer of the Class R
Certificates will be prohibited to any non-United States person, and will be
subject to certain additional transfer restrictions described herein under
"Certain Federal Income Tax Consequences-Special Tax Considerations Applicable
to REMIC Residual Certificates" and in the Prospectus under "Certain Federal
Income Tax Consequences-REMICs-Tax and Restrictions on Transfers of REMIC
Residual Certificates to Certain Organizations".
Distributions on the Certificates will be made, to the extent of available
funds, on the 25th day of each month or, if any such day is not a business day,
then on the next business day, beginning in _____________ 199____ (each, a
"Distribution Date"). As described herein, interest distributions on each Class
of Offered Certificates will be made on each Distribution Date based on the
variable pass-through rate (the "Pass-Through Rate") then applicable to such
Class and the stated principal amount (the "Certificate Balance") of such Class
outstanding immediately prior to such Distribution Date. The Pass-Through Rate
for each Class of Offered Certificates applicable to the first Distribution Date
will be _________% per annum. Subsequent to the initial Distribution Date, the
Pass-Through Rate for each Class of Offered Certificates will equal from time to
time the weighted average of, subject to certain adjustments described herein,
the Net Mortgage Rates (as defined herein) on the Mortgage Loans. Principal
distributions on each Class of Offered Certificates will be made in the amounts
and in accordance with the priorities described herein. See "Description of the
Certificates-Distributions" herein.
<PAGE>
iii
(cover continued)
The yield to maturity on each Class of Offered Certificates will depend on,
among other things, changes in its respective Pass-Through Rate and the rate and
timing of principal payments (including by reason of prepayments, defaults and
liquidations) on the Mortgage Loans. See "Yield and Maturity Considerations"
herein and "Yield and Maturity Considerations" and "Risk Factors-Effect of
Prepayments on Average Life of Certificates" in the Prospectus. [The following
disclosure is applicable to Stripped Interest Certificates ("Class S
Certificates"), when offered... The yield to maturity on the Class S
Certificates will be extremely sensitive to the rate and timing of principal
payments (including by reasons of prepayments, defaults and liquidations) on the
Mortgage Loans, which may fluctuate significantly from time to time. A rate of
principal payments on the Mortgage Loans that is more rapid than expected by
investors will have a material negative effect on the yield to maturity of the
Class S Certificates. Investors in the Class S Certificates should consider the
associated risks, including the risk that a rapid rate of principal payments on
the Mortgage Loans could result in the failure of investors in such Certificates
to recover fully their initial investments. See "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" and "Risk
Factors-Effect of Prepayments on Average Life of Certificates" in the
Prospectus.]
[inside front cover]
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING OFFERED
PURSUANT TO ITS PROSPECTUS DATED ____________________, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT 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.
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. An Index of Principal Definitions is included at the end of both
this Prospectus Supplement and the Prospectus. Terms that are used but not
defined in this Prospectus Supplement will have the meanings specified in the
Prospectus.
Title of Certificates................ Mortgage Pass-Through Certificates,
Series 199__-__.
Depositor........................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware Corporation. See
"The Depositor" in the Prospectus. The
Offered Certificates are not insured or
guaranteed by the Depositor, Deutsche
Bank AG or any of their affiliates.
Master Servicer..................... ____________________. See "Servicing of
the Mortgage Loans-The Master Servicer"
herein.
Special Servicer.................... _____________________. See "Servicing of
the Mortgage Loans-The Special Servicer"
herein.
Trustee .......................... _____________________. See "Description
of the Certificates-The Trustee" herein.
REMIC Administrator................. _____________________. See "Certain
Federal Income Tax
Consequences-REMICs-Reporting and Other
Administrative Matters" herein and
"Description of the Pooling
Agreements-Events of Default" and
"-Rights Upon Event of Default" in the
Prospectus.
Mortgage Loan Seller................ ________________________. See
"Description of the Mortgage Pool-The
Mortgage Loan Seller" herein.
Cut-off Date........................ ___________________, 199__.
Delivery Date....................... On or about ___________________, 199__.
Registration; Denominations......... The Class A Certificates will be issued,
maintained and transferred on the
book-entry records of DTC in
denominations of $25,000 and integral
multiples of $1 in excess thereof. The
Class B Certificates will be issued in
fully registered, certificated form in
denominations of $100,000 and in
integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to
the remainder of the initial Certificate
Balance of such Class. The Class R
Certificates will be issued in
registered, certificated form in minimum
denominations of 20% percentage interest
in such Class.
The Class A Certificates will be
represented by one or more global
Certificates registered in the name of
Cede & Co., as nominee of DTC. No person
acquiring an interest in the Class A
Certificates (any such person, a "Class
A Certificate Owner") will be entitled
to receive a Class A Certificate in
fully registered, certificated form (a
"Definitive Class A Certificate"),
except under the limited circumstances
described herein and
<PAGE>
S-2
in the Prospectus. See "Description of
the Certificates-Book-Entry Registration
of the Class A Certificates" herein and
"Description of the
Certificates-Book-Entry Registration and
Definitive Certificates" in the
Prospectus.
The Mortgage Pool................... The Mortgage Pool will consist of _____
conventional, balloon Mortgage Loans
with an Initial Pool Balance of
$_________________. On or prior to the
Delivery Date, the Depositor will
acquire the Mortgage Loans from the
Mortgage Loan Seller pursuant to a
Purchase Agreement, dated [the date
hereof], between the Depositor and the
Mortgage Loan Seller (the "Purchase
Agreement"). In the Purchase Agreement,
the Mortgage Loan Seller has made
certain representations and warranties
to the Depositor regarding the
characteristics and quality of the
Mortgage Loans and, as more particularly
described herein, has agreed to cure any
material breach thereof or repurchase
the affected Mortgage Loan. In
connection with the assignment of its
interests in the Mortgage Loans to the
Trustee, the Depositor will also assign
its rights under the Purchase Agreement
insofar as they relate to or arise out
of the Mortgage Loan Seller's
representations and warranties regarding
the Mortgage Loans. See "Description of
the Mortgage Pool-Representations and
Warranties; Repurchases" herein.
Each Mortgage Loan is secured by a first
mortgage lien on a fee simple estate in
real property (as to such Mortgage Loan,
the "Mortgaged Property") operated as a
restaurant (__ Mortgage Loans which
represent ____% of the Initial Pool
Balance), a Health Care-Related Facility
(__ Mortgage Loans which represent ____%
of the Initial Pool Balance), a retail
property (__ Mortgage Loans which
represent ___% of the Initial Pool
Balance), an office building (__
Mortgage Loans which represent ____% of
the Initial Pool Balance) or a
multifamily rental property (__ Mortgage
Loans which represent __% of the Initial
Pool Balance). ________ of the Mortgage
Loans, which represent _____% of the
Initial Pool Balance, are secured by
liens on Mortgaged Properties located in
_______________. The remaining Mortgaged
Properties are located throughout
___________ other states. See
"Description of the Mortgage
Pool-Additional Mortgage Loan
Information" and "Risk Factors-Risks
Associated With Multifamily Properties"
and "-Risks Associated with ___________
Properties" and "Description of the
Mortgage Pool-Additional Mortgage Loan
Information" herein. ___________ of the
Mortgage Loans, which represent ______%
of the Initial Pool Balance, provide for
scheduled payments of principal and/or
interest ("Monthly Payments") to be due
on the first day of each month; the
remainder of the Mortgage Loans provide
for Monthly Payments to be due on the
____, _____, _____ or _____ day of each
month (the date in any month on which a
Monthly Payment on a Mortgage Loan is
first due, the "Due Date"). The
annualized rate at which interest
accrues (the "Mortgage Rate") on ____ of
the Mortgage Loans (the "ARM Loans"),
which represent _____% of the Initial
Pool Balance, is subject to adjustment
on specified Due Dates (each such date
of adjustment, an "Interest Rate
Adjustment Date") by adding a fixed
number of basis points (a "Gross
Margin") to the value of a base index
(an "Index"), subject, in ______ cases,
to lifetime maximum and/or minimum
<PAGE>
S-3
Mortgage Rates, and in _____ cases, to
periodic maximum and/or minimum Mortgage
Rates, in each case as described herein;
and the remaining Mortgage Loans (the
"Fixed Rate Loans") bear interest at
fixed Mortgage Rates. ____ of the ARM
Loans, which represent ___% of the
Initial Pool Balance, provide for
Interest Rate Adjustment Dates that
occur monthly, while the remainder of
the ARM Loans provide for adjustments of
the Mortgage Rate to occur semi-annually
or annually. [Identify Mortgage Loan
Index] See "Description of the Mortgage
Pool-Certain Payment Characteristics"
herein.
The amount of the Monthly Payment on all
of the ARM Loans is subject to
adjustment on specified Due Dates (each
such date, a "Payment Adjustment Date")
to an amount that would amortize the
outstanding principal balance of the
Mortgage Loan over its then remaining
amortization schedule and pay interest
at the then applicable Mortgage Rate.
The ARM Loans provide for Payment
Adjustment Dates that occur on the Due
Date following each related Interest
Rate Adjustment Date.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly
longer than the remaining terms of such
Mortgage Loans, thereby leaving
substantial principal amounts due and
payable (each such payment, together
with the corresponding interest payment,
a "Balloon Payment") on their respective
maturity dates, unless prepaid prior
thereto.
Description of the Certificates..... The Certificates will be issued pursuant
to a Pooling and Servicing Agreement, to
be dated as of the Cut-off Date, among
the Depositor, the Master Servicer, the
Special Servicer, the Trustee and the
REMIC Administrator (the "Pooling and
Servicing Agreement"), and will
represent in the aggregate the entire
beneficial ownership interest in the
Trust Fund, which will consist of the
Mortgage Pool and certain related
assets.
The aggregate Certificate Balance of the
Certificates as of the Delivery Date
will equal the Initial Pool Balance.
Each Class of Offered Certificates will
have the initial Certificate Balance set
forth on the cover page, and the Class C
Certificates will have an initial
Certificate Balance of $____________.
See "Description of the
Certificates-General" herein.
The Pass-Through Rate applicable to each
Class of Certificates for the initial
Distribution Date will equal _____% per
annum. With respect to any Distribution
Date subsequent to the initial
Distribution Date, the Pass-Through Rate
for each Class of Certificates will
equal the weighted average of the
applicable Effective Net Mortgage Rates
for the Mortgage Loans, weighted on the
basis of their respective Stated
Principal Balances (as described herein)
immediately prior to such Distribution
Date. For purposes of calculating the
Pass-Through Rate for any Class of
Certificates and any Distribution Date,
the "applicable Effective Net Mortgage
Rate" for each Mortgage Loan is an
annualized rate equal to the Mortgage
Rate in effect for such Mortgage Loan as
of the [second]
<PAGE>
S-4
day of the most recently ended calendar
month, (a) reduced by ___ basis points
(the Mortgage Rate, as so reduced, the
"Net Mortgage Rate"), and (b) if the
accrual of interest on such Mortgage
Loan is computed other than on the basis
of a 360-day year consisting of twelve
30-day months (which is the basis of
accrual for interest on the
Certificates), then adjusted to reflect
that difference in computation. See
"Description of the
Certificates-Distributions-Pass-Through
Rates" and "-Distributions-Certain
Calculations with Respect to Individual
Mortgage Loans" herein.
Interest Distributions
on the Senior Certificates........ On each Distribution Date, to the extent
of the Available Distribution Amount,
holders of each Class of Senior
Certificates will be entitled to receive
distributions of interest in an amount
equal to all Distributable Certificate
Interest with respect to such
Certificates for such Distribution Date
and, to the extent not previously paid,
for all prior Distribution Dates. See
"Description of the
Certificates-Distributions" herein.
The "Distributable Certificate Interest"
in respect of any Class of Certificates
for any Distribution Date will equal one
month's interest at the then-applicable
Pass-Through Rate accrued on the
Certificate Balance of such Class of
Certificates immediately prior to such
Distribution Date, reduced (to not less
than zero) by such Class of
Certificates' allocable share (in each
case, calculated as described herein) of
any Net Aggregate Prepayment Interest
Shortfall (also as described herein) for
such Distribution Date. See "Description
of the Certificates-Distributions-
Distributable Certificate Interest"
herein.
The "Available Distribution Amount" for
any Distribution Date is, as described
herein under "Description of the
Certificates-Distributions", the total
of all payments or other collections (or
available advances) on or in respect of
the Mortgage Loans that are available
for distribution on the Certificates on
such date.
Principal Distributions on
the Senior Certificates........... On each Distribution Date, to the extent
of the Available Distribution Amount
remaining after the distributions of
interest to be made on the Senior
Certificates on such date, holders of
the Senior Certificates will be entitled
to distributions of principal (until the
Certificate Balances of such Classes of
Certificates are reduced to zero) in an
aggregate amount equal to the sum of (a)
such holders' pro rata share of the
Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) the
entire Unscheduled Principal
Distribution Amount for such
Distribution Date. Distributions of
principal on the Senior Certificates
will be paid first to the holders of the
Class R Certificates until the
Certificate Balance of such Certificates
is reduced to zero, and then to the
holders of the Class A Certificates. See
"Description of the
Certificates-Distributions-Scheduled
Principal Distribution Amount and
Unscheduled Principal Distribution
Amount" herein.
Interest Distributions on
<PAGE>
S-5
the Class B Certificates.......... On each Distribution Date, to the extent
of the Available Distribution Amount
remaining after all distributions to be
made on the Senior Certificates on such
date (such remaining portion, the "Class
B Available Distribution Amount"),
holders of the Class B Certificates will
be entitled to receive distributions of
interest in an amount equal to all
Distributable Certificate Interest with
respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior
Distribution Dates. See "Description of
the Certificates-Distributions" herein.
Principal Distributions on
the Class B Certificates.......... On each Distribution Date, to the extent
of the Class B Available Distribution
Amount remaining after the distributions
of interest to be made on the Class B
Certificates on such date, holders of
the Class B Certificates will be
entitled to distributions of principal
(until the Certificate Balance of such
Class of Certificates is reduced to
zero) in an amount equal to the sum of
(a) such holders' pro rata share of the
Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) if
the Certificate Balances of the Senior
Certificates have been reduced to zero,
then to the extent not distributed in
reduction of such Certificate Balances
on such Distribution Date, the entire
Unscheduled Principal Distribution
Amount for such Distribution Date. See
"Description of the
Certificates-Distributions" herein.
Certain Yield and Prepayment
Considerations.................... The yield on the Offered Certificates of
any class will depend on, among other
things, the Pass-Through Rate for such
Certificates. The yield on any Offered
Certificate that is purchased at a
discount or premium will also be
affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) on the Mortgage Loans and
(ii) the extent to which such principal
payments are applied on any Distribution
Date in reduction of the Certificate
Balance of the Class to which such
Certificate belongs. See "Description of
the Certificates-Distributions-Priority"
and "-Distributions-Scheduled Principal
Distribution Amount and Unscheduled
Principal Distribution Amount" herein.
An investor that purchases an Offered
Certificate at a discount should
consider the risk that a slower than
anticipated rate of principal payments
on such Certificate will result in an
actual yield that is lower than such
investor's expected yield. An investor
that purchases any Offered Certificate
at a premium should consider the risk
that a faster than anticipated rate of
principal payments on such Certificate
will result in an actual yield that is
lower than such investor's expected
yield. Insofar as an investor's initial
investment in any Offered Certificate is
repaid, there can be no assurance that
such amounts can be reinvested in a
comparable alternative investment with a
comparable yield.
The actual rate of prepayment of
principal on the Mortgage Loans cannot
be predicted. The Mortgage Loans may be
prepaid at any time, subject, in the
case of ____ Mortgage Loans, to payment
of a Prepayment
<PAGE>
S-6
Premium. 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 expected
weighted average life of the Certificate
may not be realized. For a discussion of
certain factors affecting prepayment of
the Mortgage Loans, including the effect
of Prepayment Premiums, see "Yield and
Maturity Considerations" herein. In
deciding whether to purchase any Offered
Certificates, an investor should make an
independent decision as to the
appropriate prepayment assumptions to be
used.
[The structure of the Offered
Certificates causes the yield of certain
Classes to be particularly sensitive to
changes in the rates of prepayment of
the Mortgage Loans and other factors, as
follows:]
[Allocation to the Senior Certificates,
for so long as they are outstanding, of
the entire Unscheduled Principal
Distribution Amount for each
Distribution Date will generally
accelerate the amortization of such
Certificates relative to the actual
amortization of the Mortgage Loans.
Following retirement of the Class A
Certificates, the Unscheduled Principal
Distribution Amount for each
Distribution Date will be allocated to
the Class B Certificates.]
[The following disclosure is applicable
to Stripped Interest Certificates, when
offered... The Stripped Interest
Certificates. The Class S Certificates
are interest-only Certificates and are
not entitled to any distributions in
respect of principal. The yield to
maturity of the Class S Certificates
will be especially sensitive to the
prepayment, repurchase and default
experience on the Mortgage Loans, which
may fluctuate significantly from time to
time. A rate of principal payments that
is more rapid than expected by investors
will have a material negative effect on
the yield to maturity of the Class S
Certificates. See "Yield and Maturity
Considerations-Yield Sensitivity of the
Class S Certificates" herein.]
Class R Certificates: Holders of the
Class R Certificates are entitled to
receive distributions of principal and
interest as described herein; however,
holders of such Certificates may have
tax liabilities with respect to their
Certificates during the early years of
the term of the Trust Fund that
substantially exceed the principal and
interest payable thereon during such
periods. See "Yield and Maturity
Considerations", especially "-Additional
Yield Considerations Applicable Solely
to the Class R Certificates," herein and
"Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Advances ........................... The Master Servicer is required to make
advances (each, an "Advance") of
delinquent principal and interest (net
of related Servicing Fees) on the
Mortgage Loans or, in the case of each
Mortgage Loan that is delinquent
<PAGE>
S-7
in respect of its Balloon Payment or as
to which the related Mortgaged Property
was acquired through foreclosure, deed
in lieu of foreclosure or otherwise,
only of delinquent interest (net of
related Servicing Fees), in any event
under the circumstances and subject to
the limitations set forth herein.
Advances are intended to maintain a
regular flow of scheduled interest and
principal payments to the
Certificateholders, rather than to
guarantee or insure against losses.
Accordingly, Advances which cannot be
reimbursed out of collections on or in
respect of the related Mortgage Loans
("Nonrecoverable Advances") will
represent a portion of the losses to be
borne by Certificateholders.
The Master Servicer will be entitled to
interest on any Advances made, and the
Master Servicer and the Special Servicer
will each be entitled to interest on
certain servicing expenses incurred by
it or on its behalf, such interest
accruing at the rate and payable under
the circumstances described herein.
Interest accrued on outstanding Advances
will result in a reduction in amounts
payable on the Certificates. See
"Description of the
Certificates-Advances" and
"-Subordination; Allocation of
Collateral Support Deficit" herein and
"Description of the
Certificates-Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements-Certificate Account"
in the Prospectus.
Each Distribution Date Statement
delivered by the Trustee to the
Certificateholders will contain
information relating to the amounts of
Advances made with respect to the
related Distribution Date. See
"Description of the Certificates-Reports
to Certificateholders; Certain Available
Information" herein and "Description of
Certificates-Reports to
Certificateholders" in the Prospectus.
Subordination; Allocation of Collateral
Support Deficit.................. The rights of the holders of the Class B
and Class C Certificates to receive
distributions with respect to the
Mortgage Loans will be subordinate to
the rights of the holders of the Senior
Certificates, and the rights of the
holders of the Class C Certificates to
receive distributions with respect to
the Mortgage Loans will be subordinate
to the rights of the holders of the
Class B Certificates, in each case to
the extent described herein and in the
Prospectus. This subordination is
intended to enhance the likelihood of
timely receipt by the holders of the
Senior Certificates of the full amount
of all Distributable Certificate
Interest payable in respect of such
Certificates on each Distribution Date,
and the ultimate receipt by such holders
of principal in an amount equal to the
entire aggregate Certificate Balance of
the Senior Certificates. Similarly, but
to a lesser degree, this subordination
is also intended to enhance the
likelihood of timely receipt by the
holders of the Class B Certificates of
the full amount of all Distributable
Certificate Interest payable in respect
of such Certificates on each
Distribution Date, and the ultimate
receipt by such holders of principal in
an amount equal to the entire
Certificate Balance of the Class B
Certificates. Such subordination will be
accomplished by the application of the
Available Distribution Amount on each
Distribution Date to distributions on
the respective Classes of Certificates
in the order described herein under
"Description of the
[
<PAGE>
S-8
Certificates-Distributions-Priority". No
other form of Credit Support will be
available for the benefit of the holders
of the Offered Certificates.
Allocation to the Senior Certificates,
for so long as they are outstanding, of
the entire Unscheduled Principal
Distribution Amount for each
Distribution Date will generally
accelerate the amortization of such
Certificates relative to the actual
amortization of the Mortgage Loans. To
the extent that the Senior Certificates
are amortized faster than the Mortgage
Loans, the percentage interest evidenced
by the Senior Certificates in the Trust
Fund will be decreased (with a
corresponding increase in the interest
in the Trust Fund evidenced by the Class
B and Class C Certificates), thereby
increasing, relative to their respective
Certificate Balances, the subordination
afforded the Senior Certificates by the
Class B and Class C Certificates.
Following retirement of the Class A
Certificates, allocation to the Class B
Certificates, for so long as they are
outstanding, of the entire Unscheduled
Principal Distribution Amount for each
Distribution Date will provide a similar
benefit to such Class of Certificates as
regards the relative amount of
subordination afforded thereto by the
Class C Certificates.
As a result of losses and other
shortfalls experienced with respect to
the Mortgage Loans or otherwise with
respect to the Trust Fund (which may
include shortfalls arising both from
interest accrued on Advances and from
Nonrecoverable Advances), the aggregate
Stated Principal Balance of the Mortgage
Pool expected to be outstanding
immediately following any Distribution
Date may be less than the aggregate
Certificate Balance of the Certificates
immediately following the distributions
on such Distribution Date. Such deficit
(the "Collateral Support Deficit") will
be allocated first to the Class C
Certificates, then to the Class B
Certificates and last to the Class A
Certificates (in reduction of their
Certificate Balances), in each case
until the related Certificate Balance
has been reduced to zero. See
"Description of the Certificates -
Subordination; Allocation of Collateral
Support Deficit" herein.
Optional Termination................ At its option, on any Distribution Date
on which the remaining aggregate Stated
Principal Balance of the Mortgage Pool
is less than 5% of the Initial Pool
Balance, the Master Servicer or the
Depositor may purchase all of the
Mortgage Loans and REO Properties, and
thereby effect termination of the Trust
Fund and early retirement of the then
outstanding Certificates. See
"Description of the
Certificates-Termination; Retirement of
Certificates" herein and in the
Prospectus.
Certain Federal Income
Tax Consequences............... An election will be made to treat the
Trust Fund as a REMIC for Federal income
tax purposes. Upon the issuance of the
Offered Certificates,
_______________________, counsel to the
Depositor, will deliver its opinion
generally to the effect that, assuming
compliance with all provisions of the
Pooling and Servicing Agreement, for
Federal income tax purposes, the Trust
Fund will qualify as a REMIC under
Sections 860A through 860G of the Code.
For Federal income tax purposes, the
Class A, Class B and Class C
Certificates will be the "regular
interests"
<PAGE>
S-9
in the Trust Fund, and the Class R
Certificates will be the sole class of
"residual interests" in the Trust Fund.
Under the REMIC Regulations, the Class R
Certificates will not be regarded as
having "significant value" for purposes
of applying the rules relating to
"excess inclusions." In addition, the
Class R Certificates may constitute
"noneconomic" residual interests for
purposes of the REMIC Regulations.
Transfers of the Class R Certificates
will be restricted under the Pooling and
Servicing Agreement to United States
Persons in a manner designed to prevent
a transfer of a noneconomic residual
interest from being disregarded under
the REMIC Regulations. See "Certain
Federal Income Tax Consequences-Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein and
"Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners
of REMIC Residual Certificates-Excess
Inclusions" and "-Noneconomic REMIC
Residual Certificates" in the
Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years
of the Trust Fund's term that
significantly exceeds distributions on
the Class R Certificates during such
years, with corresponding tax deductions
or losses deferred until the later years
of the Trust Fund's term. Accordingly,
on a present value basis, the tax
detriments occurring in the earlier
years may substantially exceed the sum
of any tax benefits in the later years.
As a result, the Class R
Certificateholders' after-tax rate of
return may be zero or negative, event if
their pre-tax rate of return is
positive.
See "Yield and Maturity Considerations,"
especially "-Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain
Federal Income Tax Consequences-Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein.
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.
Rating ........................... It is a condition of their issuance that
the Senior Certificates be rated not
lower than "___", and that the Class B
Certificates be rated not lower than
"___", by _______________________
([collectively,] the "Rating
Agenc[ies]"). 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. A security
rating does not address the frequency of
prepayments of Mortgage Loans, or the
corresponding effect on yield to
investors. [The following disclosure is
applicable to Stripped Interest
Certificates, when offered... A security
rating does not address the frequency or
likelihood of prepayments (whether
voluntary or involuntary) of Mortgage
Loans, or the possibility that, as a
result of prepayments, investors in the
Class S Certificates may realize a lower
than anticipated yield or may fail to
recover fully their initial investment.]
See "Rating" herein.
<PAGE>
S-10
ERISA Considerations................ Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh
plans, and collective investment funds
and separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that are
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of
Offered Certificates could give rise to
a transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in the
Prospectus.
Legal Investment.................... [The Senior Certificates will constitute
"mortgage related securities" for
purposes of SMMEA, for so long as they
are rated in one of the two highest
ratings categories by one or more
nationally recognized statistical rating
organizations and, as such, are legal
investments for certain entities to the
extent provided in SMMEA. Such
investments, however, will be subject to
general regulatory considerations
governing investment practices under
state and federal law. In addition,
institutions whose investment activities
are subject to review by federal or
state regulatory authorities may be or
may become subject to restrictions,
which may be retroactively imposed by
such regulatory authorities, on the
investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain states
have recently enacted legislation
overriding the legal investment
provisions of SMMEA.]
[The Class B Certificates will not be
"mortgage related securities" within the
meaning of SMMEA. As a result, the
appropriate characterization of the
Class B Certificates under various legal
investment restrictions, and thus the
ability of investors subject to these
restrictions to purchase the Class B
Certificates, may be subject to
significant interpretative
uncertainties.]
Investors should consult their legal
advisors to determine whether and to
what extent the Offered Certificates
constitute legal investments for them.
See "Legal Investment" herein and in the
Prospectus.
<PAGE>
S-11
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among other
things, the following risk factors (as well as the risk factors set forth under
"Risk Factors" in the Prospectus) in connection with an investment therein.
Limited Liquidity. There is currently no secondary market for the Offered
Certificates. The Underwriter has indicated its intention to make a secondary
market in the Offered Certificates, but it is not obligated 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 Offered
Certificates with liquidity of investment or that it will continue for the life
of the Offered Certificates. The Offered Certificates will not be listed on any
securities exchange. See "Risk Factors-Limited Liquidity" in the Prospectus.
Certain Yield Considerations. The yield on any Offered Certificate will
depend on (a) the price at which such Certificate is purchased by an investor
and (b) the rate, timing and amount of distributions on such Certificate. The
rate, timing and amount of distributions on any Offered Certificate will, in
turn, depend on, among other things, (w) the Pass-Through Rate for such
Certificate, (x) the rate and timing of principal payments (including principal
prepayments) and other principal collections on or in respect of the Mortgage
Loans and the extent to which such amounts are to be applied or otherwise result
in a reduction of the Certificate Balance [or Notional Amount] of the Class of
Certificates to which such Certificates belongs, (y) the rate, timing and
severity of losses on or in respect of the Mortgage Loans and the extent to
which such losses result in a reduction of the Certificate Balance [or Notional
Amount] of the Class of Certificates to which such Certificate belongs, and (z)
the timing and severity of any Net Aggregate Prepayment Interest Shortfalls and
the extent to which such shortfalls are allocated in reduction of the
Distributable Certificate Interest payable on the Class of Certificates to which
such Certificate belongs. It is impossible to predict with certainty any of the
factors described in the preceding sentence. Accordingly, investors may find it
difficult to analyze the effect that such factors might have on the yield to
maturity of any Class of Offered Certificates. [The yield to maturity of the
Class S Certificates will be highly sensitive to the rate and timing of
principal payments (including by reason of prepayments, defaults and
liquidations) on or in respect of the Mortgage Loans, and investors in the Class
S Certificates should fully consider the associated risks, including the risk
that an extremely rapid rate of amortization and prepayment of the related
Notional Amount could result in the failure of such investors to recoup their
initial investments.] See "Description of the Mortgage Pool", "Description of
the Certificates--Distributions" and "--Subordination; Allocation of Collateral
Support Deficit" and "Yield and Maturity Considerations" herein. See also "Yield
and Maturity Considerations" in the Prospectus.
Potential Liability to the Trust Fund Relating to a Materially Adverse
Environmental Condition. [An environmental site assessment was performed at
[each][all but ___] of the Mortgaged Properties during the _____ month period
prior to the Cut-off Date. [Note any special environmental problems.]
[Otherwise,] no such environmental assessment revealed any material adverse
environmental condition or circumstance at any Mortgaged Property[, except for
(i) those cases in which the condition or circumstance was remediated or an
escrow for such remediation has been established and (ii) those cases in which
an operations and maintenance plan or periodic monitoring of nearby properties
was recommended, which recommendations are consistent with industrywide
practices].
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property securing a
defaulted Mortgage Loan prior to acquiring title thereto or assuming its
operation. Such prohibition effectively precludes enforcement of the security
for the related Mortgage Note until a satisfactory environmental site assessment
is obtained (or until any required remedial action is thereafter taken), but
will decrease the likelihood that the Trust Fund will become liable for a
material adverse environmental condition at the Mortgaged Property. However,
there can be no assurance that the requirements of the Pooling and Servicing
Agreement will effectively insulate the Trust Fund from potential liability for
a materially adverse environmental condition at any Mortgaged Property. See
"Description of the Pooling Agreements-Realization Upon Defaulted Mortgage
Loans", "Risk Factors-Certain Factors Affecting Delinquency, Foreclosure and
Loss of the Mortgage Loans-Risk of Liability Arising from Environmental
Conditions" and "Certain Legal Aspects of Mortgage Loans-Environmental
Considerations" in the Prospectus.
<PAGE>
S-12
Exposure of the Mortgage Pool to Adverse Economic or other Developments
Based on Geographic Concentration. ______ Mortgage Loans, which represent ____%
of the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in _____________. In general, that concentration increases the exposure
of the Mortgage Pool to any adverse economic or other developments that may
occur in _________. In recent periods, _____________ (along with other regions
of the United States) has experienced a significant downturn in the market value
of real estate.
Increased Risk of Loss Associated With Concentration of Mortgage Loans and
Borrowers. Several of the Mortgage Loans have Cut-off Date Balances that are
substantially higher than the average Cut-off Date Balance. In general,
concentrations in a mortgage pool of loans with larger-than-average balances can
result in losses that are more severe, relative to the size of the pool, than
would be the case if the aggregate balance of the pool were more evenly
distributed. Concentration of borrowers also poses increased risks. For
instance, if a borrower that owns several Mortgaged Properties experiences
financial difficulty at one Mortgaged Property, or at another income-producing
property that it owns, it could attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting Monthly Payments
for an indefinite period on all of the related Mortgage Loans.
Increased Risk of Default Associated with Adjustable Rate Mortgage Loans.
________ of the Mortgage Loans, which represent ____% of the Initial Pool
Balance, are ARM Loans. Increases in the required Monthly Payments on ARM Loans
in excess of those assumed in the original underwriting of such loans may result
in a default rate higher than that on mortgage loans with fixed mortgage rates.
Increased Risk of Default Associated with Balloon Payments. None of the
Mortgage Loans is fully amortizing over its term to maturity. Thus, each
Mortgage Loan will have a substantial payment (that is, a Balloon Payment) due
at its stated maturity unless prepaid prior thereto. Loans with Balloon Payments
involve a greater likelihood of default than self-amortizing loans because the
ability of a borrower to make a Balloon Payment typically will depend upon its
ability either to refinance the loan or to sell the related mortgaged property.
See "Risk Factors-Certain Factors Affecting Delinquency, Foreclosure and Loss of
the Mortgage Loans-Increased Risk of Default Associated With Balloon Payments"
in the Prospectus.
Extension Risk Associated With Modification of Mortgage Loans with Balloon
Payments. In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Special Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is reasonably
foreseeable; subject, however, to the limitations described under "Servicing of
the Mortgage Loans-Modifications, Waivers and Amendments" herein. There can be
no assurance, however, that any such extension or modification will increase the
present value of recoveries in a given case. Any delay in collection of a
Balloon Payment that would otherwise be distributable in respect of a Class of
Offered Certificates, whether such delay is due to borrower default or to
modification of the related Mortgage Loan by the Special Servicer, will likely
extend the weighted average life of such Class of Offered Certificates. See
"Yield and Maturity Considerations" herein and in the Prospectus.
Risks Particular to Restaurant Properties. Repayment of a mortgage loan
made on the security of a restaurant is dependent primarily on the success of
the restaurant. Various factors may affect the economic viability of
restaurants, including but not limited to competition from other restaurants;
perceptions by prospective customers of the safety, convenience, services and
attractiveness of the restaurant; the cost, quality and availability of food
products; changes in demographics, consumer habits and traffic patterns; the
ability to provide or contract for capable management and adequate maintenance;
and retroactive changes to building codes and other legal requirements.
Additional factors that can affect the success of a restaurant that is part of a
regionally or nationally-known chain of restaurants include actions and
omissions of any franchisor (including management practices that adversely
affect the nature of the business or that require the franchisee to expend sums
for renovation, refurbishment or expansion); the ability of a franchisor to
provide support in the way of advertising and arrangements with providers of
products and services; and the bankruptcy or business discontinuation of any
such franchisor.
<PAGE>
S-13
Risks Particular to Health Care-Related Facilities. Certain types of Health
Care-Related Facilities (including nursing homes) typically receive a
substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare are subject to statutory
and regulatory changes, retroactive rate adjustments, administrative rulings,
policy interpretations, delays by fiscal intermediaries and government funding
restrictions. Accordingly, there can be no assurance that payments under
government reimbursement programs will be sufficient to fully reimburse the cost
of caring for program beneficiaries. If such payments are insufficient, net
operating income of those Health Care-Related Facilities that receive revenues
from those sources, and consequently the ability of the related borrowers to
meet their obligations under the Mortgage Loans secured thereby, could be
adversely affected.
Health Care-Related Facilities are generally subject to federal and state
laws and licensing requirements that relate to the adequacy of medical care,
distribution of pharmaceuticals, rate setting, equipment, personnel, operating
policies and additions to facilities and services. The failure of an operator to
maintain or renew any required license or regulatory approval could prevent it
from continuing operations at a Health Care-Related Facility or, if applicable,
bar it from participation in government reimbursement programs. Furthermore,
under applicable federal and state laws and regulations, Medicare and Medicaid
reimbursements are generally not permitted to be made to any person other than
the provider who actually furnished the related medical goods and services.
Moreover, where licenses or other governmental approvals are necessary, such are
generally personal to the operator of the facility. Accordingly, in the event of
foreclosure of a defaulted Mortgage Loan, the purchaser at foreclosure would
generally not be entitled to obtain governmental reimbursement payments relating
to services furnished at the facility prior to foreclosure, and might be
required to obtain new government operating licenses or approvals.
Risks Particular to Retail Properties. In addition to risks generally
associated with income producing real estate, mortgage loans secured by liens on
retail properties can also be adversely affected by changes in consumer spending
patterns, local competitive conditions (such as the supply of retail space or
the existence or construction of new competitive shopping centers), growth of
alternative forms of retailing (such as direct mail and video shopping networks
which need little or no retail space) and the public perception of the safety of
customers at shopping centers. In addition, significant tenants at a retail
property play an important part in generating customer traffic and making a
retail property a desirable location for other tenants at such property.
A retail property may also be adversely affected if a significant tenant
ceases operations at such location (which may occur on account of a voluntary
decision not to renew a lease, bankruptcy or insolvency of such tenant, such
tenant's general cessation of business activities or for other reasons). Certain
tenants at retail properties may be entitled to terminate their leases if an
anchor tenant ceases operations at such property. In such cases, there can be no
assurance that any such anchor tenants will continue to occupy space in the
related shopping centers.
Risks Particular to Office Properties. Mortgage loans secured by liens on
office properties can be adversely affected by local competitive conditions,
including the overall supply of office space and the existence of competitive
buildings. For example, office buildings that are not equipped to accommodate
the needs of modern businesses may become functionally obsolete and unable to
attract tenants. Similarly, a property will likely suffer if prospective tenants
consider it less attractive, or less well-located, than nearby office
properties. Accordingly, office properties generally require their owners to
expend significant sums to pay for capital improvements and tenant improvements,
as well as costs related to re-leasing space.
Risks Particular to Multifamily Properties. In the case of multifamily
lending in particular, adverse economic conditions, either local, regional or
national, may limit the amount of rent that can be charged and may result in a
reduction in timely rent payments or a reduction in occupancy levels. Occupancy
and rent levels may also be affected by construction of additional housing
units, local military base closings and national and local politics, including
current or future rent stabilization and rent control laws and agreements.
Certain of the Mortgaged Properties may be subject to rent stabilization or rent
control laws. In addition, the level of mortgage interest rates may encourage
tenants to purchase single-family housing. Further, the cost of operating a
multifamily property may increase, including the costs of utilities and the
costs of required capital expenditures. All of these conditions and events may
increase the possibility that a borrower may be unable to meet its obligation
under its Mortgage Loan.
<PAGE>
S-14
Risks Relating to Lack of Certificateholder Control Over Trust Fund.
Certificateholders generally do not have a right to vote, except with respect to
required consents to certain amendments to the Pooling and Servicing Agreement.
Furthermore, Certificateholders will generally not have the right to make
decisions with respect to the administration of the Trust Fund. Such decisions
are generally made, subject to the express terms of the Pooling and Servicing
Agreement, by the Master Servicer, the Trustee, the Special Servicer or the
REMIC Administrator, as applicable. Any decision made by one of those parties in
respect of the Trust Fund, even if made in the best interests of the
Certificateholders (as determined by such party in its good faith and reasonable
judgment), may be contrary to the decision that would have been made by the
holders of any particular Class of Offered Certificates and may negatively
affect the interests of such holders.
Yield Risk Associated With Changes in Concentrations. If and as payments in
respect of principal (including any principal prepayments, liquidations and the
principal portion of the repurchase prices of any Mortgage Loans repurchased due
to breaches of representations) are received with respect to the Mortgage Loans,
the remaining Mortgage Loans as a group may exhibit increased concentration with
respect to the type of properties, property characteristics, number of
Mortgagors and affiliated Mortgagors and geographic location. Because
unscheduled collections of principal on the Mortgage Loans is payable on the
Class A, Class B and Class C Certificates in sequential order, such Classes that
have a lower sequential priority are relatively more likely to be exposed to any
risks associated with changes in concentrations of loan or property
characteristics.
Subordination of Class B and Class C Certificates. As and to the extent
described herein, the rights of the holders of the Class B and Class C
Certificates to receive distributions of amounts collected or advanced on or in
respect of the Mortgage Loans will be subordinated to those of the holders of
the Senior Certificates and also, in the case of the holders of the Class C
Certificates, also to those of the holders of the Class B Certificates. See
"Description of the Certificates-Distributions-Priority" and "-Subordination;
Allocation of Collateral Support Deficit" herein.
Book-Entry Registration. The Class A Certificates will be initially
represented by one or more certificates registered in the name of Cede & Co., as
the nominee for DTC, and will not be registered in the names of the related
holders of Certificates or their nominees. As a result, holders of Class A
Certificates will not be recognized as "Certificateholders." Hence, those
beneficial owners will be able to exercise the rights of holders of Certificates
only indirectly through DTC and DTC Participants. See "Description of the
Certificates-General" and "-Book-Entry Registration" herein and "Description of
the Certificates-Book-Entry Registration and Definitive Certificates" in the
Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
General
The Trust Fund will consist primarily of ___ conventional, balloon Mortgage
Loans with an Initial Pool Balance of $_______________. Each Mortgage Loan is
evidenced by a promissory note (a "Mortgage Note") and secured by a mortgage,
deed of trust or other similar security instrument (a "Mortgage") that creates a
first mortgage lien on a fee simple estate in real property (a "Mortgaged
Property") operated as a restaurant, a Health Care-Related Facility, a retail
property, an office building or a multifamily rental property. All percentages
of the Mortgage Loans, or of any specified group of Mortgage Loans, referred to
herein without further description are approximate percentages by aggregate
Cut-off Date Balance. The "Cut-off Date Balance" of any Mortgage Loan is the
unpaid principal balance thereof as of the Cut-off Date, after application of
all payments due on or before such date, whether or not received.
The Mortgage Loans are not insured or guaranteed by any governmental entity
or private mortgage insurer. The Depositor has not undertaken any evaluation of
the significance of the recourse provisions of any of a number of the Mortgage
Loans that provide for recourse against the related borrower or another person
in the event of a default. Accordingly, investors should consider all of the
Mortgage Loans to be nonrecourse loans as to which recourse in the
<PAGE>
S-15
case of default will be limited to the specific property and such other assets,
if any, as were pledged to secure a Mortgage Loan.
On or prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to the Purchase Agreement and will
thereupon assign its interests in the Mortgage Loans, without recourse, to the
Trustee for the benefit of the Certificateholders. See "-The Mortgage Loan
Seller" herein and "Description of the Pooling Agreements-Assignment of Mortgage
Loans; Repurchases" in the Prospectus. For purposes of the Prospectus, the
Mortgage Loan Seller constitutes a "Mortgage Asset Seller".
The Mortgage Loans were originated between 19__ and 19__. The Mortgage Loan
Seller originated ____ of the Mortgage Loans, which represent ___% of the
Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof, generally in accordance with the underwriting
criteria described below under "-Underwriting Standards".
Certain Payment Characteristics
___ of the Mortgage Loans, which represent ___% of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The remaining
Mortgage Loans have Due Dates that occur on the ______ (____% of the Mortgage
Loans), _____ (____% of the Mortgage Loans), _____ (____% of the Mortgage
Loans), and _______ (____% of the Mortgage Loans) day of each month.
____________ of the Mortgage Loans, which represent ____% of the Initial
Pool Balance, are ARM Loans. The ARM Loans bear interest at Mortgage Rates that
are subject to adjustment on periodically occurring Interest Rate Adjustment
Dates by adding the related Gross Margin to the applicable value of the related
Index, subject in ______ cases to rounding conventions and lifetime minimum
and/or maximum Mortgage Rates and, in the case of ________ Mortgage Loans, which
represent ____% of the Initial Pool Balance, to periodic minimum and/or maximum
Mortgage Rates. The remaining Mortgage Loans are Fixed Rate Loans. None of the
ARM Loans is convertible into a Fixed Rate Loan.
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates on the
ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment Date,
or may be based on the value of the related Index as most recently published as
of an Interest Rate Adjustment Date or as of a designated date preceding an
Interest Rate Adjustment Date. ____ of the ARM Loans, which represent ___% of
the Initial Pool Balance, provide for Interest Rate Adjustment Dates that occur
monthly; ____ of the ARM Loans, which represent ___% of the Initial Pool
Balance, provide for Interest Rate Adjustment Dates that occur semi-annually;
and the remaining ARM Loans provide for Interest Rate Adjustment Dates that
occur annually.
The Monthly Payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule and
pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date following each related Interest Rate
Adjustment Date. None of the ARM Loans provide for negative amortization.
All of the Mortgage Loans provide for monthly payments of principal based
on amortization schedules significantly longer than the remaining terms of such
Mortgage Loans. Thus, each Mortgage Loan will have a Balloon Payment due at its
stated maturity date, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Prepayment Premiums are payable
to the Master Servicer as additional servicing compensation, to the extent not
otherwise applied to offset Prepayment Interest Shortfalls, and may be waived by
the Master Servicer in accordance with the servicing standard described under
"Servicing of the Mortgage Loans-General" herein.
<PAGE>
S-16
[The Index]
Describe Index and include 5 year history.
[Delinquent and Nonperforming Mortgage Loans]
[Describe those delinquent and nonperforming Mortgage Loans, if any,
included in the Trust Fund.]
Additional Mortgage Loan Information
The following tables set forth the specified characteristics of, in each
case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to rounding.
<PAGE>
S-17
<TABLE>
<CAPTION>
Mortgage Rates as of the Cut-off Date
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Range of Mortgage Rates(%) Loans Date Balance Date Balance
------------------------- --------- ----------------- ------------------
<S> <C> <C> <C>
-------------- ------------------- --------------------
Total..........................................
============== =================== ====================
</TABLE>
Weighted Average
Mortgage Rate (All Mortgage Loans):
______% per annum
Weighted Average
Mortgage Rate (ARM Loans): ____% per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): _____% per annum
Gross Margins for the ARM Loans
<TABLE>
<CAPTION>
Percent by
Number of Aggregate Cut-off Aggregate Cut-off
Range of Gross Margins(%) ARM Loans Date Balance Date Balance
------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
-------------- ------------------ -------------------
Total............................................
============== ================== ====================
</TABLE>
Weighted Average
Gross Margin: ____%
<PAGE>
S-18
<TABLE>
<CAPTION>
Frequency of Adjustments to Mortgage Rates and Monthly Payments for the ARM Loans
Monthly
Mortgage Rate Payment Number of Percent by
Adjustment Adjustment Mortgage Aggregate Cut-off Aggregate Cut-off
Frequency Frequency Loans Date Balance Date Balance
-------------- ---------- --------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
-------------- ------------------ -------------------
Total..................
============== ================== ===================
Maximum Lifetime Mortgage Rates for the ARM Loans
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Date Balance
------------------------- --------- ----------------- ------------------
<S> <C> <C> <C>
Total..........................................
============== ================== ===================
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
- -----------------
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
Minimum Lifetime Mortgage Rates for the ARM Loans
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Date Balance
------------------------- --------- ----------------- ------------------
<S> <C> <C> <C> <C>
Total..........................................
============== ================== ===================
Weighted Average Minimum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- -----------------
(A) This calculation does not include the __________ ARM Loans without minimum
lifetime Mortgage Rates.
<PAGE>
S-19
<TABLE>
<CAPTION>
Maximum Annual Mortgage Rates for the ARM Loans
Percent by
Range of Maximum Number of Aggregate Cut-off Aggregate Cut-off
Annual Mortgage Rates(%) ARM Loans Date Balance Date Balance
----------------------- --------- ----------------- ------------------
<S> <C> <C> <C>
Total..........................................
============== ================== ===================
Weighted Average Maximum Annual
Mortgage Rate (ARM Loans): _____% per annum (A)
- -----------------
(A) This calculation does not include the __________ ARM Loans without maximum
annual Mortgage Rates.
<CAPTION>
Minimum Annual Mortgage Rates for the ARM Loans
Percent by
Range of Minimum Number of Aggregate Cut-off Aggregate Cut-off
Annual Mortgage Rates(%) ARM Loans Date Balance Date Balance
----------------------- ---------- ------------------ ------------------
<S> <C> <C> <C>
Total..........................................
============== ================== ====================
Weighted Average Minimum Annual
Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- -----------------
(A) This calculation does not include the __________ ARM Loans without minimum
annual Mortgage Rates.
<PAGE>
S-20
<TABLE>
<CAPTION>
Cut-off Date Balances
Number of Percent by
Cut-off Date Mortgage Aggregate Cut-off Aggregate Cut-off
Balance Range ($) Loans Date Balance Date Balance
----------------- ---------- ----------------- ------------------
<S> <C> <C> <C> <C>
-------------- ------------------ -------------------
Total...............................................
============== ================== ===================
Average Cut-off Date
Balance (All Mortgage
Loans): $____________
Average Cut-off Date
Balance (ARM Loans): $____________
Average Cut-off Date
Balance (Fixed Rate Loans): $____________
<CAPTION>
Types of Mortgaged Properties
Percent by
Number of Aggregate Cut-off Date Aggregate Cut-off
Property Type Mortgage Loans Balance Date Balance
------------- -------------- ---------------------- -------------
<S> <C> <C> <C>
Multifamily......................................
Retail...........................................
Office...........................................
Health Care-Related Facility.....................
Restaurant.......................................
[other property types]...........................
Total......................................
</TABLE>
<PAGE>
S-21
<TABLE>
<CAPTION>
Geographic Distribution of the Mortgaged Properties
Number of Aggregate Cut-off Percent by Aggregate Weighted Average
State Mortgage Loans Date Balance Cut-off Date Balance DSC Ratio
----- -------------- -------------- -------------------- ---------
<S> <C> <C> <C> <C>
Total.................
<CAPTION>
Original Term to Stated Maturity (in Months)
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
----------------- --------- ----------------- -----------------
<S> <C> <C> <C>
-------------- ------------------------- ---------------------
Total.........................................
============== ========================= =====================
</TABLE>
Weighted Average Original
Term to Stated Maturity
(All Mortgage Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): ____ months
<PAGE>
S-22
<TABLE>
<CAPTION>
Remaining Term to Stated Maturity (in Months)
as of the Cut-off Date
Number of Percent by
Range of Remaining Mortgage Aggregate Cut-off Aggregate Cut-off
Terms (in Months) Loans Date Balance Date Balance
------------------ --------- ----------------- ------------------
<S> <C> <C> <C>
-------------- ------------------------- -------------------
Total.........................................
============== ========================= ===================
Weighted Average Remaining
Term to Stated Maturity
(All Mortgage Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): ___ months
</TABLE>
<PAGE>
S-23
<TABLE>
<CAPTION>
Year of Origination
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
----- --------- ----------------- -----------------
<S> <C> <C> <C>
-------------- ------------------------- -------------------
Total.........................................
============== ========================= ===================
<CAPTION>
Year of Scheduled Maturity
Number of Percent by
Mortgage Aggregate Cut-off Aggregate Cut-off
Year Loans Date Balance Date Balance
----- ---------- ----------------- -----------------
<S> <C> <C> <C>
--------------------- ------------------ -------------------
Total.........................
===================== ================== ===================
</TABLE>
<PAGE>
S-24
The following table sets forth a range of Debt Service Coverage Ratios for
the Mortgage Loans. The "Debt Service Coverage Ratio" set forth in the following
table for any Mortgage Loan is the ratio of (i) Net Operating Income produced by
the related Mortgaged Property for the period (annualized if the period was less
than one year) covered by the most recent operating statement available to the
Depositor to (ii) the amount of the Monthly Payment in effect as of the Cut-off
Date multiplied by 12. "Net Operating Income" is the revenue derived from the
use and operation of a Mortgaged Property (consisting primarily of rental income
and deposit forfeitures), less operating expenses (such as utilities, general
administrative expenses, management fees, advertising, repairs and maintenance),
and further less fixed expenses (such as insurance and real estate taxes). Net
Operating Income generally does not reflect capital expenditures. The following
table was prepared using operating statements obtained from the respective
mortgagors or the related property managers. In each case, the information
contained in such operating statements was unaudited, and the Depositor has made
no attempt to verify its accuracy. In the case of _____ Mortgage Loans (____ ARM
Loans and ____ Fixed Rate Loans), representing __% of the Initial Pool Balance,
operating statements could not be obtained, and accordingly, Debt Service
Coverage Ratios for those Mortgage Loans were not calculated. The last day of
the period (which may not correspond to the end of the calendar year most recent
to the Cut-off Date) covered by each operating statement from which a Debt
Service Coverage Ratio was calculated is set forth in Annex A with respect to
the related Mortgage Loan.
<TABLE>
<CAPTION>
Debt Service Coverage Ratios(A)
Range of Number of Percent by
Debt Service Mortgage Aggregate Cut-off Aggregate Cut-off
Coverage Ratios Loans Date Balance Date Balance
--------------- --------- ------------------ ------------------
<S> <C> <C> <C>
Not Calculated(B).............. -------------- --------------------------- -------------------
Total..........................
============== =========================== ===================
Weighted Average
Debt Service Coverage
Ratio (All Mortgage
Loans): _____x(C)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans): _____x(D)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): _____x(E)
</TABLE>
- -------------------
(A) The Debt Service Coverage Ratios are based on the most recently available
operating statements obtained from the respective mortgagors or the related
property managers.
(B) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(C) This calculation does not include the ________ Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ________ ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(E) This calculation does not include the ________ Fixed Rate Loans as to which
Debt Service Coverage Ratios were not calculated.
<PAGE>
S-25
The following tables set forth the range of LTV Ratios of the Mortgage
Loans at origination and the Cut-off Date. An "LTV Ratio" for any Mortgage Loan,
as of any date of determination, is a fraction, expressed as a percentage, the
numerator of which is the original principal balance of such Mortgage Loan or
the Cut-off Date Balance of such Mortgage Loan, as applicable, and the
denominator of which is the appraised value of the related Mortgaged Property as
determined by an appraisal thereof obtained in connection with the origination
of such Mortgage Loan. Because it is based on the value of a Mortgaged Property
determined as of loan origination, the information set forth in the table below
is not necessarily a reliable measure of the related borrower's current equity
in each Mortgaged Property. In a declining real estate market, the fair market
value of a Mortgaged Property could have decreased from the value determined at
origination, and the current actual loan-to-value ratio of a Mortgage Loan may
be higher than even its LTV Ratio at origination, notwithstanding taking into
account amortization since origination.
<TABLE>
<CAPTION>
LTV Ratios at Origination
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Aggregate Cut-off
LTV Ratios(%) Loans Date Balance Date Balance
----------------- --------- ----------------- ------------------
<S> <C> <C> <C>
--------------------- ------------------ ------------------
Total...................
===================== ================== ==================
Weighted Average Original
LTV Ratio (All Mortgage
Loans): _____%
Weighted Average Original
LTV Ratio (ARM Loans):
-----%
Weighted Average Original
LTV Ratio (Fixed Rate
Loans): _____%
</TABLE>
<PAGE>
S-26
<TABLE>
<CAPTION>
LTV Ratios at Cut-off Date
Number of Percent by
Range of LTV Ratios(%) Mortgage Aggregate Cut-off Aggregate Cut-off
as of Cut-off Date Loans Date Balance Date Balance
--------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
--------------------- ------------------ ------------------
Total...................
===================== ================== ==================
Weighted Average LTV
Ratio as of Cut-off Date
(All Mortgage Loans):
-----%
Weighted Average LTV
Ratio as of Cut-off Date
(ARM Loans): _____%
Weighted Average LTV
Ratio as of Cut-off Date
(Fixed Rate Loans):
-----%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S-27
Occupancy Rates
Number of Percent by
Range of Mortgage Aggregate Cut-off Aggregate Cut-off
Occupancy Rates(A) Loans Date Balance Date Balance
------------------ --------- ----------------- -----------------
<S> <C> <C> <C>
--------------------- ------------------ -------------------
Total....................................
===================== ================== ===================
Weighted Average Occupancy Rate (All
Mortgage Loans)(A): _____%
Weighted Average Occupancy Rate
(ARM Loans)(A): _____%
Weighted Average Occupancy Rate
(Fixed Rate Loans)(A): _____%
</TABLE>
- ----------
(A) Physical occupancy rates calculated based on rent rolls provided by the
respective Mortgagors or related property managers as of a date no more
than ___ months prior to the Cut-off Date.
<TABLE>
<CAPTION>
Prepayment Restrictions in Effect as of the Cut-off Date
% by Cum. Weighted Averages
-----------------------------------------------------------------------
Aggregate Aggregate % of Indicative
Cut-off Cut-off Initial Stated Remaining Cut-off
Prepayment Number Date Date Pool Mortgage Remaining Amort. Implied Date
Restrictions of Loans Balance Balance Balance Rate Term (Mo.) Term (Mo.) DSCR DSCR LTV
- ------------ -------- ---------- ---------- ------- -------- ----------- ----------- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Locked Out (A)
Yield Maintenance (B)
Declining Percentage Premium
____% Premium
____% Premium
No Prepayment Restrictions
TOTALS
</TABLE>
- ------------------
(A) The weighted average term to the expiration of the lock-out periods is ___
years. _____ of the Mortgage Loans within their lock-out periods are
subject to declining percentage Prepayment Premiums after the expiration of
their lock-out periods; the remaining Mortgage Loans are subject to a yield
maintenance-type Prepayment Premium following such expiration.
(B) All Mortgage Loans subject to yield maintenance-type Prepayment Premiums
remain subject to payment of the Prepayment Premium until at least ___
months prior to maturity.
<PAGE>
S-28
Specified in Annex A to this Prospectus Supplement are the foregoing and
certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage Loans
is contained herein under "-Underwriting Standards" and "-Representations and
Warranties; Repurchases" and in the Prospectus under "Description of the Trust
Funds-Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans".
[Delinquencies. As of the Cut-off Date, [no] Mortgage Loan was more than 30
days delinquent in respect of any Monthly Payment.]
The Mortgage Loan Seller
General. [The Mortgage Loans Seller [, a wholly-owned subsidiary of
__________,] is a _________________ organized in 19___ under the laws of
__________________. As of December 31, 199_, the Mortgage Loan Seller had a net
worth of approximately $_________________, and currently holds and services for
its own account a total residential and commercial mortgage loan portfolio of
approximately $__________________, of which approximately $__________________
constitutes multifamily mortgage loans.]
The information set forth herein concerning the Mortgage Loan Seller and
its underwriting standards has been provided by the Mortgage Loan Seller, and
neither the Depositor nor the Underwriter makes any representation or warranty
as to the accuracy or completeness of such information.
Underwriting Standards
[All of the Mortgage Loans were originated or acquired by the Mortgage Loan
Seller, generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
The Depositor believes that the Mortgage Loans selected for inclusion in
the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so selected
on any basis which would have a material adverse effect on the
Certificateholders.]
Representations and Warranties; Repurchases
In the Purchase Agreement, the Mortgage Loan Seller has represented and
warranted with respect to each Mortgage Loan, as of [the Delivery Date], or as
of such other date specifically provided in the representation and warranty,
among other things, that:
[Specify significant representations and warranties.]
If the Mortgage Loan Seller has been notified of a material breach of any
of the foregoing representations and warranties as described in the Prospectus
and if the Mortgage Loan Seller cannot cure such breach within a period of 90
days following its receipt of such notice, then the Mortgage Loan Seller will be
obligated pursuant to the Purchase Agreement (the relevant rights under which
will be assigned, together with its interests in the Mortgage Loans, by the
Depositor to the Trustee) to repurchase the affected Mortgage Loan within such
90-day period at a price (the "Purchase Price") equal to the sum of (i) the
unpaid principal balance of such Mortgage Loan, (ii) unpaid accrued interest on
such Mortgage Loan at the Mortgage Rate from the date to which interest was last
paid to the Due Date in the Due Period in which the purchase is to occur, and
(iii) certain servicing expenses that are reimbursable to the Master Servicer
and the Special Servicer.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. The Mortgage Loan Seller will be the sole Warranting Party in respect of
the Mortgage Loans, and none of the Depositor,
<PAGE>
S-29
the Master Servicer or any of their affiliates [(other than the Mortgage Loan
Seller)] will be obligated to repurchase any affected Mortgage Loan in
connection with a breach of the Mortgage Loan Seller's representations and
warranties if the Mortgage Loan Seller defaults on its obligation to do so.
However, the Depositor will not include any Mortgage Loan in the Mortgage Pool
if anything has come to the Depositor's attention prior to the Closing Date that
would cause it to believe that the representations and warranties made by the
Mortgage Loan Seller regarding such Mortgage Loan will not be correct in all
material respects. See "Description of the Pooling Agreements-Representations
and Warranties; Repurchases" in the Prospectus.
Changes in Mortgage Pool Characteristics
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for the
scheduled principal payments due on or before the Cut-off Date. Prior to the
issuance of the Offered Certificates, a Mortgage Loan may be removed from the
Mortgage Pool if the Depositor deems such removal necessary or appropriate or if
it is prepaid. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Offered Certificates, unless
including such Mortgage Loans would materially alter the characteristics of the
Mortgage Pool as described herein. The Depositor believes that the information
set forth herein will be representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Offered Certificates are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date and
will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph, such
removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
General
Each of the Master Servicer and the Special Servicer will be required to
service and administer the Mortgage Loans for which it is responsible, either
directly or through sub-servicers, on behalf of the Trustee and in the best
interests of and for the benefit of the Certificateholders (as determined by the
Master Servicer or the Special Servicer, as the case may be, in its good faith
and reasonable judgment), in accordance with applicable law, the terms of the
Pooling and Servicing Agreement, the terms of the respective Mortgage Loans and,
to the extent consistent with the foregoing, in the same manner as would prudent
institutional mortgage lenders and loan servicers servicing mortgage loans
comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are located, and with a view to the maximization of timely and
complete recovery of principal and interest, but without regard to: (i) any
relationship that the Master Servicer or the Special Servicer, as the case may
be, or any affiliate thereof, may have with the related mortgagor; (ii) the
ownership of any Certificate by the Master Servicer or the Special Servicer, as
the case may be, or any affiliate thereof; (iii) the Master Servicer's or the
Special Servicer's, as the case may be, obligation to make advances, whether in
respect of delinquent payments of principal and/or interest or to cover certain
servicing expenses; and (iv) the Master Servicer's or the Special Servicer's, as
the case may be, right to receive compensation for its services under the
Pooling and Servicing Agreement or with respect to any particular transaction.
Except as otherwise described under "-Inspections; Collection of Operating
Information" below, the Master Servicer initially will be responsible for the
servicing and administration of the entire Mortgage Pool. With respect to any
Mortgage Loan (i) which has a Balloon Payment which is past due or any other
payment which is more than [60] days past due, (ii) as to which the borrower has
entered into or consented to bankruptcy, appointment of a receiver or
conservator or a similar insolvency proceeding, or the borrower has become the
subject of a decree or order for such a
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proceeding which shall have remained in force undischarged or unstayed for a
period of [60] days, (iii) as to which the Master Servicer shall have received
notice of the foreclosure or proposed foreclosure of any other lien on the
Mortgaged Property, or (iv) as to which, in the judgment of the Master Servicer,
a payment default has occurred or is imminent and is not likely to be cured by
the borrower within [60] days, and prior to acceleration of amounts due under
the related Mortgage Note or commencement of any foreclosure or similar
proceedings, the Master Servicer will transfer its servicing responsibilities to
the Special Servicer, but will continue to receive payments on such Mortgage
Loan (including amounts collected by the Special Servicer), to make certain
calculations with respect to such Mortgage Loan and to make remittances and
prepare certain reports to the Certificateholders with respect to such Mortgage
Loan. If the related Mortgaged Property is acquired in respect of any such
Mortgage Loan (upon acquisition, an "REO Property"), whether through
foreclosure, deed-in-lieu of foreclosure or otherwise, the Special Servicer will
continue to be responsible for the operation and management thereof. The
Mortgage Loans serviced by the Special Servicer are referred to herein as the
"Specially Serviced Mortgage Loans" and, together with any REO Properties,
constitute the "Specially Serviced Mortgage Assets". The Master Servicer shall
have no responsibility for the performance by the Special Servicer of its duties
under the Pooling and Servicing Agreement.
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing Mortgage Loan for at least [90] days, the Special Servicer
will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below, following the subsection captioned "-The Master Servicer",
is a description of certain pertinent provisions of the Pooling and Servicing
Agreement relating to the servicing of the Mortgage Loans. Reference is also
made to the Prospectus, in particular to the section captioned "Pooling and
Servicing Agreements", for important information in addition to that set forth
herein regarding the terms and conditions of the Pooling and Servicing Agreement
as they relate to the rights and obligations of the Master Servicer thereunder.
The Master Servicer
[__________________________________, a ___________________, will act as
Master Servicer with respect to the Mortgage Pool. Founded in ____ as a
____________, the Master Servicer today furnishes a variety of wholesale banking
services. As of December 31, 19__, the Master Servicer had a net worth of
approximately $__________, and a total mortgage loan servicing portfolio of
approximately $___________, of which approximately $_____________ represented
multifamily mortgage loans.
The offices of the Master Servicer that will be primarily responsible for
servicing and administering the Mortgage Pool are located at
____________________________.
[If and to the extent available and relevant to an investment decision: The
following table sets forth the historical prepayment information with respect to
the Master Servicer's multifamily and commercial mortgage loan servicing
portfolio:
Prepayment Experience of Master Servicer's Multifamily and Commercial Mortgage
Loan Servicing Portfolio
[Table to include relevant information regarding the size of the Master
Servicer's multifamily and commercial mortgage loan servicing portfolio (by
number and/or balance) and the portion of such loans that was subject to
prepayment.]]
The information set forth herein concerning the Master Servicer has been
provided by the Master Servicer, and neither the Depositor nor the Underwriter
makes any representation or warranty as to the accuracy or completeness of such
information.
<PAGE>
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The Special Servicer
[_______________________________, a ____________________, will be
responsible for the servicing and administration of the Specially Serviced
Mortgage Assets. As of December 31, 19___, the Special Servicer had a total
mortgage loan servicing portfolio of approximately $____________, of which
approximately $_____________ represented multifamily mortgage loans.
The Special Servicer has ___ offices in ___ states with a total staff of
____ employees. Its principal executive offices are located at
_________________________.]
The information set forth herein concerning the Special Servicer has been
provided by the Special Servicer, and neither the Depositor nor the Underwriter
makes any representation or warranty as to the accuracy or completeness of such
information.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities will be the Master Servicing Fee. The "Master
Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each Mortgage Loan, will accrue in accordance
with the terms of the related Mortgage Note at a rate equal to ________% per
annum, in the case of Mortgage Loans other than Specially Serviced Mortgage
Loans, and ____% per annum, in the case of Specially Serviced Mortgage Loans,
and will be computed on the basis of the same principal amount and for the same
period respecting which any related interest payment on the related Mortgage
Loan is computed. [As additional servicing compensation, the Master Servicer
will be entitled to retain all Prepayment Premiums, assumption and modification
fees, late charges and penalty interest and, as and to the extent described
below, Prepayment Interest Excesses collected from mortgagors. In addition, the
Master Servicer is authorized but not required to invest or direct the
investment of funds held in the Certificate Account in Permitted Investments,
and the Master Servicer will be entitled to retain any interest or other income
earned on such funds.]
The principal compensation to be paid to the Special Servicer in respect of
its special servicing activities will consist of the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and the Workout
Fee. Like the Master Servicing Fee, the "Special Servicing Fee" will be payable
monthly on a loan-by-loan basis from amounts received in respect of interest on
each Mortgage Loan, will accrue in accordance with the terms of the related
Mortgage Note at a rate equal to _____% per annum, in the case of Mortgage Loans
other than Specially Serviced Mortgage Loans, and ___% per annum, in the case of
Specially Serviced Mortgage Loans, and will be computed on the basis of the same
principal amount and for the same period respecting which any related interest
payment on the related Mortgage Loan is computed. The "Workout Fee" will equal a
specified percentage (varying from ____% to ____% (the "Workout Fee Rate")
depending on the related unpaid principal balance) of, and will be payable from,
all collections and proceeds received in respect of principal of each Mortgage
Loan which is or has been a Specially Serviced Mortgage Loan (including those
for which servicing has been returned to the Master Servicer); provided that, in
the case of Liquidation Proceeds, the otherwise fixed Workout Fee Rate will be
proportionately reduced to reflect the extent to which, if at all, the principal
portion of such Liquidation Proceeds is less than the unpaid principal balance
of the related Mortgage Loan immediately prior to the receipt thereof. As
additional servicing compensation, the Special Servicer will be entitled to
retain all assumption and modification fees received on Mortgage Loans serviced
thereby.
Although the Master Servicer and Special Servicer are each required to
service and administer the Mortgage Pool in accordance with the general
servicing standard described under "-General" above and, accordingly, without
regard to its right to receive compensation under the Pooling and Servicing
Agreement, additional servicing compensation in the nature of assumption and
modification fees, Prepayment Premiums and Prepayment Interest Excesses may
under certain circumstances provide the Master Servicer or the Special Servicer,
as the case may be, with an economic disincentive to comply with such standard.
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S-32
[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period (as defined herein) on a date that is prior to its Due
Date in such Due Period, a Prepayment Interest Shortfall may result. If such a
principal prepayment occurs during any Due Period after the Due Date for such
Mortgage Loan in such Due Period, the amount of interest (net of related
Servicing Fees) that accrues on the amount of such principal prepayment may
exceed (such excess, a "Prepayment Interest Excess") the corresponding amount of
interest accruing on the Certificates. As to any Due Period, to the extent
Prepayment Interest Excesses collected for all Mortgage Loans are greater than
Prepayment Interest Shortfalls incurred, such excess will be paid to the Master
Servicer as additional servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates-Advances", the Master Servicer will be entitled to receive interest
on Advances, and the Master Servicer and the Special Servicer will be entitled
to receive interest on reimbursable servicing expenses, such interest to be
paid, contemporaneously with the reimbursement of the related Advance or
servicing expense, out of any other collections on the Mortgage Loans.]
The Master Servicer generally will be required to pay all expenses incurred
by it in connection with its servicing activities under the Pooling and
Servicing Agreement, and will not be entitled to reimbursement therefor except
as expressly provided in the Pooling and Servicing Agreement. However, the
Master Servicer will be permitted to pay certain of such expenses directly out
of the Certificate Account and at times without regard to the relationship
between the expense and the funds from which it is being paid. In connection
therewith, the Master Servicer will be responsible for all fees of any
sub-servicers, other than management fees earned in connection with the
operation of an REO Property, which management fees the Master Servicer will be
authorized to pay out of revenues received from such property (thereby reducing
the portion of such revenues that would otherwise be available for distribution
to Certificateholders). See "Description of the
Certificates-Distributions-Method, Timing and Amount" herein and "Description of
the Pooling Agreements-Certificate Account" and "-Servicing Compensation and
Payment of Expenses" in the Prospectus.
Modifications, Waivers and Amendments
The Master Servicer or the Special Servicer may, consistent with its normal
servicing practices, agree to modify, waive or amend any term of any Mortgage
Loan, without the consent of the Trustee or any Certificateholder, subject,
however, to each of the following limitations, conditions and restrictions:
(a) with limited exception, the Master Servicer and the Special
Servicer may not agree to any modification, waiver or amendment that will
(i) affect the amount or timing of any scheduled payments of principal or
interest on the Mortgage Loan or (ii) in its judgment, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely
payment of amounts due thereon; unless, in any such case, in the Master
Servicer's or the Special Servicer's judgment, as the case may be, a
material default on the Mortgage Loan has occurred or a payment default is
reasonably foreseeable, and such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation.
(b) [describe additional limitations to permitted modification
standards]
The Master Servicer and the Special Servicer will notify the Trustee of any
modification, waiver or amendment of any term of any Mortgage Loan, and must
deliver to the Trustee or the related Custodian, for deposit in the related
Mortgage File, an original counterpart of the agreement related to such
modification, waiver or amendment, promptly (and in any event within [10]
business days) following the execution thereof. Copies of each agreement whereby
any such modification, waiver or amendment of any term of any Mortgage Loan is
effected are to be available for review during normal business hours at the
offices of the [Trustee]. See "Description of the Certificates-Reports to
Certificateholders; Certain Available Information" herein.
<PAGE>
S-33
Inspections; Collection of Operating Information
The Special Servicer will perform physical inspections of each Mortgaged
Property at such times and in such manner as are consistent with the Special
Servicer's normal servicing procedures, but in any event (i) at least once per
calendar year, commencing in the calendar year _______, and (ii), if any
scheduled payment becomes more than 60 days delinquent on the related Mortgage
Loan, as soon as practicable thereafter. The Special Servicer will prepare a
written report of each such inspection describing the condition of the Mortgaged
Property and specifying the existence of any material vacancies in the Mortgaged
Property, of any sale, transfer or abandonment of the Mortgaged Property, of any
material change in the condition or value of the Mortgaged Property, or of any
waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to deliver
such statements, the Special Servicer is also required to collect and review the
annual operating statements of the related Mortgaged Property. [Most] of the
Mortgages obligate the related borrower to deliver annual property operating
statements. However, there can be no assurance that any operating statements
required to be delivered will in fact be delivered, nor is the Special Servicer
likely to have any practical means of compelling such delivery in the case of an
otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to above
are to be available for review by Certificateholders during normal business
hours at the offices of the [Trustee]. See "Description of the
Certificates-Reports to Certificateholders; Certain Available Information"
herein.
Additional Obligations of the Master Servicer with Respect to ARM Loans
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is not
published or is otherwise unavailable, then the Master Servicer is required to
select a comparable alternative index over which it has no direct control, that
is readily verifiable and that is acceptable under the terms of the related
Mortgage Note. If the Mortgage Rate or the Monthly Payment with respect to any
ARM Loan is not properly adjusted by the Master Servicer pursuant to the terms
of such Mortgage Loan and applicable law, the Master Servicer is required to
deposit in the Certificate Account on or prior to the Due Date of the affected
Monthly Payment, an amount equal to the excess, if any, of (i) the amount that
would have been received from the borrower if the Mortgage Rate or Monthly
Payment had been properly adjusted, over (ii) the amount of such improperly
adjusted Monthly Payment, subject to reimbursement only out of such amounts as
are recovered from the borrower in respect of such excess.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all payments
under and proceeds of the Mortgage Loans received after the Cut-off Date
(exclusive of payments of principal and interest due on or before the Cut-off
Date); (ii) any REO Property; (iii) such funds or assets as from time to time
are deposited in the Certificate Account; (iv) the rights of the mortgagee under
all insurance policies with respect to the Mortgage Loans; and (v) certain
rights of the Depositor under the Purchase Agreement relating to Mortgage Loan
document delivery requirements and the representations and warranties of the
Mortgage Loan Seller regarding the Mortgage Loans.
The Certificates will consist of the following four Classes: (i) the Class
A Certificates and the Class R Certificates (collectively, the "Senior
Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. The Class A Certificates will have an initial Certificate Balance
of $____________, which represents ____% of the Initial Pool Balance; the Class
B Certificates will have an initial Certificate Balance of $____________, which
represents ____% of the Initial Pool Balance; the Class C Certificates will have
an initial Certificate Balance of $____________, which represents ___% of the
Initial Pool Balance; and the Class R Certificates will have an initial
Certificate Balance of $100.
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S-34
The Certificate Balance of any Class of Certificates outstanding at any time
represents the maximum amount which the holders thereof are entitled to receive
as distributions allocable to principal from the cash flow on the Mortgage Loans
and the other assets in the Trust Fund. On each Distribution Date, the
Certificate Balance of each Class of Certificates will be reduced by any
distributions of principal actually made on, and any Collateral Support Deficit
actually allocated to, such Class of Certificates on such Distribution Date.
Only the Senior Certificates and the Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C Certificates have
not been registered under the Securities Act of 1933 and are not offered hereby.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its DTC Participants in denominations of $25,000
and integral multiples of $1 in excess thereof. The Class B Certificates will be
issued in fully registered, certificated form in denominations of $100,000 and
integral multiples of $1,000 in excess thereof, with one Class B Certificate
evidencing an additional amount equal to the remainder of the initial
Certificate Balance of such Class. The Class R Certificates will be issued in
registered, certificated form in minimum denominations of 20% Percentage
Interest in such Class. The "Percentage Interest" evidenced by any Offered
Certificate is equal to the initial denomination thereof as of the Delivery
Date, divided by the initial Certificate Balance of the Class to which it
belongs.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The Depositor
has been informed by DTC that DTC's nominee will be Cede & Co. No Class A
Certificate Owner will be entitled to receive a Definitive Class A Certificate
representing its interest in such Class, except as set forth below under
"-Book-Entry Registration of the Class A Certificates-Definitive Class A
Certificates". Unless and until Definitive Class A Certificates are issued, all
references to actions by holders of the Class A Certificates will refer to
actions taken by DTC upon instructions received from Class A Certificate Owners
through DTC Participants, and all references herein to payments, notices,
reports and statements to holders of the Class A Certificates will refer to
payments, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Class A Certificates, for distribution to Class A
Certificate Owners through its DTC Participants in accordance with DTC
procedures. See "Description of the Certificates-Book-Entry Registration and
Definitive Certificates" in the Prospectus.
Until Definitive Class A Certificates are issued, interests in such Class
will be transferred on the book-entry records of DTC and its DTC Participants.
Subject to certain restrictions on the transfer of such Certificates to Plans
(see "ERISA Considerations" herein), the Class B and Class R Certificates may be
transferred or exchanged at the offices of ___________________________ located
at ______________________________________________, without the payment of any
service charges, other than any tax or other governmental charge payable in
connection therewith. ________________________ will initially serve as registrar
(in such capacity, the "Certificate Registrar") for purposes of recording and
otherwise providing for the registration of the Offered Certificates and of
transfers and exchanges of the Class B and, if issued, the Definitive Class A
Certificates.
Book-Entry Registration of the Class A Certificates
General. The Class A Certificates will be registered as one or more global
Certificates held by Cede & Co., as nominee of DTC. Beneficial interests in such
Certificates will be held by investors through the book-entry facilities of DTC.
Except as described below, no Class A Certificate Owner will be entitled to
receive a physical certificate representing its beneficial interest in such
Certificates (a "Definitive Class A Certificate").
Beneficial ownership of a Class A 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 related Class
A Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Class A 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 related Class A Certificate Owner's Financial Intermediary is not a DTC
Participant). Therefore, the related Class A Certificate Owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Class A
Certificate. Beneficial ownership of a Class A Certificate may only be
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S-35
transferred by compliance with the procedures of such Financial Intermediaries
and DTC Participants. Arrangements may be made for clearance and settlement
through the Euroclear System and CEDEL, S.A., if they are DTC Participants.
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 Class A Certificates, whether held
for its own account or as a nominee for another person. In general, beneficial
ownership of Class A Certificates will be subject to the rules, regulations and
procedures governing DTC and DTC Participants as in effect from time to time.
Distributions of principal of and interest 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 Class A
Certificate Owners 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 Class A Certificate Owners that it represents.
Under a book-entry format, Class A Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Trustee to DTC. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a Class A Certificate Owner to pledge to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such Class A Certificates, may be limited due to the lack of physical
certificates for such Class A Certificates. In addition, issuance of the Class A
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.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action permitted
to be taken by a Certificateholder under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose
depository accounts the Class A Certificates are credited. DTC may take
conflicting actions with respect to other Class A Certificates to the extent
that such actions are taken on behalf of Financial Intermediaries whose holdings
include such Class A Certificates.
Definitive Class A Certificates. Definitive Class A Certificates will be
issued to Class A Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only under the limited conditions set forth in the
Prospectus under "Description of the Certificates-Book-Entry Registration and
Definitive Certificates."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates-Book-Entry Registration and
Definitive Certificates," the Trustee is required to notify, through DTC, DTC
Participants who have ownership of Class A Certificates as indicated on the
records of DTC of the availability of Definitive Class A Certificates. Upon
surrender by DTC of the definitive certificates representing the Class A
Certificates and upon receipt of instructions from DTC for re-registration, the
Trustee will reissue the Class A Certificates as Definitive Class A Certificates
issued in the respective principal amounts owned by individual Class A
Certificate Owners, and thereafter the Trustee and the Master Servicer will
recognize the holders of such Definitive Class A Certificates as
Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and Certificates maintained on the
book-entry records thereof, see "Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in the Prospectus.
Distributions
Method, Timing and Amount. Distributions on the Certificates will be made
by the [Trustee], to the extent of available funds, on the 25th day of each
month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in _________ 199__ (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close
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S-36
of business on each Record Date, which will be the last business day of the
month preceding the month in which the related Distribution Date occurs. Each
such distribution will be made by wire transfer in immediately available funds
to the account specified by the Certificateholder at a bank or other entity
having appropriate facilities therefor, if such Certificateholder will have
provided the [Trustee] with wiring instructions [no less than five business days
prior to the related Record Date (which wiring instructions may be in the form
of a standing order applicable to all subsequent distributions) and is the
registered owner of Certificates with an aggregate initial principal amount of
at least $5,000,000], or otherwise by check mailed to such Certificateholder.
The final distribution on any Certificate will be made in like manner, but only
upon presentation and surrender of such Certificate at the location that will be
specified in a notice of the pendency of such final distribution. All
distributions made with respect to a Class of Certificates will be allocated pro
rata among the outstanding Certificates of such Class based on their respective
Percentage Interests.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date (the "Available Distribution Amount") will, in general,
equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans and
any REO Properties that is on deposit in the Certificate Account as of the
related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a Due Date
subsequent to the related Due Period,
(ii) all principal prepayments (together with related payments of
interest thereon and related Prepayment Premiums), Liquidation
Proceeds, Insurance Proceeds, Condemnation Proceeds and other
unscheduled recoveries received subsequent to the related Due Period,
and
(iii) all amounts in the Certificate Account that are due or
reimbursable to any person other than the Certificateholders; and
(b) all Advances made by the Master Servicer with respect to such
Distribution Date. See "Description of the Pooling Agreements-Certificate
Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that begins
on the [second] day of the month preceding the month in which such Distribution
Date occurs and ends on the [first] day of the month in which such Distribution
Date occurs. For purposes of the discussion in the Prospectus, the Due Period is
also the Prepayment Period. The "Determination Date" for each Distribution Date
is the [15th] day of the month in which such Distribution Date occurs or, if any
such [15th] day is not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Certificate
Balances of the Offered Certificates have not been reduced to zero, the
[Trustee] will (except as otherwise described under "-Termination; Retirement of
Certificates" below) apply amounts on deposit in the Certificate Account, to the
extent of the Available Distribution Amount, in the following order of priority:
(1) to distributions of interest to the holders of the Senior
Certificates, pro rata among the respective Classes thereof, in an
amount equal to all Distributable Certificate Interest in respect of
the Senior Certificates for such Distribution Date and, to the extent
not previously paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Senior
Certificates in an amount equal to the sum of (a) the product of (i)
the Senior Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) the entire Unscheduled Principal Distribution Amount for
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S-37
such Distribution Date (but not more than would be necessary to reduce
the aggregate Certificate Balance of the Senior Certificates to zero);
(3) to distributions to the holders of the Class A Certificates, until all
amounts of Collateral Support Deficit previously allocated to the
Class A Certificates, but not previously reimbursed, have been
reimbursed in full;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class B Certificates for such Distribution
Date and, to the extent not previously paid, for all prior
Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of (i)
the Class B Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) if the Certificate Balances of the Senior Certificates have
been reduced to zero, then to the extent not distributed in reduction
of such Certificate Balances on such Distribution Date, the entire
Unscheduled Principal Distribution Amount for such Distribution Date
(but not more than would be necessary to reduce the Certificate
Balance of the Class B Certificates to zero);
(6) to distributions to the holders of the Class B Certificates , until
all amounts of Collateral Support Deficit previously allocated to the
Class B Certificates, but not previously reimbursed, have been
reimbursed in full;
(7) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class C Certificates for such Distribution
Date and, to the extent not previously distributed, for all prior
Distribution Dates;
(8) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(9) to distributions to the holders of the Class C Certificates, until all
amounts of Collateral Support Deficit previously allocated to the
Class C Certificates, but not previously reimbursed, have been
reimbursed in full; and
(10) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance, if any, of the Available
Distribution Amount.
The distributions of principal to the holders of the Senior Certificates as
described in clause (2) above will be paid first to the holders of the Class R
Certificates until the Certificate Balance of such Certificates is reduced to
zero, and then to the holders of the Class A Certificates. Accordingly, it is
expected that the Certificate Balance of the Class R Certificates would be
reduced to zero on the initial Distribution Date and that no other distributions
of interest or principal would thereafter be made on the Class R Certificates
except pursuant to subparagraph (10) immediately above.
Reimbursement of previously allocated Collateral Support Deficit will not
constitute distributions of principal for any purpose and will not result in an
additional reduction in the Certificate Balance of the Class of Certificates in
respect of which any such reimbursement is made.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Certificates for the initial Distribution Date will equal _______% per annum.
With respect to any Distribution Date subsequent to the initial Distribution
Date,
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the Pass-Through Rate for each Class of Certificates will equal the weighted
average of the applicable Effective Net Mortgage Rates for the Mortgage Loans,
weighted on the basis of their respective Stated Principal Balances immediately
prior to such Distribution Date. For purposes of calculating the Pass-Through
Rate for any Class of Certificates and any Distribution Date, the "applicable
Effective Net Mortgage Rate" for each Mortgage Loan is: (a) if such Mortgage
Loan accrues interest on the basis of a 360-day year consisting of twelve 30-day
months (a "30/360 basis", which is the basis of accrual for interest on the
Certificates), the Net Mortgage Rate in effect for such Mortgage Loan as of the
commencement of the related Due Period; and (b) if such Mortgage Loan does not
accrue interest on a 30/360 basis, the annualized rate at which interest would
have to accrue during the one month period preceding the Due Date for such
Mortgage Loan during the related Due Period on a 30/360 basis in order to
produce the aggregate amount of interest (adjusted to the actual Net Mortgage
Rate) accrued during such period. The "Net Mortgage Rate" for each Mortgage Loan
is equal to the related Mortgage Rate in effect from time to time less the
Servicing Fee Rate.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of Certificates for each Distribution Date
represents that portion of the Accrued Certificate Interest in respect of such
Class of Certificates for such Distribution Date that is net of such Class's
allocable share (calculated as described below) of the aggregate of any
Prepayment Interest Shortfalls resulting from voluntary principal prepayments
made on the Mortgage Loans during the related Due Period that are not offset by
Prepayment Interest Excesses collected during the related Due Period (the
aggregate of such Prepayment Interest Shortfalls that are not so offset or
covered, as to such Distribution Date, the "Net Aggregate Prepayment Interest
Shortfall").
The "Accrued Certificate Interest" in respect of each Class of Certificates
for each Distribution Date is equal to one month's interest at the Pass-Through
Rate applicable to such Class of Certificates for such Distribution Date accrued
on the related Certificate Balance outstanding immediately prior to such
Distribution Date. Accrued Certificate Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of Certificates will equal the
product of (a) such Net Aggregate Prepayment Interest Shortfall, multiplied by
(b) a fraction, the numerator of which is equal to the Accrued Certificate
Interest in respect of such Class of Certificates for such Distribution Date,
and the denominator of which is equal to the Accrued Certificate Interest in
respect of all the Classes of Certificates for such Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments [, net of any related Workout Fees
payable therefrom to the Special Servicer], due during or, if and to the extent
not previously received or advanced and distributed to Certificateholders on a
preceding Distribution Date, prior to the related Due Period, in each case to
the extent paid by the related borrower or advanced by the Master Servicer and
included in the Available Distribution Amount for such Distribution Date. The
Scheduled Principal Distribution Amount from time to time will include all late
payments of principal made by a borrower, including late payments in respect of
a delinquent Balloon Payment, regardless of the timing of such late payments,
except to the extent such late payments are otherwise reimbursable to the Master
Servicer for prior Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution Date
will equal the aggregate of: (a) all voluntary prepayments of principal received
on the Mortgage Loans during the related Due Period [, net of any related
Workout Fees payable therefrom to the Special Servicer]; and (b) any other
collections (exclusive of payments by borrowers) received on the Mortgage Loans
and any REO Properties during the related Due Period, whether in the form of
Liquidation Proceeds, Insurance Proceeds, Condemnation Proceeds, net income from
REO Property or otherwise, that were identified and applied by the Master
Servicer as recoveries of previously unadvanced principal of the related
Mortgage Loan [, net of any related Workout Fees payable therefrom to the
Special Servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as the
"Distributable Principal".
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The "Ownership Percentage" evidenced by any Class or Classes of
Certificates as of any date of determination will equal a fraction, expressed as
a percentage, the numerator of which is the then Certificate Balance(s) of such
Class(es) of Certificates, and the denominator of which is the then aggregate
Stated Principal Balance of the Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans. The "Stated
Principal Balance" of each Mortgage Loan outstanding at any time represents the
principal balance of such Mortgage Loan ultimately due and payable to the
Certificateholders subject to the Special Servicer's right to receive any
Workout Fee with respect to such Mortgage Loan. The Stated Principal Balance of
each Mortgage Loan will initially equal the Cut-off Date Balance thereof and, on
each Distribution Date, will be reduced by the portion of the Distributable
Principal for such date that is attributable to such Mortgage Loan. The Stated
Principal Balance of a Mortgage Loan may also be reduced in connection with any
forced reduction of the actual unpaid principal balance thereof imposed by a
court presiding over a bankruptcy proceeding wherein the related borrower is the
debtor. See "Certain Legal Aspects of Mortgage Loans-Foreclosure-Bankruptcy
Laws" in the Prospectus. If any Mortgage Loan is paid in full or such Mortgage
Loan (or any Mortgaged Property acquired in respect thereof) is otherwise
liquidated, then, as of the first Distribution Date that follows the end of the
Due Period in which such payment in full or liquidation occurred, and
notwithstanding that a loss may have occurred in connection with any such
liquidation, the Stated Principal Balance of such Mortgage Loan shall be zero.
For purposes of calculating distributions on, and allocations of Collateral
Support Deficit to, the Certificates, as well as for purposes of calculating the
amount of Servicing Fees payable each month, each REO Property will be treated
as if there exists with respect thereto an outstanding mortgage loan (an "REO
Loan"), and all references to "Mortgage Loan", "Mortgage Loans" and "Mortgage
Pool" herein and in the Prospectus, when used in such context, will be deemed to
also be references to or to also include, as the case may be, any "REO Loans".
Each REO Loan will generally be deemed to have the same characteristics as its
actual predecessor Mortgage Loan, including the same adjustable or fixed
Mortgage Rate (and, accordingly, the same Net Mortgage Rate and Effective Net
Mortgage Rate) and the same unpaid principal balance and Stated Principal
Balance. Amounts due on such predecessor Mortgage Loan, including any portion
thereof payable or reimbursable to the Master Servicer, will continue to be
"due" in respect of the REO Loan; and amounts received in respect of the related
REO Property, net of payments to be made, or reimbursement to the Master
Servicer or the Special Servicer for payments previously advanced, in connection
with the operation and management of such property, generally will be applied by
the Master Servicer as if received on the predecessor Mortgage Loan. However,
notwithstanding the terms of the predecessor Mortgage Loan, the Monthly Payment
"due" on an REO Loan will in all cases, for so long as the related Mortgaged
Property is part of the Trust Fund, be deemed to equal one month's interest
thereon at the applicable Mortgage Rate.
Subordination; Allocation of Collateral Support Deficit
The rights of holders of the Class B Certificates and the Class C
Certificates to receive distributions of amounts collected or advanced on the
Mortgage Loans will be subordinated, to the extent described herein, to the
rights of holders of the Senior Certificates; and the rights of holders of the
Class C Certificates to receive distributions of amounts collected or advanced
on the Mortgage Loans will be subordinated, to the extent described herein, to
the rights of holders of the Class B Certificates. This subordination is
intended to enhance the likelihood of timely receipt by the holders of the
Senior Certificates of the full amount of all Distributable Certificate Interest
payable in respect of such Certificates on each Distribution Date, and the
ultimate receipt by such holders of principal in an amount equal to the entire
aggregate Certificate Balance of the Senior Certificates. Similarly, but to a
lesser degree, this subordination is also intended to enhance the likelihood of
timely receipt by the holders of the Class B Certificates of the full amount of
all Distributable Certificate Interest payable in respect of such Certificates
on each Distribution Date, and the ultimate receipt by such holders of principal
in an amount equal to the entire Certificate Balance of the Class B
Certificates. This subordination will be accomplished by the application of the
Available Distribution Amount on each Distribution Date in accordance with the
order of priority described under "-Distributions-Priority" above. No other form
of Credit Support will be available for the benefit of the holders of the
Offered Certificates.
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S-40
Allocation to the Senior Certificates, for so long as they are outstanding,
of the entire Unscheduled Principal Distribution Amount for each Distribution
Date will generally accelerate the amortization of such Certificates relative to
the actual amortization of the Mortgage Loans. To the extent that the Senior
Certificates are amortized faster than the Mortgage Loans, the percentage
interest evidenced by the Senior Certificates in the Trust Fund will be
decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Class B and Class C Certificates), thereby increasing, relative
to their respective Certificate Balances, the subordination afforded the Senior
Certificates by the Class B and Class C Certificates. Following retirement of
the Class A Certificates, allocation to the Class B Certificates, for so long as
they are outstanding, of the entire Unscheduled Principal Distribution Amount
for each Distribution Date will provide a similar benefit to such Class of
Certificates as regards the relative amount of subordination afforded thereto by
the Class C Certificates.
On each Distribution Date, immediately following the distributions to be
made to the Certificateholders on such date, the [Trustee] is to calculate the
amount, if any, by which (i) the aggregate Stated Principal Balance of the
Mortgage Pool expected to be outstanding immediately following such Distribution
Date is less than (ii) the then aggregate Certificate Balance of the REMIC
Regular Certificates (any such deficit, "Collateral Support Deficit"). The
[Trustee] will be required to allocate any such Collateral Support Deficit among
the respective Classes of Certificates as follows: first, to the Class C
Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; second, to the Class B Certificates, until the
remaining Certificate Balance of such Class of Certificates is reduced to zero;
and last, to the Class A Certificates, until the remaining Certificate Balance
of such Class of Certificates has been reduced to zero. Any allocation of
Collateral Support Deficit to a Class of Certificates will be made by reducing
the Certificate Balance thereof by the amount so allocated. Any Collateral
Support Deficit allocated to a Class of REMIC Regular Certificates will be
allocated among the respective Certificates of such Class in proportion to the
Percentage Interests evidenced thereby. In general, Collateral Support Deficit
will result from the occurrence of: (i) losses and other shortfalls on or in
respect of the Mortgage Loans, including as a result of defaults and
delinquencies thereon, Nonrecoverable Advances made in respect thereof and the
payment to the Master Servicer of interest on Advances and certain servicing
expenses; and (ii) certain unanticipated, non-Mortgage Loan specific expenses of
the Trust Fund, including certain reimbursements to the Trustee as described
under "Description of the Pooling Agreements - Certain Matters Regarding the
Trustee" in the Prospectus, certain reimbursements to the Master Servicer and
the Depositor as described under "Description of the Pooling Agreements -
Certain Matters Regarding the Master Servicer and the Depositor" in the
Prospectus and certain federal, state and local taxes, and certain tax-related
expenses, payable out of the Trust Fund as described under "Certain Federal
Income Tax Consequences - REMICs - Prohibited Transactions Tax and Other Taxes "
in the Prospectus. Accordingly, the allocation of Collateral Support Deficit as
described above will constitute an allocation of losses and other shortfalls
experienced by the Trust Fund.
Advances
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability determination
described in the next paragraph, to make advances (each, an "Advance") out of
its own funds or, subject to the replacement thereof as provided in the Pooling
and Servicing Agreement, funds held in the Certificate Account that are not
required to be part of the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of: (i) all Monthly Payments (net of
the related Servicing Fee), other than Balloon Payments, which were due on the
Mortgage Loans during the related Due Period and delinquent as of the related
Determination Date; (ii) in the case of each Mortgage Loan delinquent in respect
of its Balloon Payment as of the related Determination Date, an amount equal to
one month's interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee), but
only to the extent that the related mortgagor has not made a payment sufficient
to cover such amount under any forbearance arrangement or otherwise that has
been included in the Available Distribution Amount for such Distribution Date;
and (iii) in the case of each REO Property, an amount equal to thirty days'
imputed interest with respect thereto at the related Mortgage Rate in effect as
of the commencement of the related Due Period (net of the related Servicing
Fee), but only to the extent that such amount is not covered by any net income
from such REO Property included in the Available Distribution Amount for such
Distribution Date. The Master Servicer's obligations to make Advances in respect
of any Mortgage Loan or REO
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S-41
Property will continue through liquidation of such Mortgage Loan or disposition
of such REO Property, as the case may be.
The Master Servicer will be entitled to recover any Advance made out of its
own funds from any amounts collected in respect of the Mortgage Loan as to which
such Advance was made, whether in the form of late payments, Insurance Proceeds,
Condemnation Proceeds, Liquidation Proceeds or otherwise ("Related Proceeds").
Notwithstanding the foregoing, the Master Servicer will not be obligated to make
any Advance that it determines in its reasonable good faith judgment would, if
made, not be recoverable out of Related Proceeds (a "Nonrecoverable Advance"),
and the Master Servicer will be entitled to recover any Advance that it so
determines to be a Nonrecoverable Advance out of general funds on deposit in the
Certificate Account. Nonrecoverable Advances will represent a portion of the
losses to be borne by the Certificateholders. See "Description of the
Certificates-Advances in Respect of Delinquencies" and "Description of the
Pooling Agreements-Certificate Account" in the Prospectus.
In connection with its recovery of any Advance or reimbursable servicing
expense, each of the Master Servicer and the Special Servicer will be entitled
to be paid, out of any amounts then on deposit in the Certificate Account,
interest at ____% per annum (the "Reimbursement Rate") accrued on the amount of
such Advance or expense from the date made to but not including the date of
reimbursement.
To the extent not offset or covered by amounts otherwise payable on the
Class C Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Class B Certificates; and to the extent not
offset or covered by amounts otherwise payable on the Class B and Class C
Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Senior Certificates. To the extent that any
holder of an Offered Certificate must bear the cost of the Master Servicer's
and/or Special Servicer's Advances, the benefits of such Advances to such holder
will be contingent on the ability of such holder to reinvest the amounts
received as a result of such Advances at a rate of return equal to or greater
than the Reimbursement Rate.]
Each Distribution Date Statement delivered by the Trustee to the
Certificateholders will contain information relating to the amounts of Advances
made with respect to the related Distribution Date. See "Description of the
Certificates-Reports to Certificateholders; Certain Available Information"
herein and "Description of Certificates-Reports to Certificateholders" in the
Prospectus.
Reports to Certificateholders; Certain Available Information
On each Distribution Date, the [Trustee] will be required to forward by
mail to each holder of an Offered Certificate a statement (a "Distribution Date
Statement") providing various items of information relating to distributions
made on such date with respect to the relevant Class and the recent status of
the Mortgage Pool. For a more detailed discussion of the particular items of
information to be provided in each Distribution Date Statement, as well as a
discussion of certain annual information reports to be furnished by the
[Trustee] to persons who at any time during the prior calendar year were holders
of the Offered Certificates, see "Description of the Certificates-Reports to
Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [Trustee] make
available at its offices primarily responsible for [administration of the Trust
Fund], during normal business hours, for review by any holder of an Offered
Certificate, originals or copies of, among other things, the following items:
(a) the Pooling and Servicing Agreement and any amendments thereto, (b) all
Distribution Date Statements delivered to holders of the relevant Class of
Offered Certificates since the Delivery Date, (c) all officer's certificates
delivered to the Trustee since the Delivery Date as described under "Description
of the Pooling Agreements-Evidence as to Compliance" in the Prospectus, (d) all
accountants' reports delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements-Evidence as to
Compliance" in the Prospectus, (e) the most recent property inspection report
prepared by or on behalf of the Special Servicer and delivered to the Trustee in
respect of each Mortgaged Property, (f) the most recent annual operating
statements, if any, collected by or on behalf of the Special Servicer and
delivered to the Trustee in respect of each Mortgaged Property, and (g) any and
all modifications, waivers and amendments of the terms of a
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Mortgage Loan entered into by the Master Servicer or the Special Servicer and
delivered to the Trustee. Copies of any and all of the foregoing items will be
available from the [Trustee] upon request; however, the [Trustee] will be
permitted to require payment of a sum sufficient to cover the reasonable costs
and expenses of providing such copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and DTC
Participants. Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Financial Intermediaries and Class A
Certificate Owners, and by Financial Intermediaries to Class A Certificate
Owners, will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time. The Master
Servicer, the Special Servicer, the Trustee, the Depositor, the REMIC
Administrator and the Certificate Registrar are required to recognize as
Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee for
DTC.
Voting Rights
At all times during the term of the Pooling and Servicing Agreement, the
voting rights for the series offered hereby (the "Voting Rights") shall be
allocated among the respective Classes of Certificateholders in proportion to
the Certificate Balances of their Certificates. Voting Rights allocated to a
Class of Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
Termination; Retirement of Certificates
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in respect
thereof) or other liquidation of the last Mortgage Loan or REO Property subject
thereto, and (ii) the purchase of all of the assets of the Trust Fund by the
Master Servicer or the Depositor. Written notice of termination of the Pooling
and Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at the office of the Certificate Registrar or other location
specified in such notice of termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (a) the sum of (i) the aggregate Purchase Price of all the
Mortgage Loans (exclusive of REO Loans) then included in the Trust Fund and (ii)
the aggregate fair market value of all REO Properties then included in the Trust
Fund (which fair market value for any REO Property may be less than the Purchase
Price for the corresponding REO Loan), as determined by an appraiser mutually
agreed upon by the Master Servicer and the Trustee, over (b) the aggregate of
amounts payable or reimbursable to the Master Servicer under the Pooling and
Servicing Agreement. Such purchase will effect early retirement of the then
outstanding Offered Certificates, but the right of the Master Servicer or the
Depositor to effect such termination is subject to the requirement that the then
aggregate Stated Principal Balance of the Mortgage Pool be less than 5% of the
Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer or the Depositor, as the case may be, for the Mortgage Loans and other
assets in the Trust Fund (if the Trust Fund is to be terminated as a result of
the purchase described in the preceding paragraph), together with all other
amounts on deposit in the Certificate Account and not otherwise payable to a
person other than the Certificateholders (see "Description of the Pooling
Agreements-Certificate Account" in the Prospectus), will be applied generally as
described above under "-Distributions-Priority", except that the distributions
of principal described thereunder will, in the case of each Class of
Certificates, be made, subject to available funds, in an amount equal to the
related Certificate Balance then outstanding.
The Trustee
____________, a _____________________, will act as Trustee on behalf of the
Certificateholders. [The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee.] The offices of the Trustee primarily
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S-43
responsible for the administration of the Trust Fund are located at
_____________________________. See "Description of the Pooling Agreements-the
Trustee", "-Duties of the Trustee", "-Certain Matters Regarding the Trustee" and
"-Resignation and Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
Yield Considerations
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the rate
and timing of payments of principal on such Certificate; and (iii) the aggregate
amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will equal the weighted average
of the applicable Effective Net Mortgage Rates. Accordingly, the yield on the
Offered Certificates will be sensitive to (x) adjustments to the Mortgage Rates
on the ARM Loans and (y) changes in the relative composition of the Mortgage
Pool as a result of scheduled amortization, voluntary prepayments and
involuntary liquidations of the Mortgage Loans. See "Description of the Mortgage
Pool" herein and "-Yield Considerations-Rate and Timing of Principal Payments"
below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by the
rate and timing of principal payments on the Mortgage Loans (including principal
prepayments on the Mortgage Loans resulting from both voluntary prepayments by
the mortgagors and involuntary liquidations). The rate and timing of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules thereof, the dates on which Balloon Payments are due and the rate and
timing of principal prepayments and other unscheduled collections thereon
(including for this purpose, collections made in connection with liquidations of
Mortgage Loans due to defaults, casualties or condemnations affecting the
Mortgaged Properties, or purchases of Mortgage Loans out of the Trust Fund).
Prepayments and, assuming the respective stated maturity dates therefor have not
occurred, liquidations and purchases of the Mortgage Loans, will result in
distributions on the Offered Certificates of amounts that would otherwise be
distributed over the remaining terms of the Mortgage Loans. Defaults on the
Mortgage Loans, particularly at or near their stated maturity dates, may result
in significant delays in payments of principal on the Mortgage Loans (and,
accordingly, on the Offered Certificates) while work-outs are negotiated or
foreclosures are completed. See "Servicing of the Mortgage Loans-Modifications,
Waivers and Amendments" herein and "Description of the Pooling
Agreements-Realization Upon Defaulted Mortgage Loans" and "Certain Legal Aspects
of Mortgage Loans-Foreclosure" in the Prospectus. Because the rate of principal
payments on the Mortgage Loans will depend on future events and a variety of
factors (as described below), no assurance can be given as to such rate or the
rate of principal prepayments in particular. The Depositor is not aware of any
relevant publicly available or authoritative statistics with respect to the
historical prepayment experience of a large group of mortgage loans comparable
to the Mortgage Loans.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which such Certificates are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans are in turn distributed
on such Certificates. An investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on such Certificate could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments on such Certificate could result in an
actual yield to such investor that is lower than the anticipated yield. In
general, the earlier a payment of principal is made on an Offered Certificate
purchased at a discount or premium, the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal payments on such investor's Offered Certificates occurring at a rate
higher (or lower) than the rate anticipated by the investor during any
particular period would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
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Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net Aggregate
Prepayment Interest Shortfalls, generally be borne: first, by the holders of the
Class C Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; second, by the holders of the Class B
Certificates, to the extent of amounts otherwise distributable in respect of
their Certificates; and last, by the holders of the Senior Certificates. As more
fully described herein under "Description of the
Certificates-Distributions-Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective Classes
of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by a
number of factors, including, without limitation, prevailing interest rates, the
terms of the Mortgage Loans (for example, Prepayment Premiums, adjustable
Mortgage Rates and amortization terms that require Balloon Payments), the
demographics and relative economic vitality of the areas in which the Mortgaged
Properties are located and the general supply and demand for rental properties,
food services, retail shopping space, office space or beds in a Health
Care-Related Facility, as the case may be, in such areas, the quality of
management of the Mortgaged Properties, the servicing of the Mortgage Loans,
possible changes in tax laws and other opportunities for investment. See "Risk
Factors" and "Description of the Mortgage Pool" herein and "Risk Factors" and
"Yield and Maturity Considerations-Yield and Prepayment Considerations" in the
Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Although most of the Mortgage Loans are ARM Loans, adjustments to the
Mortgage Rates thereon will generally be limited by lifetime and/or periodic
caps and floors and, in each case, will be based on the related Index (which may
not rise and fall consistently with mortgage interest rates then available) plus
the related Gross Margin (which may be different from margins then offered on
adjustable rate mortgage loans). See "Description of the Mortgage Pool-Certain
Payment Characteristics" and "-The Index" herein. As a result, the Mortgage
Rates on the ARM Loans at any time may not be comparable to prevailing market
interest rates. In addition, as prevailing market interest rates decline, and
without regard to whether the Mortgage Rates on the ARM Loans decline in a
manner consistent therewith, related borrowers may have an increased incentive
to refinance for purposes of either (i) converting to a fixed rate loan and
thereby "locking in" such rate, or (ii) taking advantage of a different index,
margin or rate cap or floor on another adjustable rate mortgage loan. The
Mortgage Loans may be prepaid at any time and, in ____ cases (approximately
_____% of the Initial Pool Balance), may be prepaid in whole or in part without
payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by Federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to which
a default will have occurred as of any date or as to the overall rate of
prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until a date that is scheduled to be at least
_____ days and as many as ______ days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of the
Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming such
prices did not account for such delay).
<PAGE>
S-45
Unpaid Distributable Certificate Interest. As described under "Description
of the Certificates-Distributions-Priority" herein, if the portion of the
Available Distribution Amount distributable in respect of interest on any Class
of Offered Certificates on any Distribution Date is less than the Distributable
Certificate Interest then payable for such Class, the shortfall will be
distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
Weighted Average Life
The weighted average life of an Offered Certificate refers to the average
amount of time that will elapse from the date of its issuance until each dollar
allocable to principal of such Certificate is distributed to the investor. The
weighted average life of an Offered Certificate will be influenced by, among
other things, the rate at which principal on the Mortgage Loans is paid or
otherwise collected, which may be in the form of scheduled amortization,
voluntary prepayments, Insurance Proceeds, Condemnation Proceeds and Liquidation
Proceeds.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the ["Constant Prepayment
Rate" or "CPR" model. The CPR model represents an assumed constant annual rate
of prepayment each month, expressed as a per annum percentage of the then
scheduled principal balance of the pool of mortgage loans. As used in each of
the following tables, the column headed "0%" assumes that none of the Mortgage
Loans is prepaid before maturity. The columns headed "___%", "___%", "___%" and
"___%" assume that prepayments on the Mortgage Loans are made at those levels of
CPR. There is no assurance, however, that prepayments of the Mortgage Loans will
conform to any level of CPR, and no representation is made that the Mortgage
Loans will prepay at the levels of CPR shown or at any other prepayment rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each of the Class A Certificates and the Class B Certificates that
would be outstanding after each of the dates shown at various CPRs and the
corresponding weighted average life of each such Class of Certificates. The
tables have been prepared on the basis of the following assumptions, among
others: (i) scheduled monthly payments of principal and interest on the Mortgage
Loans, in each case prior to any prepayment of the loan, will be timely received
(with no defaults) and will be distributed on the 25th day of each month
commencing in ________ 199___; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan, until
its next Interest Rate Adjustment Date, when a new Mortgage Rate that is to
remain in effect to maturity will be calculated reflecting the value of the
related Index as of ________, 199__, subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 30/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the Cut-off
Date will continue to be due (a) in the case of each Fixed Rate Loan, on each
Due Date until maturity and (b) in the case of each ARM Loan, until its next
Payment Adjustment Date, when a new payment that is to be due on each Due Date
until maturity will be calculated reflecting the appropriate Mortgage Rate and
remaining amortization term; (v) any principal prepayments on the Mortgage Loans
will be received on their respective Due Dates at the respective levels of CPR
set forth in the tables, and there will be no Net Aggregate Prepayment Interest
Shortfalls in connection therewith; and (vi) the Mortgage Loan Seller will not
be required to repurchase any Mortgage Loan, and neither the Master Servicer nor
the Depositor will exercise its option to purchase all the Mortgage Loans and
thereby cause an early termination of the Trust Fund. To the extent that the
Mortgage Loans have characteristics that differ from those assumed in preparing
the tables set forth below, the Class A Certificates or the Class B Certificates
may mature earlier or later than indicated by the tables. It is highly unlikely
that the Mortgage Loans will prepay at any constant rate until maturity or that
all the Mortgage Loans will prepay at the same rate. In addition, variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentages of initial Certificate Balances
(and weighted average lives) shown in the following tables. Such variations may
occur even if the average prepayment experience of the Mortgage Loans were to
equal any of the specified CPR percentages. Investors are urged to conduct their
own analyses of the rates at which the Mortgage Loans may be expected to prepay.
Based on the foregoing assumptions, the following table indicates the resulting
weighted average lives of the Class A Certificates and sets forth the percentage
of
<PAGE>
S-46
the initial Certificate Balance of the Class A Certificates that would be
outstanding after each of the dates shown at the indicated CPRs.
Percent of the Initial Certificate Balance of the
Class A Certificates at the Respective CPRs
Set Forth Below:
Date 0% % % % %
- ---- -- -- -- -- --
Delivery Date............................. 100.0 100.0 100.0 100.0 100.0
_________ 25, 1997........................
_________ 25, 1998........................
_________ 25, 1999........................
_________ 25, 2000........................
_________ 25, 2001........................
_________ 25, 2002........................
_________ 25, 2003........................
_________ 25, 2004........................
_________ 25, 2005........................
Weighted Average Life (years)(A)..........
- ----
(A) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class A Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth the
percentage of the initial Certificate Balance of the Class B Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
Percent of the Initial Certificate Balance of the
Class B Certificates at the Respective CPRs
Set Forth Below:
Date 0% % % % %
- ---- -- -- -- -- --
Delivery Date............................. 100.0 100.0 100.0 100.0 100.0
_________ 25, 1997........................
_________ 25, 1998........................
_________ 25, 1999........................
_________ 25, 2000........................
_________ 25, 2001........................
_________ 25, 2002........................
_________ 25, 2003........................
_________ 25, 2004........................
_________ 25, 2005........................
Weighted Average Life (years)(A)..........
[NY01:238039.2] 17629-00005 11/15/96 1:03pm
<PAGE>
S-47
- --------------------
(A) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the number
of years from the date of issuance of the Class B Certificates to the
related Distribution Date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the reductions in the principal balance of
such Class B Certificate.
[The following disclosure is applicable to Stripped Interest Certificates, when
offered...
Yield Sensitivity of the Class S Certificates
The yield to maturity of the Class S Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the Mortgage
Loans, which may fluctuate significantly from time to time. A rapid rate of
principal payments will have a material negative effect on the yield to maturity
of the Class S Certificates. There can be no assurance that the Mortgage Loans
will prepay at any particular rate. Prospective investors in the Class S
Certificates should fully consider the associated risks, including the risk that
such investors may not fully recover their initial investment.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class S Certificates to various constant rates of prepayment on
the Mortgage Loans by projecting the monthly aggregate payments of interest on
the Class S Certificates and computing the corresponding pre-tax yields to
maturity on a corporate bond equivalent basis, based on the assumptions
described in the third paragraph under the heading "--Weighted Average Life"
above, including the assumptions regarding the characteristics and performance
of the Mortgage Loans which differ from the actual characteristics and
performance thereof and assuming the aggregate purchase price set forth below.
Any differences between such assumptions and the actual characteristics and
performance of the Mortgage Loans and of the Class S Certificates may result in
yields being different from those shown in such table. Discrepancies between
assumed and actual characteristics and performance underscore the hypothetical
nature of the table, which is provided only to give a general sense of the
sensitivity of yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Class S Certificates
at the Following CPRs
Assumed Purchase Price 0% % % % % %
- ---------------------- -- -- -- -- -- --
$________________........ ____% ____% ____% ____% ____% ____%
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class S Certificates, would cause
the discounted present value of such assumed stream of cash flows to equal the
assumed purchase price listed in the table. Accrued interest is included in the
assumed purchase price and is used in computing the corporate bond equivalent
yields shown. These yields 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 S Certificates, and thus do not reflect the return on
any investment in the Class S Certificates when any reinvestment rates other
than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Class S
Certificates is likely to differ from those shown in the tables, even if all of
the Mortgage Loans prepay at the indicated CPRs over any given time period or
over the entire life of the Certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class S Certificates will conform to
the yields described herein. Investors are urged to make their investment
decisions based
<PAGE>
S-48
on the determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Class S Certificates should fully consider the risk
that a rapid rate of prepayments on the Mortgage Loans could result in the
failure of such investors to fully recover their investments.]
Additional Yield Considerations Applicable Solely to the Class R Certificates
The Class R Certificateholders' after-tax rate of return on the Class R
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Class R Certificates. Holders of Class R
Certificates may have tax liabilities with respect to their Certificates during
the early years of the Trust Fund's term that substantially exceed any
distributions payable thereon during any such period. In addition, holders of
Class R Certificates 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 the Class R
Certificates may be negative or may otherwise be significantly adversely
affected. The timing and amount of taxable income attributable to the Class R
Certificates will depend on, among other things, the timing and amounts of
prepayments and losses experienced with respect to the Mortgage Pool.
The Class R Certificateholders should consult their tax advisors as to the
effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Class R Certificates on after-tax rates of
return on such Certificates. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and Class C Certificates will evidence
"regular interests" in such REMIC and (ii) the Class R Certificates will be the
sole class of "residual interests" in such REMIC, each within the meaning of the
REMIC Provisions in effect on the date hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Trust Fund
will be classified as a grantor trust under Subpart E, part I of subchapter J of
the Code, and not as an association taxable as a corporation or as a
partnership.]
The __________ Certificates [may] [will] [will not] be treated as having
been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of __%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Original
Issue Discount" in the Prospectus.
The ___________________ Certificates may be treated for Federal income tax
purposes as having been issued at a premium. Whether any holder of [either] such
Class of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Premium" in
the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest
<PAGE>
S-49
described in Section 856(c)(3)(B) of the Code. Moreover, the Offered
Certificates will be "qualified mortgages" within the meaning of Section
860(A)(3) of the Code. See "Certain Federal Income Tax
Consequences-REMICs-Characterization of Investments in REMIC Certificates" in
the Prospectus.
________________________, a _______________, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences-REMICs-Reporting and Other Administrative
Matters" and "Description of the Pooling Agreements-Certain Matters Regarding
the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "-Events of Default" and "-Rights Upon Event of Default" in the
Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences-REMICs" in the Prospectus.
Special Tax Considerations Applicable to REMIC Residual Certificates
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests to
United States persons. Pursuant to the Pooling and Servicing Agreement, the
Class R Certificates may not be transferred to non-United States persons. See
"Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating to
"excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Class R Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences-REMICs-Taxation of
Owners of REMIC Residual Certificates-Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if "a significant purpose of the transfer was
to impede the assessment or collection of tax." Based on the REMIC Regulations,
the Class R Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Class R Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Class R Certificates. All transfers of the Class R
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Class R Certificates
constitute noneconomic residual interests. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Residual
Certificates-Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Certificateholders from the Trust Fund with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the Trust Fund's term as a result of their ownership of the
Class R Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Class R Certificate (or possibly later
under the "wash sale" rules of Section
<PAGE>
S-50
1091 of the Code) may cause the Class R Certificateholders' after-tax rate of
return to be zero or negative even if the Class R Certificateholders' pre-tax
rate of return is positive. That is, on a present value basis, the Class R
Certificateholders' resulting tax liabilities could substantially exceed the sum
of any tax benefits and the amount of any cash distributions on the Class R
Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage Interest
in the Class R Certificates shall, by its acceptance of such Certificates, agree
to irrevocably appoint the Master Servicer as its agent to perform all of the
duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations-Additional Yield Considerations Applicable Solely to the Class R
Certificates" herein and "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated _____________, 199_ (the "Underwriting Agreement"), ______________________
(the "Underwriter") has agreed to purchase and the Depositor has agreed to sell
to the Underwriter each class of the Offered Certificates. It is expected that
delivery of the Class A Certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that the delivery of
the Class B and Class R Certificates will be made at the offices of the
Underwriter, _____________________, on or about _____________, 199_ against
payment therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of its Certificates is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
Depositor from the sale of the Offered Certificates, before deducting expenses
payable by the Depositor, will be approximately ____% of the aggregate
Certificate Balance of the Offered Certificates plus accrued interest thereon
from the Cut-off Date. The Underwriter may effect such transactions by selling
its Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
Underwriter and any dealers that participate with such Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Depositor, against certain civil liabilities under the Securities Act of
1933, as amended, or contribute to payments required to be made in respect
thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the Prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the Offered
Certificates and
<PAGE>
S-51
the status of the applicable form of credit enhancement. Except as
described herein under "Description of the Certificates--Reports to
Certificateholders; Certain Available Information", there can be no assurance
that any additional information regarding the Offered Certificates will be
available through any other source. In addition, the Depositor is not aware of
any source through which price information about the Offered Certificates will
be generally available on an ongoing basis. The limited nature of such
information regarding the Offered Certificates may adversely affect the
liquidity of the Offered Certificates, even if a secondary market for the
Offered Certificates becomes available.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made at
negotiated prices determined at the time of sale.]
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Underwriter by ________________. Certain federal income tax matters and
other matters will be passed upon for the Depositor by Thacher Proffitt & Wood.
RATING
It is a condition to issuance that the Senior Certificates be rated not
lower than "__", and the Class B Certificates be rated not lower than "__", by
____________________________________.
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood or
frequency of prepayments (whether voluntary or involuntary) on the Mortgage
Loans, [The following disclosure is applicable to Stripped Interest
Certificates, when offered... or the possibility that as a result of prepayments
investors in the Class S Certificates may realize a lower than anticipated yield
or may fail to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any Class
thereof and, if so, what such rating would be. A rating assigned to any Class of
Offered Certificates by a rating agency that has not been requested by the
Depositor to do so may be lower than the rating assigned thereto by
___________________________.
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. 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.
LEGAL INVESTMENT
[As long as the Senior Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, the Senior Certificates will constitute "mortgage related
securities" within the meaning of SMMEA, and as such 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 whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Under
<PAGE>
S-52
SMMEA, however, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA.]
[The Class B Certificates will not be "mortgage related securities" for
purposes of SMMEA. As a result, the appropriate characterization of the Class B
Certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase the Class B Certificates,
is subject to significant interpretive uncertainties.]
The Depositor makes no representation as to the proper characterization of
any class of Offered Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase 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 or 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.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh plans
and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, including insurance company general
accounts, that is subject to ERISA, or Section 4975 of the Code (each, a "Plan")
should review with its legal advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction that is prohibited or is not
otherwise permitted either under ERISA or Section 4975 of the Code or whether
there exists any statutory or administrative exemption applicable thereto.
[The U.S. Department of Labor issued to [Underwriter] an individual
prohibited transaction exemption, Prohibited Transaction Exemption _____ (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code
and Section 501(i) of ERISA, certain transactions, among others, relating to the
servicing and operation of mortgage pools, such as the Mortgage Pool, and the
purchase, sale and holding of mortgage pass-through certificates, such as the
Class A Certificates, underwritten by an Underwriter (as hereinafter defined),
provided that certain conditions set forth in the Exemption are satisfied. For
purposes of this Section "ERISA Considerations", the term "Underwriter" shall
include (a) [Underwriter], (b) any person directly or indirectly, through one or
more intermediaries, controlling, controlled by or under common control with
[Underwriter], and (c) any member of the underwriting syndicate or selling group
of which a person described in (a) or (b) is a manager or co-manager with
respect to the 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 A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the 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
A Certificates must not be subordinated to the rights and interests evidenced by
the other certificates of the same trust. Third, the Class A Certificates at the
time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by Standard & Poor's Corporation ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit
Rating Co. ("Duff & Phelps") or Fitch Investors Service, Inc. ("Fitch"). Fourth,
the Trustee cannot be an affiliate of any other member of the "Restricted
Group", which consists of any Underwriter, the Depositor, the Trustee, the
Master Servicer, the Special Servicer, any sub-servicer, and any mortgagor with
respect to Mortgage Loans constituting more than 5% of the aggregate unamortized
principal balance of the Mortgage Loans as of the date of initial issuance of
<PAGE>
S-53
the Class A Certificates. Fifth, the sum of all payments made to and retained by
the Underwriter must represent not more than reasonable compensation for
underwriting the 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
obligations; and the sum of all payments made to and retained by the Master
Servicer, the Special Servicer and any sub-servicer 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 A Certificates are not subordinated to any other Class of
Certificates, the second general condition set forth above is satisfied with
respect to such Certificates. It is a condition of the issuance of the Class A
Certificates that they be rated not lower than "__" by
_______________________________________________________. As of the Delivery
Date, the fourth general condition set forth above will be satisfied with
respect to the Class A Certificates. A fiduciary of a Plan contemplating
purchasing a Class A Certificate in the secondary market must make its own
determination that, at the time of such purchase, the Class A Certificates
continue to satisfy the third and fourth general conditions set forth above. A
fiduciary of a Plan contemplating purchasing a Class A Certificate, whether in
the initial issuance of such Certificates or in the secondary market, must make
its own determination that the first, fifth and sixth general conditions set
forth above will be satisfied with respect to such Class A Certificate.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates in such other
investment pools must have been rated in one of the three highest categories of
Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least one year prior
to the Plan's acquisition of Class A Certificates; and (iii) certificates in
such other investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of Class A
Certificates.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1) (A) through (D) of the Code) in connection
with (i) the direct or indirect sale, exchange or transfer of Class A
Certificates in the initial issuance of Certificates between the Depositor or an
Underwriter and a Plan when the Depositor, the Underwriter, the Trustee, the
Master Servicer, the Special Servicer, a Sub-Servicer or a mortgagor is a Party
in Interest with respect to the investing Plan, (ii) the direct or indirect
acquisition or disposition in the secondary market of the Class A Certificates
by a Plan and (iii) the holding of Class A Certificates by a Plan. However, no
exemption is provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2)
and 407 of ERISA for the acquisition or holding of a Class A Certificate on
behalf of an "Excluded Plan" by any person who has discretionary authority or
renders investment advice with respect to the assets of such Excluded Plan. For
purposes hereof, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Certificates between
the Depositor or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in such Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the Mortgage Loans or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Class A Certificates by a Plan and (3) the holding of Class A Certificates by a
Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Mortgage Pool.
<PAGE>
S-54
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Offered Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A Certificates constitute "certificates" for
purposes of the Exemption and (ii) the specific and general conditions and the
other requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider the availability
of any other prohibited transaction exemptions. See "ERISA Considerations" in
the Prospectus. A purchaser of a Class A Certificate should be aware, however,
that even if the conditions specified in one or more exemptions are satisfied,
the scope of relief provided by an exemption may not cover all acts which might
be construed as prohibited transactions.
Because the characteristics of the Class B Certificates [and the Class R
Certificates] do not meet the requirements of the Exemption, the purchase or
holding of such Certificates by a Plan may result in prohibited transactions or
the imposition of excise taxes or civil penalties. As a result, no transfer of a
Class B Certificate [or Class R Certificate] or any interest therein may be made
to a Plan or to any person who is directly or indirectly purchasing such
Certificate or interest therein on behalf of, as named fiduciary of, as trustee
of, or with assets of a Plan, unless the prospective transferee provides the
Certificate Registrar with a certification of facts and an opinion of counsel
which establish to the satisfaction of the Certificate Registrar that such
transfer will not result in a violation of Section 406 of ERISA or Section 4975
of the Code or cause the Master Servicer, the Special Servicer or the Trustee to
be deemed a fiduciary of such Plan or result in the imposition of an excise tax
under Section 4975 of the Code. See "ERISA Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase an Offered Certificate 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.
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus Supplement and
the Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Depositor or by the
Underwriter. This Prospectus Supplement and the Prospectus do not constitute an
offer to sell, or a solicitation of an offer t buy, the securities offered
hereby to anyone in any jurisdiction in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make any such offer or solicitation. Neither the delivery of this Prospectus
Supplement and the Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time o since the date of this Prospectus Supplement or the
Prospectus.
TABLE OF CONTENTS
Page
Prospectus Supplement
Summary................................................
Risk Factors...........................................
Description of the Mortgage Pool.......................
Servicing of the Mortgage Loans........................
Description of the Certificates........................
Yield and Maturity Considerations......................
Certain Federal Income Tax Consequences................
Method of Distribution.................................
Legal Matters..........................................
Rating.................................................
Legal Investment.......................................
ERISA Considerations...................................
Index of Principal Definitions.........................
Prospectus
Prospectus Supplement..................................
Available Information..................................
Incorporation of Certain Information by Reference......
Summary of Prospectus..................................
Risk Factors...........................................
Description of the Trust Funds.........................
Yield and Maturity Considerations......................
The Depositor..........................................
Description of the Certificates........................
Description of the Pooling Agreements..................
Description of Credit Support..........................
Certain Legal Aspects of Mortgage Loans................
Certain Federal Income Tax Consequences................
State Tax and Other Considerations.....................
ERISA Considerations...................................
Legal Investment.......................................
Use of Proceeds........................................
Method of Distribution.................................
Legal Matters..........................................
Financial Information..................................
Rating.................................................
Index of Principal Definitions.........................
DEUTSCHE MORTGAGE & ASSET RECEIVING
CORPORATION
$___________
Mortgage Pass-Through
Certificates
Series 199_-_
Class A Certificates Variable Rate $___________
Class B Certificates Variable Rate $___________
Class R Certificates Variable Rate $ 100
-----------
PROSPECTUS SUPPLEMENT
-----------
[UNDERWRITER]
Dated __________, 199_
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
30/360 basis .........................................................S-38
Accrued Certificate Interest...............................................S-38
Advance ....................................................S-6, S-40
ARM Loans ..........................................................S-2
Available Distribution Amount..............................................S-36
Balloon Payment ..........................................................S-3
CEDEL .........................................................S-14
Certificate Balance..........................................................ii
Certificate Registrar......................................................S-34
Certificates ............................................................i
Class ............................................................i
Class A Certificate Owner...................................................S-1
Class B Available Distribution Amount.......................................S-5
Class S Certificates........................................................iii
Collateral Support Deficit............................................S-8, S-40
Constant Prepayment Rate...................................................S-45
CPR .........................................................S-45
Cut-off Date ...........................................................ii
Cut-off Date Balance.......................................................S-14
Debt Service Coverage Ratio................................................S-24
Definitive Class A Certificate........................................S-1, S-34
Delivery Date ...........................................................ii
Depositor ..........................................................S-1
Determination Date.........................................................S-36
Distributable Certificate Interest.........................................S-38
Distributable Principal....................................................S-38
Distribution Date .....................................................ii, S-35
Distribution Date Statement................................................S-41
Due Date ..........................................................S-2
Due Period .........................................................S-36
Effective Net Mortgage Rate................................................S-38
ERISA .........................................................S-10
ERISA Considerations.......................................................S-52
Euroclear .........................................................S-14
Financial Intermediary.....................................................S-34
Fixed Rate Loans ..........................................................S-3
Form 8-K .........................................................S-29
Gross Margin ..........................................................S-2
Index ..........................................................S-2
Initial Pool Balance.........................................................ii
Interest Rate Adjustment Date...............................................S-2
LTV Ratio .........................................................S-25
Master Servicer ..........................................................S-1
Master Servicing Fee.......................................................S-31
Monthly Payments ..........................................................S-2
Mortgage .........................................................S-14
Mortgage Loan Seller........................................................S-1
Mortgage Loans ...........................................................ii
Mortgage Note .........................................................S-14
Mortgage Pool ...........................................................ii
Mortgage Rate ..........................................................S-2
Mortgaged Property....................................................S-2, S-14
Net Aggregate Prepayment Interest Shortfall................................S-38
Net Mortgage Rate ..........................................................S-4
Net Operating Income.......................................................S-24
Nonrecoverable Advance.....................................................S-41
Offered Certificates....................................................i, S-34
Ownership Percentage.......................................................S-39
Pass-Through Rate ...........................................................ii
Payment Adjustment Date.....................................................S-3
Percentage Interest........................................................S-34
Plan .........................................................S-52
Pooling and Servicing Agreement.............................................S-3
Prepayment Interest Excess.................................................S-32
Prepayment Premiums........................................................S-15
Purchase Agreement..........................................................S-2
Purchase Price .........................................................S-28
Reimbursement Rate.........................................................S-41
Related Proceeds .........................................................S-41
REMIC Administrator.........................................................S-1
REMIC Regular Certificates...................................................ii
REO Loan .........................................................S-39
REO Property ...................................................S-30, S-33
Senior Certificates.....................................................i, S-33
Servicing Fees .........................................................S-31
Special Servicer ..........................................................S-1
Special Servicing Fee......................................................S-31
Specially Serviced Mortgage Assets.........................................S-30
Specially Serviced Mortgage Loans..........................................S-30
Stated Principal Balance...................................................S-39
Trust Fund ...........................................................ii
Trustee ..........................................................S-1
Underwriter ......................................................i, S-50
Underwriting Agreement.....................................................S-50
Voting Rights .........................................................S-42
Workout Fee .........................................................S-31
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ________, 199_
[Version 1 - General Base]
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
Mortgage Pass-Through Certificates
The mortgage pass-through certificates offered hereby (the "Offered
Certificates") and by the supplements hereto (each, a "Prospectus Supplement")
will be offered from time to time in series. The Offered Certificates of any
series, together with any other mortgage pass-through certificates of such
series, are collectively referred to herein as the "Certificates".
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") to be formed by Deutsche Mortgage & Asset Receiving Corporation
(the "Depositor") and including a segregated pool (a "Mortgage Asset Pool") of
various types of multifamily and commercial mortgage loans ("Mortgage Loans"),
mortgage-backed securities ("MBS") that evidence interests in, or that are
secured by pledges of, one or more of various types of multifamily or commercial
mortgage loans, or a combination of Mortgage Loans and MBS (collectively,
"Mortgage Assets"). The Mortgage Loans in (and the mortgage loans underlying the
MBS in) any Trust Fund will be secured by first or junior liens on, or security
interests in, one or more of the following types of real property: (i)
residential properties consisting of five or more rental or cooperatively-owned
dwelling units and mobile home parks; and (ii) commercial properties consisting
of office buildings, retail shopping facilities, hotels and motels, health
care-related facilities, recreational vehicle parks, warehouse facilities,
mini-warehouse facilities, self-storage facilities, industrial facilities,
parking lots, restaurants, mixed use properties (that is, any combination of the
foregoing), and unimproved land. However, neither restaurants nor health
care-related facilities will represent security for a material concentration of
the Mortgage Loans in (or the mortgage loans underlying the MBS in) any Trust
Fund, based on principal balance at the time such Trust Fund is formed. If so
specified in the related Prospectus Supplement, the Trust Fund for a series of
Certificates may also include letters of credit, surety bonds, insurance
policies, guarantees, reserve funds, guaranteed investment contracts, interest
rate exchange agreements, interest rate cap or floor agreements, or other
agreements designed to reduce the effects of interest rate fluctuations on the
Mortgage Assets. See "Description of the Trust Funds", "Description of the
Certificates" and "Description of Credit Support".
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. See
"Yield and Maturity Considerations". A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination;
Retirement of the Certificates".
(cover continued on next page)
--------
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR ANY
OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE ASSETS
WILL BE GUARANTEED OR INSURED BY THE DEPOSITOR OR ANY OF ITS AFFILIATES OR,
UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------
Prospective investors should review the information appearing on page 8
herein under the caption "Risk Factors" and such information as may be set forth
under the caption "Risk Factors" in the related Prospectus Supplement before
purchasing any Offered Certificate.
The Offered Certificates of any series may be offered through one or more
different methods, including offerings through underwriters, as described under
"Method of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any
series prior to the offering thereof. There can be no assurance that a secondary
market for any Offered Certificates will develop or, if it does develop,
<PAGE>
(ii)
that it will continue. Unless otherwise provided in the related Prospectus
Supplement, the Certificates will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Offered Certificates of any series unless
accompanied by the Prospectus Supplement for such series.
--------
The date of this Prospectus is ______, 199_
<PAGE>
(iii)
(cover continued)
As described in the related Prospectus Supplement, the Certificates of each
series, including the Offered Certificates of such series, may consist of one or
more classes of Certificates that: (i) provide for the accrual of interest
thereon based on a fixed, variable or adjustable interest rate; (ii) are senior
or subordinate to one or more other classes of Certificates in entitlement to
certain distributions on the Certificates; (iii) are entitled to distributions
of principal, with disproportionate, nominal or no distributions of interest;
(iv) are entitled to distributions of interest, with disproportionate, nominal
or no distributions of principal; (v) provide for distributions of interest
thereon or principal thereof that commence only following the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of such series; (vi) provide for distributions of principal thereof
to be made, from time to time or for designated periods, at a rate that is
faster (and, in some cases, substantially faster) or slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund; or
(vii) provide for distributions of principal thereof to be made, subject to
available funds, based on a specified principal payment schedule or other
methodology. Distributions in respect of the Certificates of each series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. See "Description of the
Certificates".
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" (each, a "REMIC") for federal income
tax purposes. If applicable, the Prospectus Supplement for a series of
Certificates will specify which class or classes of such series of Certificates
will be considered to be regular interests in the related REMIC and which class
of Certificates or other interests will be designated as the residual interest
in the related REMIC. See "Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this Prospectus
specifying the location of definitions of important or frequently used defined
terms.
<PAGE>
(iv)
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to each series of Offered Certificates will, among other things, set forth, as
and to the extent appropriate: (i) a description of the class or classes of such
Offered Certificates, including the payment provisions with respect to each such
class, the aggregate principal amount, if any, of each such class, the rate at
which interest accrues from time to time, if at all, with respect to each such
class or the method of determining such rate, and whether interest with respect
to each such class will accrue from time to time on its aggregate principal
amount, if any, or on a specified notional amount, if at all; (ii) information
with respect to any other classes of Certificates of the same series; (iii) the
respective dates on which distributions are to be made; (iv) information as to
the assets, including the Mortgage Assets, constituting the related Trust Fund
(all such assets, with respect to the Certificates of any series, the "Trust
Assets"); (v) the circumstances, if any, under which the related Trust Fund may
be subject to early termination; (vi) additional information with respect to the
method of distribution of such Offered Certificates; (vii) whether one or more
REMIC elections will be made and the designation of the "regular interests" and
"residual interests" in each REMIC to be created and the identity of the person
(the "REMIC Administrator") responsible for the various tax-related duties in
respect of each REMIC to be created; (viii) the initial percentage ownership
interest in the related Trust Fund to be evidenced by each class of Certificates
of such series; (ix) information concerning the Trustee (as defined herein) of
the related Trust Fund; (x) if the related Trust Fund includes Mortgage Loans,
information concerning the Master Servicer and any Special Servicer (each as
defined herein) of such Mortgage Loans and the circumstances under which all or
a portion, as specified, of the servicing of a Mortgage Loan would transfer from
the Master Servicer to the Special Servicer; (xi) information as to the nature
and extent of subordination of any class of Certificates of such series,
including a class of Offered Certificates; and (xii) whether such Offered
Certificates will be initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to each
series of Offered Certificates contain 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, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http://www.sec.gov).
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or any related Prospectus Supplement, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Depositor or any other person. Neither the delivery of this Prospectus or
any related Prospectus Supplement nor any sale made hereunder or thereunder
shall under any circumstances create an implication that there has been no
change in the information herein since the date hereof or therein since the date
thereof. This Prospectus and any related Prospectus Supplement are not an offer
to sell or a solicitation of an offer to buy any security in any jurisdiction in
which it is unlawful to make such offer or solicitation.
<PAGE>
(v)
The Master Servicer, the Trustee or another specified person will cause to
be provided to registered holders of the Offered Certificates of each series
periodic unaudited reports concerning the related Trust Fund. If beneficial
interests in a class or series of Offered Certificates are being held and
transferred in book-entry format through the facilities of The Depository Trust
Company ("DTC") as described herein, then unless otherwise provided in the
related Prospectus Supplement, such reports will be sent on behalf of the
related Trust Fund to a nominee of DTC as the registered holder of the Offered
Certificates. Conveyance of notices and other communications by DTC to its
participating organizations, and directly or indirectly through such
participating organizations to the beneficial owners of the applicable Offered
Certificates, will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time. See
"Description of the Certificates--Reports to Certificateholders" and
"--Book-Entry Registration and Definitive Certificates".
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder. The Depositor intends to make a
written request to the staff of the Commission that the staff either (i) issue
an order pursuant to Section 12(h) of the Exchange Act exempting the Depositor
from certain reporting requirements under the Exchange Act with respect to each
Trust Fund or (ii) state that the staff will not recommend that the Commission
take enforcement action if the Depositor fulfills its reporting obligations as
described in its written request. If such request is granted, the Depositor will
file or cause to be filed with the Commission as to each Trust Fund the periodic
unaudited reports to holders of the Offered Certificates referenced in the
preceding paragraph; however, because of the nature of the Trust Funds, it is
unlikely that any significant additional information will be filed. In addition,
because of the limited number of Certificateholders expected for each series,
the Depositor anticipates that a significant portion of such reporting
requirements will be permanently suspended following the first fiscal year for
the related Trust Fund.
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 of 1934, as amended, prior
to the termination of an offering of Offered Certificates evidencing interests
therein. 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 Offered Certificates, upon written or oral request of
such person, 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 Offered Certificates, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by reference
in such documents). Such requests to the Depositor should be directed in writing
to the Depositor at One International Place, Room 608, Boston, Massachusetts
02110, Attention: Secretary, or by telephone at (617) 951-7690.
<PAGE>
(vi)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROSPECTUS SUPPLEMENT........................................................................................................ iv
AVAILABLE INFORMATION........................................................................................................ iv
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................................................................ v
SUMMARY OF PROSPECTUS........................................................................................................ 1
RISK FACTORS................................................................................................................. 8
Limited Liquidity of Offered Certificates........................................................................... 8
Credit Support Limitations.......................................................................................... 9
Effect of Prepayments on Average Life of Certificates............................................................... 9
Effect of Prepayments on Yield of Certificates ..................................................................... 11
Limited Nature of Ratings........................................................................................... 11
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans................................... 11
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset Pool................................... 15
Termination......................................................................................................... 15
DESCRIPTION OF THE TRUST FUNDS............................................................................................... 16
General............................................................................................................. 16
Mortgage Loans...................................................................................................... 16
MBS................................................................................................................. 20
Certificate Accounts................................................................................................ 21
Credit Support...................................................................................................... 21
Cash Flow Agreements................................................................................................ 21
YIELD AND MATURITY CONSIDERATIONS............................................................................................ 22
General............................................................................................................. 22
Pass-Through Rate................................................................................................... 22
Payment Delays...................................................................................................... 22
Certain Shortfalls in Collections of Interest....................................................................... 22
Yield and Prepayment Considerations................................................................................. 23
Weighted Average Life and Maturity.................................................................................. 24
Other Factors Affecting Yield, Weighted Average Life and Maturity................................................... 25
THE DEPOSITOR................................................................................................................ 27
DEUTSCHE BANK AG............................................................................................................. 27
DESCRIPTION OF THE CERTIFICATES.............................................................................................. 28
General............................................................................................................. 28
Distributions of Interest on the Certificates....................................................................... 29
</TABLE>
<PAGE>
(vii)
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Distributions of Principal of the Certificates...................................................................... 30
Distributions on the Certificates in Respect of Prepayment Premiums or in Respect of Equity
Participations...................................................................................................... 31
Allocation of Losses and Shortfalls................................................................................. 31
Advances in Respect of Delinquencies................................................................................ 31
Reports to Certificateholders....................................................................................... 32
Voting Rights....................................................................................................... 34
Termination......................................................................................................... 34
Book-Entry Registration and Definitive Certificates................................................................. 35
DESCRIPTION OF THE POOLING AGREEMENTS........................................................................................ 36
General............................................................................................................. 36
Assignment of Mortgage Loans; Repurchases........................................................................... 37
Representations and Warranties; Repurchases......................................................................... 38
Collection and Other Servicing Procedures........................................................................... 39
Sub-Servicers....................................................................................................... 41
Certificate Account................................................................................................. 42
Modifications, Waivers and Amendments of Mortgage Loans............................................................. 44
Realization Upon Defaulted Mortgage Loans........................................................................... 45
Hazard Insurance Policies........................................................................................... 46
Due-on-Sale and Due-on-Encumbrance Provisions....................................................................... 47
Servicing Compensation and Payment of Expenses...................................................................... 47
Evidence as to Compliance........................................................................................... 48
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor........................................................................................................... 49
Events of Default................................................................................................... 50
Rights Upon Event of Default........................................................................................ 51
Amendment........................................................................................................... 51
List of Certificateholders.......................................................................................... 52
The Trustee......................................................................................................... 52
Duties of the Trustee............................................................................................... 52
Certain Matters Regarding the Trustee............................................................................... 53
Resignation and Removal of the Trustee.............................................................................. 53
DESCRIPTION OF CREDIT SUPPORT................................................................................................ 53
General............................................................................................................. 53
Subordinate Certificates............................................................................................ 54
Insurance or Guarantees with Respect to Mortgage Loans.............................................................. 54
Letter of Credit.................................................................................................... 55
Certificate Insurance and Surety Bonds.............................................................................. 55
Reserve Funds....................................................................................................... 55
Credit Support with respect to MBS.................................................................................. 55
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS...................................................................................... 56
General............................................................................................................. 56
Types of Mortgage Instruments....................................................................................... 56
</TABLE>
<PAGE>
(viii)
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Leases and Rents.................................................................................................... 57
Personalty.......................................................................................................... 57
Foreclosure......................................................................................................... 57
Bankruptcy Laws..................................................................................................... 60
Environmental Considerations........................................................................................ 62
Due-on-Sale and Due-on-Encumbrance Provisions....................................................................... 63
Junior Liens; Rights of Holders of Senior Liens..................................................................... 64
Subordinate Financing............................................................................................... 64
Default Interest and Limitations on Prepayments..................................................................... 64
Applicability of Usury Laws......................................................................................... 65
Certain Laws and Regulations........................................................................................ 65
Americans with Disabilities Act..................................................................................... 65
Soldiers' and Sailors' Civil Relief Act of 1940..................................................................... 65
Forfeitures in Drug and RICO Proceedings............................................................................ 66
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................................................................... 66
General............................................................................................................. 66
REMICs.............................................................................................................. 67
Grantor Trust Funds................................................................................................. 84
STATE AND OTHER TAX CONSEQUENCES............................................................................................. 93
ERISA CONSIDERATIONS......................................................................................................... 93
General............................................................................................................. 93
Plan Asset Regulations.............................................................................................. 94
Consultation With Counsel........................................................................................... 96
Tax Exempt Investors................................................................................................ 96
LEGAL INVESTMENT............................................................................................................. 96
USE OF PROCEEDS.............................................................................................................. 97
METHOD OF DISTRIBUTION....................................................................................................... 98
LEGAL MATTERS................................................................................................................ 99
FINANCIAL INFORMATION........................................................................................................ 99
RATING....................................................................................................................... 99
INDEX OF PRINCIPAL DEFINITIONS...............................................................................................100
</TABLE>
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
Securities Offered.................. Mortgage pass-through certificates.
Depositor........................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation. See
"The Depositor".
Trustee............................. The trustee (the "Trustee") for each
series of Certificates will be named in
the related Prospectus Supplement. See
"Description of the Pooling
Agreements-The Trustee".
Master Servicer..................... If a Trust Fund includes Mortgage Loans,
then the master servicer (the "Master
Servicer") for the corresponding series
of Certificates will be named in the
related Prospectus Supplement. See
"Description of the Pooling
Agreements-Certain Matters Regarding the
Master Servicer, the Special Servicer,
the REMIC Administrator and the
Depositor".
Special Servicer.................... If a Trust Fund includes Mortgage Loans,
then the special servicer (the "Special
Servicer") for the corresponding series
of Certificates will be named, or the
circumstances under which a Special
Servicer may be appointed will be
described, in the related Prospectus
Supplement. See "Description of the
Pooling Agreements-Collection and Other
Servicing Procedures".
MBS Administrator.................... If a Trust Fund includes MBS, then the
entity responsible for administering
such MBS (the "MBS Administrator") will
be named in the related Prospectus
Supplement. If an entity other than the
Trustee and the Master Servicer is the
MBS Administrator, such entity will be
herein referred to as the "Manager".
REMIC Administrator.................. The person (the "REMIC Administrator")
responsible for the various tax- related
administration duties for a series of
Certificates as to which one or more
REMIC elections have been made, will be
named in the related Prospectus
Supplement. See "Certain Federal Income
Tax Consequences-REMIC's-Reporting and
Other Administrative Matters."
The Mortgage Assets.................. The Mortgage Assets will be the primary
assets of any Trust Fund. The Mortgage
Assets with respect to each series of
Certificates will, in general, consist
of a pool of mortgage loans ("Mortgage
Loans") secured by first or junior liens
on, or security interests in, one or
more of the following types of real
property: (i) residential properties
("Multifamily Properties") consisting of
five or more rental or
cooperatively-owned dwelling units in
high-rise, mid-rise or garden apartment
buildings or other residential
<PAGE>
-2-
structures, and mobile home parks; and
(ii) commercial properties ("Commercial
Properties") consisting of office
buildings, retail shopping facilities
(such as shopping centers, malls and
individual stores), hotels and motels,
health care-related facilities (such as
hospitals, skilled nursing facilities,
nursing homes, congregate care
facilities and senior housing),
recreational vehicle parks, warehouse
facilities, mini-warehouse facilities,
self-storage facilities, industrial
facilities, parking lots, restaurants,
mixed use properties (that is, any
combination of the foregoing), and
unimproved land. However, neither
restaurants nor health care-related
facilities will represent security for a
material concentration of the Mortgage
Loans in any Trust Fund, based on
principal balance at the time such Trust
Fund is formed. The Mortgage Loans will
not be guaranteed or insured by the
Depositor or any of its affiliates or,
unless otherwise provided in the related
Prospectus Supplement, by any
governmental agency or instrumentality
or by any other person. If so specified
in the related Prospectus Supplement,
some Mortgage Loans may be delinquent or
nonperforming as of the date the related
Trust Fund is formed.
As and to the extent described in the
related Prospectus Supplement, a
Mortgage Loan (i) may provide for no
accrual of interest or for accrual of
interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its
term or that adjusts from time to time,
or that may be converted at the
borrower's election from an adjustable
to a fixed Mortgage Rate, or from a
fixed to an adjustable Mortgage Rate,
(ii) may provide for level payments to
maturity or for payments that adjust
from time to time to accommodate changes
in the Mortgage Rate or to reflect the
occurrence of certain events, and may
permit negative amortization, (iii) may
be fully amortizing or may be partially
amortizing or nonamortizing, with a
balloon payment due on its stated
maturity date, (iv) may prohibit over
its term or for a certain period
prepayments and/or require payment of a
premium or a yield maintenance payment
in connection with certain prepayments
and (v) may provide for payments of
principal, interest or both, on due
dates that occur monthly, quarterly,
semi-annually or at such other interval
as is specified in the related
Prospectus Supplement. Each Mortgage
Loan will have had an original term to
maturity of not more than 40 years. No
Mortgage Loan will have been originated
by the Depositor. See "Description of
the Trust Funds-Mortgage Loans".
If any Mortgage Loan, or group of
related Mortgage Loans, constitutes a
concentration of credit risk, financial
statements or other financial
information with respect to the related
Mortgaged Property or Mortgaged
Properties will be included in the
related Prospectus Supplement. See
"Description of the Trust Funds-Mortgage
Loans-Mortgage Loan Information in
Prospectus Supplements".
<PAGE>
-3-
If and to the extent specified in the
related Prospectus Supplement, the
Mortgage Assets with respect to a series
of Certificates may also include, or
consist of, mortgage participations,
mortgage pass-through certificates
and/or other mortgage-backed securities
(collectively, "MBS"), that evidence an
interest in, or are secured by a pledge
of, one or more mortgage loans that
conform to the descriptions of the
Mortgage Loans contained herein and
which may or may not be issued, insured
or guaranteed by the United States or an
agency or instrumentality thereof. See
"Description of the Trust Funds-MBS".
The Certificates.................... Each series of Certificates will be
issued in one or more classes pursuant
to a pooling and servicing agreement or
other agreement specified in the related
Prospectus Supplement (in any case, a
"Pooling Agreement") and will represent
in the aggregate the entire beneficial
ownership interest in the related Trust
Fund.
As described in the related Prospectus
Supplement, the Certificates of each
series, including the Offered
Certificates of such series, may consist
of one or more classes of Certificates
that, among other things: (i) are senior
(collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate
Certificates") to one or more other
classes of Certificates in entitlement
to certain distributions on the
Certificates; (ii) are entitled to
distributions of principal, with
disproportionate, nominal or no
distributions of interest (collectively,
"Stripped Principal Certificates");
(iii) are entitled to distributions of
interest, with disproportionate, nominal
or no distributions of principal
(collectively, "Stripped Interest
Certificates"); (iv) provide for
distributions of interest thereon or
principal thereof that commence only
after the occurrence of certain events,
such as the retirement of one or more
other classes of Certificates of such
series; (v) provide for distributions of
principal thereof to be made, from time
to time or for designated periods, at a
rate that is faster (and, in some cases,
substantially faster) or slower (and, in
some cases, substantially slower) than
the rate at which payments or other
collections of principal are received on
the Mortgage Assets in the related Trust
Fund; (vi) provide for distributions of
principal thereof to be made, subject to
available funds, based on a specified
principal payment schedule or other
methodology; or (vii) provide for
distribution based on collections on the
Mortgage Assets in the related Trust
Fund attributable to prepayment
premiums, yield maintenance payments or
equity participations.
If so specified in the related
Prospectus Supplement, a series of
Certificates may include one or more
"Controlled Amortization Classes", which
will entitle the holders thereof to
receive principal distributions
according to a specified principal
payment schedule. Although prepayment
risk cannot be eliminated entirely for
any class of Certificates, a Controlled
Amortization Class will generally
provide a relatively stable cash flow so
long as the actual rate of prepayment on
the Mortgage Loans in the related Trust
Fund remains
<PAGE>
-4-
relatively constant at the rate, or
within the range of rates, of prepayment
used to establish the specific principal
payment schedule for such Certificates.
Prepayment risk with respect to a given
Mortgage Asset Pool does not disappear,
however, and the stability afforded to a
Controlled Amortization Class comes at
the expense of one or more other classes
of the same series, any of which other
classes may also be a class of Offered
Certificates. See "Risk Factors-Effect
of Prepayments on Average Life of
Certificates" and "-Effect of
Prepayments on Yield of Certificates".
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain classes of
REMIC Residual Certificates (as defined
herein), will have an initial stated
principal amount (a "Certificate
Balance"); and each class of
Certificates, other than certain classes
of Stripped Principal Certificates and
certain classes of REMIC Residual
Certificates, will accrue interest on
its Certificate Balance or, in the case
of certain classes of Stripped Interest
Certificates, on a notional amount (a
"Notional Amount"), based on a fixed,
variable or adjustable interest rate (a
"Pass-Through Rate"). The related
Prospectus Supplement will specify the
Certificate Balance, Notional Amount
and/or Pass-Through Rate (or, in the
case of a variable or adjustable
Pass-Through Rate, the method for
determining such rate), as applicable,
for each class of Offered Certificates.
If so specified in the related
Prospectus Supplement, a class of
Certificates may have two or more
component parts, each having
characteristics that are otherwise
described herein as being attributable
to separate and distinct classes.
The Certificates will not be guaranteed
or insured by the Depositor or any of
its affiliates, by any governmental
agency or instrumentality or by any
other person or entity, unless otherwise
provided in the related Prospectus
Supplement. See "Risk Factors-Limited
Assets".
Distributions of Interest on the
Certificates...................... Interest on each class of Offered
Certificates (other than certain classes
of Stripped Principal Certificates and
certain classes of REMIC Residual
Certificates) of each series will accrue
at the applicable Pass-Through Rate on
the Certificate Balance or, in the case
of certain classes of Stripped Interest
Certificates, the Notional Amount
thereof outstanding from time to time
and will be distributed to
Certificateholders as provided in the
related Prospectus Supplement (each of
the specified dates on which
distributions are to be made, a
"Distribution Date"). Distributions of
interest with respect to one or more
classes of Certificates (collectively,
"Accrual Certificates") may not commence
until the occurrence of certain events,
such as the retirement of one or more
other classes of Certificates, and
interest accrued with respect to a class
of Accrual Certificates prior to the
occurrence of such an event will either
be added to the Certificate Balance
thereof or otherwise deferred as
<PAGE>
-5-
described in the related Prospectus
Supplement. Distributions of interest
with respect to one or more classes of
Certificates may be reduced to the
extent of certain delinquencies, losses
and other contingencies described herein
and in the related Prospectus
Supplement. See "Risk Factors-Effect of
Prepayments on Average Life of
Certificates" and "-Effect of
Prepayments on Yield of Certificates",
"Yield and Maturity Considerations-
Certain Shortfalls in Collections of
Interest" and "Description of the
Certificates-Distributions of Interest
on the Certificates".
Distributions of Principal of
the Certificates................... Each class of Certificates of each
series (other than certain classes of
Stripped Interest Certificates and
certain classes of REMIC Residual
Certificates) will have a Certificate
Balance. The Certificate Balance of a
class of Certificates outstanding from
time to time will represent the maximum
amount that the holders thereof are then
entitled to receive in respect of
principal from future cash flow on the
assets in the related Trust Fund. The
initial aggregate Certificate Balance of
all classes of a series of Certificates
will not be greater than the outstanding
principal balance of the related
Mortgage Assets as of a specified date
(the "Cut-off Date"), after application
of scheduled payments due on or before
such date, whether or not received. As
and to the extent described in each
Prospectus Supplement, distributions of
principal with respect to the related
series of Certificates will be made on
each Distribution Date to the holders of
the class or classes of Certificates of
such series then entitled thereto until
the Certificate Balances of such
Certificates have been reduced to zero.
Distributions of principal with respect
to one or more classes of Certificates:
(i) may be made at a rate that is faster
(and, in some cases, substantially
faster) or slower (and, in some cases,
substantially slower) than the rate at
which payments or other collections of
principal are received on the Mortgage
Assets in the related Trust Fund; (ii)
may not commence until the occurrence of
certain events, such as the retirement
of one or more other classes of
Certificates of the same series; (iii)
may be made, subject to certain
limitations, based on a specified
principal payment schedule; or (iv) may
be contingent on the specified principal
payment schedule for another class of
the same series and the rate at which
payments and other collections of
principal on the Mortgage Assets in the
related Trust Fund are received. Unless
otherwise specified in the related
Prospectus Supplement, distributions of
principal of any class of Offered
Certificates will be made on a pro rata
basis among all of the Certificates of
such class. See "Description of the
Certificates-Distributions of Principal
of the Certificates".
Credit Support and
Cash Flow Agreements................ If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on
the Mortgage Assets in the related Trust
Fund may be provided to one or more
classes of Certificates of the related
series in the form of subordination of
one or more other classes of
<PAGE>
-6-
Certificates of such series, which other
classes may include one or more classes
of Offered Certificates, or by one or
more other types of credit support,
which may include a letter of credit, a
surety bond, an insurance policy, a
guarantee, a reserve fund, or a
combination thereof (any such coverage
with respect to the Certificates of any
series, "Credit Support"). If so
provided in the related Prospectus
Supplement, a Trust Fund may include:
(i) guaranteed investment contracts
pursuant to which moneys held in the
funds and accounts established for the
related series will be invested at a
specified rate; or (ii) interest rate
exchange agreements, interest rate cap
or floor agreements, or other agreements
designed to reduce the effects of
interest rate fluctuations on the
Mortgage Assets or on one or more
classes of Certificates (any such
agreement, in the case of clause (i) or
(ii), a "Cash Flow Agreement"). Certain
relevant information regarding any
applicable Credit Support or Cash Flow
Agreement will be set forth in the
Prospectus Supplement for a series of
Offered Certificates. See "Risk
Factors-Credit Support Limitations",
"Description of the Trust Funds-Credit
Support" and "-Cash Flow Agreements" and
"Description of Credit Support".
Advances............................ If and to the extent provided in the
related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the
Master Servicer, the Special Servicer,
the Trustee, any provider of Credit
Support and/or any other specified
person may be obligated to make, or have
the option of making, certain advances
with respect to delinquent scheduled
payments of principal and/or interest on
such Mortgage Loans. Any such advances
made with respect to a particular
Mortgage Loan will be reimbursable from
subsequent recoveries in respect of such
Mortgage Loan and otherwise to the
extent described herein and in the
related Prospectus Supplement. See
"Description of the Certificates
-Advances in Respect of Delinquencies".
If and to the extent provided in the
Prospectus Supplement for a series of
Certificates, any entity making such
advances may be entitled to receive
interest thereon for a specified period
during which certain or all of such
advances are outstanding, payable from
amounts in the related Trust Fund. See
"Description of the Certificates-
Advances in Respect of Delinquencies".
If a Trust Fund includes MBS, any
comparable advancing obligation of a
party to the related Pooling Agreement,
or of a party to the related MBS
Agreement, will be described in the
related Prospectus Supplement.
Optional Termination................ If so specified in the related
Prospectus Supplement, a series of
Certificates may be subject to optional
early termination through the repurchase
of the Mortgage Assets in the related
Trust Fund by the party or parties
specified therein, under the
circumstances and in the manner set
forth therein. If so provided in the
related Prospectus Supplement, upon the
reduction of the Certificate Balance of
a specified class or classes of
Certificates by a specified percentage
or amount or upon a specified date, a
party specified therein may be
authorized or required to solicit bids
for the purchase of all of the Mortgage
Assets of the related Trust Fund, or of
a sufficient portion
<PAGE>
-7-
of such Mortgage Assets to retire such
class or classes, under the
circumstances and in the manner set
forth therein. See "Description of the
Certificates-Termination".
Certain Federal Income Tax
Consequences...................... The Certificates of each series will
constitute or evidence ownership of
either (i) "regular interests" ("REMIC
Regular Certificates") and "residual
interests" ("REMIC Residual
Certificates") in a Trust Fund, or a
designated portion thereof, treated as a
REMIC under Sections 860A through 860G
of the Internal Revenue Code of 1986
(the "Code"), or (ii) interests
("Grantor Trust Certificates") in a
Trust Fund treated as a grantor trust
(or a partnership) under applicable
provisions of the Code.
Investors are advised to consult their
tax advisors concerning the specific tax
consequences to them of the purchase,
ownership and disposition of the Offered
Certificates and to review "Certain
Federal Income Tax Consequences" herein
and in the related Prospectus
Supplement.
ERISA Considerations................ Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh
plans, and collective investment funds
and separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that are
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of
Offered Certificates could give rise to
a transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Legal Investment.................... The Offered Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
amended ("SMMEA"), only if so specified
in the related Prospectus Supplement.
Investors whose investment authority is
subject to legal restrictions should
consult their legal advisors to
determine whether and to what extent the
Offered Certificates constitute legal
investments for them. See "Legal
Investment" herein and in the related
Prospectus Supplement.
Rating.............................. At their respective dates of issuance,
each class of Offered Certificates will
be rated not lower than investment grade
by one or more nationally recognized
statistical rating agencies (each, a
"Rating Agency"). See "Rating" herein
and in the related Prospectus
Supplement.
<PAGE>
-8-
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly pertain
to and be influenced by the characteristics or behavior of the mortgage loans
underlying any MBS included in such Trust Fund.
Limited Liquidity of Offered Certificates
General. The Offered Certificates of any series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related Prospectus
Supplement, Certificateholders will have no redemption rights, and the Offered
Certificates of each series are subject to early retirement only under certain
specified circumstances described herein and in the related Prospectus
Supplement. See "Description of the Certificates-Termination".
Lack of a Secondary Market. There can be no assurance that a secondary
market for the Offered Certificates of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any series of Offered Certificates may indicate that
an underwriter specified therein intends to establish a secondary market in such
Offered Certificates; however, no underwriter will be obligated to do so. Any
such secondary market may provide less liquidity to investors than any
comparable market for securities that evidence interests in single-family
mortgage loans. Unless otherwise provided in the related Prospectus Supplement,
the Certificates will not be listed on any securities exchange.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Certificates of any series, including
information regarding the status of the related Mortgage Assets and any Credit
Support for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling Agreement as
described herein under the heading "Description of the Certificates-Reports to
Certificateholders". There can be no assurance that any additional ongoing
information regarding the Offered Certificates of any series will be available
through any other source. The limited nature of such information in respect of a
series of Offered Certificates may adversely affect the liquidity thereof, even
if a secondary market for such Certificates does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any series of Offered Certificates
or class thereof, the market value of such Certificates will be affected by
several factors, including the perceived liquidity thereof, the anticipated cash
flow thereon (which may vary widely depending upon the prepayment and default
assumptions applied in respect of the underlying Mortgage Loans) and prevailing
interest rates. The price payable at any given time in respect of certain
classes of Offered Certificates (in particular, a class with a relatively long
average life, a Companion Class (as defined herein) or a class of Stripped
Interest Certificates or Stripped Principal Certificates) may be extremely
sensitive to small fluctuations in prevailing interest rates; and the relative
change in price for an Offered Certificate in response to an upward or downward
movement in prevailing interest rates may not necessarily equal the relative
change in price for such Offered Certificate in response to an equal but
opposite movement in such rates. Accordingly, the sale of Offered Certificates
by a holder in any secondary market that may develop may be at a discount from
the price paid by such holder. The Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis.
Limited Assets
<PAGE>
-9-
Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other person
or entity; and no Offered Certificate of any series will represent a claim
against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make payments
on a series of Offered Certificates, no other assets will be available for
payment of the deficiency, and the holders of one or more classes of such
Offered Certificates will be required to bear the consequent loss. Furthermore,
certain amounts on deposit from time to time in certain funds or accounts
constituting part of a Trust Fund, including the Certificate Account and any
accounts maintained as Credit Support, may be withdrawn under certain
conditions, if and to the extent described in the related Prospectus Supplement,
for purposes other than the payment of principal of or interest on the related
series of Certificates. If and to the extent so provided in the Prospectus
Supplement for a series of Certificates consisting of one or more classes of
Subordinate Certificates, on any Distribution Date in respect of which losses or
shortfalls in collections on the Mortgage Assets have been incurred, all or a
portion of the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Certificates, and, thereafter, by the remaining
classes of Certificates in the priority and manner and subject to the
limitations specified in such Prospectus Supplement.
Credit Support Limitations
Limitations Regarding Types of Losses Covered. The Prospectus Supplement
for a series of Certificates will describe any Credit Support provided with
respect thereto. Use of Credit Support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement. Moreover,
such Credit Support may not cover all potential losses; for example, Credit
Support may or may not cover loss by reason of fraud or negligence by a mortgage
loan originator or other parties. Any such losses not covered by Credit Support
may, at least in part, be allocated to one or more classes of Offered
Certificates.
Disproportionate Benefits to Certain Classes and Series. A series of
Certificates may include one or more classes of Subordinate Certificates (which
may include Offered Certificates), if so provided in the related Prospectus
Supplement. Although subordination is intended to reduce the likelihood of
temporary shortfalls and ultimate losses to holders of Senior Certificates, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Offered Certificates of a series are made in a specified order of priority, any
related Credit Support may be exhausted before the principal of the later paid
classes of Offered Certificates of such series has been repaid in full. As a
result, the impact of losses and shortfalls experienced with respect to the
Mortgage Assets may fall primarily upon those classes of Offered Certificates
having a later right of payment. Moreover, if a form of Credit Support covers
the Offered Certificates of more than one series and losses on the related
Mortgage Assets exceed the amount of such Credit Support, it is possible that
the holders of Offered Certificates of one (or more) such series will be
disproportionately benefited by such Credit Support to the detriment of the
holders of Offered Certificates of one (or more) other such series.
Limitations Regarding the Amount of Credit Support. The amount of any
applicable Credit Support supporting one or more classes of Offered
Certificates, including the subordination of one or more other classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level of
defaults, delinquencies and losses on the underlying Mortgage Assets and certain
other factors. There can, however, be no assurance that the loss experience on
the related Mortgage Assets will not exceed such assumed levels. See
"Description of the Certificates--Allocation of Losses and Shortfalls" and
"Description of Credit Support". If the losses on the related Mortgage Assets do
exceed such assumed levels, the holders of one or more classes of Offered
Certificates will be required to bear such additional losses.
Effect of Prepayments on Average Life of Certificates
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As a result of prepayments on the Mortgage Loans in any Trust Fund, the
amount and timing of distributions of principal and/or interest on the Offered
Certificates of the related series may be highly unpredictable. Prepayments on
the Mortgage Loans in any Trust Fund will result in a faster rate of principal
payments on one or more classes of the related series of Certificates than if
payments on such Mortgage Loans were made as scheduled. Thus, the prepayment
experience on the Mortgage Loans in a Trust Fund may affect the average life of
one or more classes of Certificates of the related series, including a class of
Offered Certificates. The rate of principal payments on pools of mortgage loans
varies among pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. For example, if
prevailing interest rates fall significantly below the Mortgage Rates borne by
the Mortgage Loans included in a Trust Fund, then, subject to the particular
terms of the Mortgage Loans (e.g., provisions that prohibit voluntary
prepayments during specified periods or impose penalties in connection
therewith) and the ability of borrowers to obtain new financing, principal
prepayments on such Mortgage Loans are likely to be higher than if prevailing
interest rates remain at or above the rates borne by those Mortgage Loans.
Conversely, if prevailing interest rates rise significantly above the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, then principal
prepayments on such Mortgage Loans are likely to be lower than if prevailing
interest rates remain at or below the mortgage rates borne by those Mortgage
Loans. There can be no assurance as to the actual rate of prepayment on the
Mortgage Loans in any Trust Fund or that such rate of prepayment will conform to
any model described herein or in any Prospectus Supplement. As a result,
depending on the anticipated rate of prepayment for the Mortgage Loans in any
Trust Fund, the retirement of any class of Certificates of the related series
could occur significantly earlier or later, and the average life thereof could
be significantly shorter or longer, than expected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the related
series will depend on the terms and provisions of such Certificates. A class of
Certificates, including a class of Offered Certificates, may provide that on any
Distribution Date the holders of such Certificates are entitled to a pro rata
share of the prepayments on the Mortgage Loans in the related Trust Fund that
are distributable on such date, to a disproportionately large share (which, in
some cases, may be all) of such prepayments, or to a disproportionately small
share (which, in some cases, may be none) of such prepayments. A class of
Certificates that entitles the holders thereof to a disproportionately large
share of the prepayments on the Mortgage Loans in the related Trust Fund
increases the likelihood of early retirement of such class ("Call Risk") if the
rate of prepayment is relatively fast; while a class of Certificates that
entitles the holders thereof to a disproportionately small share of the
prepayments on the Mortgage Loans in the related Trust Fund increases the
likelihood of an extended average life of such class ("Extension Risk") if the
rate of prepayment is relatively slow. As and to the extent described in the
related Prospectus Supplement, the respective entitlements of the various
classes of Certificateholders of any series to receive payments (and, in
particular, prepayments) of principal of the Mortgage Loans in the related Trust
Fund may vary based on the occurrence of certain events (e.g., the retirement of
one or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such Mortgage
Loans).
A series of Certificates may include one or more Controlled Amortization
Classes, which will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of Certificates, a
Controlled Amortization Class will generally provide a relatively stable cash
flow so long as the actual rate of prepayment on the Mortgage Loans in the
related Trust Fund remains relatively constant at the rate, or within the range
of rates, of prepayment used to establish the specific principal payment
schedule for such Certificates. Prepayment risk with respect to a given Mortgage
Asset Pool does not disappear, however, and the stability afforded to a
Controlled Amortization Class comes at the expense of one or more Companion
Classes of the same series, any of which Companion Classes may also be a class
of Offered Certificates. In general, and as more specifically described in the
related Prospectus Supplement, a Companion Class may entitle the holders thereof
to a disproportionately large share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively fast, and/or may
entitle the holders thereof to a disproportionately small share of prepayments
on the Mortgage Loans in the related Trust Fund
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when the rate of prepayment is relatively slow. As and to the extent described
in the related Prospectus Supplement, a Companion Class absorbs some (but not
all) of the Call Risk and/or Extension Risk that would otherwise belong to the
related Controlled Amortization Class if all payments of principal of the
Mortgage Loans in the related Trust Fund were allocated on a pro rata basis.
Effect of Prepayments on Yield of Certificates
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately large,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might fail to recover its original investment
under some prepayment scenarios. The extent to which the yield to maturity of
any class of Offered Certificates may vary from the anticipated yield will
depend upon the degree to which such Certificates are purchased at a discount or
premium and the amount and timing of distributions thereon. An investor should
consider, in the case of any Offered Certificate purchased at a discount, the
risk that a slower than anticipated rate of principal payments on the Mortgage
Loans could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Offered Certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield. See "Yield and Maturity Considerations".
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of such Offered
Certificates will receive payments to which such Certificateholders are entitled
under the related Pooling Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Mortgage
Loans will be made, the degree to which the rate of such prepayments might
differ from that originally anticipated or the likelihood of early optional
termination of the related Trust Fund. Furthermore, such rating will not address
the possibility that prepayment of the related Mortgage Loans at a higher or
lower rate than anticipated by an investor may cause such investor to experience
a lower than anticipated yield or that an investor that purchases an Offered
Certificate at a significant premium might fail to recover its initial
investment under certain prepayment scenarios. Hence, a rating assigned by a
Rating Agency does not guarantee or ensure the realization of any anticipated
yield on a class of Offered Certificates.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of the Certificates of such
series. Those criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Loans. In other cases, such
criteria may be based upon determinations of the values of the Mortgaged
Properties that provide security for the Mortgage Loans. However, no assurance
can be given that those values will not decline in the future. As a result, the
Credit Support required in respect of the Offered Certificates of any series may
be insufficient to fully protect the holders thereof from losses on the related
Mortgage Asset Pool. See "Description of Credit Support" and "Rating".
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans
General. The payment performance of the Offered Certificates of any series
will be directly related to the payment performance of the underlying Mortgage
Loans. Set forth below is a discussion of certain factors that will affect the
full and
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timely payment of the Mortgage Loans in any Trust Fund. In addition, a
description of certain material considerations associated with investments in
mortgage loans is included herein under "Certain Legal Aspects of Mortgage
Loans".
The Offered Certificates will be directly or indirectly backed by mortgage
loans secured by multifamily and/or commercial properties. Mortgage loans made
on the security of multifamily or commercial property may have a greater
likelihood of delinquency and foreclosure, and a greater likelihood of loss in
the event thereof, than loans made on the security of an owner-occupied
single-family property. See "Description of the Trust Funds-Mortgage
Loans-Default and Loss Considerations with Respect to the Mortgage Loans". The
ability of a borrower to repay a loan secured by an income-producing property
typically is dependent primarily upon the successful operation of such property
rather than upon the existence of independent income or assets of the borrower;
thus, the value of an income-producing property is directly related to the net
operating income derived from such property. If the net operating income of the
property is reduced (for example, if rental or occupancy rates decline or real
estate tax rates or other operating expenses increase), the borrower's ability
to repay the loan may be impaired. A number of the Mortgage Loans may be secured
by liens on owner-occupied Mortgaged Properties or on Mortgaged Properties
leased to a single tenant or a small number of significant tenants. Accordingly,
a decline in the financial condition of the borrower or a significant tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
Mortgaged Property may be adversely affected by factors generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate
tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; natural
disasters and civil disturbances such as earthquakes, hurricanes, floods,
eruptions or riots; and other circumstances, conditions or events beyond the
control of a Master Servicer or a Special Servicer. Additional considerations
may be presented by the type and use of a particular Mortgaged Property. For
instance, Mortgaged Properties that operate as hospitals and nursing homes are
subject to significant governmental regulation of the ownership, operation,
maintenance and financing of health care institutions. Hotel and motel
properties are often operated pursuant to franchise, management or operating
agreements that may be terminable by the franchisor or operator, and the
transferability of a hotel's operating, liquor and other licenses upon a
transfer of the hotel, whether through purchase or foreclosure, is subject to
local law requirements.
In addition, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be greater
than for pools of single-family loans because Mortgage Loans in a Trust Fund
will generally consist of a smaller number of higher balance loans than would a
pool of single-family loans of comparable aggregate unpaid principal balance.
Limited Recourse Nature of the Mortgage Loans. It is anticipated that some
or all of the Mortgage Loans included in any Trust Fund will be nonrecourse
loans or loans for which recourse may be restricted or unenforceable. As to any
such Mortgage Loan, recourse in the event of borrower default will be limited to
the specific real property and other assets, if any, that were pledged to secure
the Mortgage Loan. However, even with respect to those Mortgage Loans that
provide for recourse against the borrower and its assets generally, there can be
no assurance that enforcement of such recourse provisions will be practicable,
or that the assets of the borrower will be sufficient to permit a recovery in
respect of a defaulted Mortgage Loan in excess of the liquidation value of the
related Mortgaged Property. See "Certain Legal Aspects of Mortgage
Loans-Foreclosure--Anti-Deficiency Legislation".
Limitations on Enforceability of Cross-Collateralization. A Mortgage Pool
may include groups of Mortgage Loans which are cross-collateralized and
cross-defaulted. These arrangements are designed primarily to ensure that all of
the collateral pledged to secure the respective Mortgage Loans in a
cross-collateralized group, and the cash flows generated
<PAGE>
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thereby, are available to support debt service on, and ultimate repayment of,
the aggregate indebtedness evidenced by those Mortgage Loans. These arrangements
thus seek to reduce the risk that the inability of one or more of the Mortgaged
Properties securing any such group of Mortgage Loans to generate net operating
income sufficient to pay debt service will result in defaults and ultimate
losses.
There may not be complete identity of ownership of the Mortgaged Properties
securing a group of cross-collateralized Mortgage Loans. In such an instance,
creditors of one or more of the related borrowers could challenge the cross-
collateralization arrangement as a fraudulent conveyance. Generally, under
federal and state fraudulent conveyance statutes, the incurring of an obligation
or the transfer of property by a person will be subject to avoidance under
certain circumstances if the person did not receive fair consideration or
reasonably equivalent value in exchange for such obligation or transfer and was
then insolvent or was rendered insolvent by such obligation or transfer.
Accordingly, a creditor seeking ownership of a Mortgaged Property subject to
such cross-collateralization to repay such creditor's claim against the related
borrower could assert (i) that such borrower was insolvent at the time the
cross-collateralized Mortgage Loans were made and (ii) that such borrower did
not, when it allowed its property to be encumbered by a lien securing the
indebtedness represented by the other Mortgage Loans in the group of
cross-collateralized Mortgage Loans, receive fair consideration or reasonably
equivalent value for, in effect, "guaranteeing" the performance of the other
borrowers. Although the borrower making such "guarantee" will be receiving
"guarantees" from each of the other borrowers in return, there can be no
assurance that such exchanged "guarantees" would be found to constitute fair
consideration or be of reasonably equivalent value, and no unqualified legal
opinion to that effect will be obtained.
The cross-collateralized Mortgage Loans constituting any group thereof may
be secured by mortgage liens on Mortgaged Properties located in different
states. Because of various state laws governing foreclosure or the exercise of a
power of sale and because, in general, foreclosure actions are brought in state
court, and the courts of one state cannot exercise jurisdiction over property in
another state, it may be necessary upon a default under any such Mortgage Loan
to foreclose on the related Mortgaged Properties in a particular order rather
than simultaneously in order to ensure that the lien of the related Mortgages is
not impaired or released.
Increased Risk of Default Associated With Balloon Payments. Certain of the
Mortgage Loans included in a Trust Fund may be nonamortizing or only partially
amortizing over their terms to maturity and, thus, will require substantial
payments of principal and interest (that is, balloon payments) at their stated
maturity. Mortgage Loans of this type involve a greater likelihood of default
than self-amortizing loans because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to refinance the loan or
to sell the related Mortgaged Property. The ability of a borrower to accomplish
either of these goals will be affected by a number of factors, including the
value of the related Mortgaged Property, the level of available mortgage rates
at the time of sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition and operating history of the
borrower and the related Mortgaged Property, tax laws, rent control laws (with
respect to certain residential properties), Medicaid and Medicare reimbursement
rates (with respect to hospitals and nursing homes), prevailing general economic
conditions and the availability of credit for loans secured by multifamily or
commercial, as the case may be, real properties generally. Neither the Depositor
nor any of its affiliates will be required to refinance any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or the Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to which a
payment default is imminent. See "Description of the Pooling
Agreements-Realization Upon Defaulted Mortgage Loans". While the Master Servicer
or the Special Servicer generally will be required to determine that any such
extension or modification is reasonably likely to produce a greater recovery
than
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liquidation, taking into account the time value of money, there can be no
assurance that any such extension or modification will in fact increase the
present value of receipts from or proceeds of the affected Mortgage Loans.
Lender Difficulty in Collecting Rents Upon the Default and/or Bankruptcy of
Borrower. Each Mortgage Loan included in any Trust Fund secured by Mortgaged
Property that is subject to leases typically will be secured by an assignment of
leases and rents pursuant to which the borrower assigns to the lender its right,
title and interest as landlord under the leases of the related Mortgaged
Property, and the income derived therefrom, as further security for the related
Mortgage Loan, while retaining a license to collect rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect rents. Some state laws may require that the lender take
possession of the Mortgaged Property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
borrower, the lender's ability to collect the rents may be adversely affected.
See "Certain Legal Aspects of Mortgage Loans-Leases and Rents".
Limitations on Enforceability of Due-on-Sale and Debt-Acceleration Clauses.
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the Mortgage Loan if the borrower sells, transfers or
conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages also may include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or nonmonetary default of the
mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse the foreclosure of a mortgage or deed of trust when an acceleration
of the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
Risk of Liability Arising From Environmental Conditions. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, a lender may be liable, as
an "owner" or "operator", for costs of addressing releases or threatened
releases of hazardous substances at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether the environmental damage or threat was caused by the
borrower or a prior owner. A lender also risks such liability on foreclosure of
the mortgage. See "Certain Legal Aspects of Mortgage Loans-Environmental
Considerations".
Lack of Insurance Coverage for Certain Special Hazard Losses. Unless
otherwise specified in a Prospectus Supplement, the Master Servicer and Special
Servicer for the related Trust Fund will be required to cause the borrower on
each Mortgage Loan in such Trust Fund to maintain such insurance coverage in
respect of the related Mortgaged Property as is required under the related
Mortgage, including hazard insurance; provided that, as and to the extent
described herein and in the related Prospectus Supplement, each of the Master
Servicer and the Special Servicer may satisfy its obligation to cause hazard
insurance to be maintained with respect to any Mortgaged Property through
acquisition of a blanket policy. In general, the standard form of fire and
extended coverage policy covers physical damage to or destruction of the
improvements of the property by fire, lightning, explosion, smoke, windstorm and
hail, and riot, strike and civil commotion, subject to the conditions and
exclusions specified in each policy. Although the policies covering the
Mortgaged Properties will be underwritten by different insurers under different
state laws in accordance with different applicable state forms, and therefore
will not contain identical terms and conditions, most such policies typically do
not cover any physical damage resulting from war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), wet or dry rot, vermin, domestic animals
and certain other kinds of risks. Unless the related Mortgage specifically
requires the mortgagor to insure against physical damage arising from such
causes, then, to the extent any consequent losses are not covered by Credit
Support, such losses may be borne, at least in part, by the holders of one
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or more classes of Offered Certificates of the related series. See "Description
of the Pooling Agreements-Hazard Insurance Policies".
Risks of Geographic Concentration. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. For example, a
region's economic condition and housing market may be directly, or indirectly,
adversely affected by natural disasters or civil disturbances such as
earthquakes, hurricanes, floods, eruptions or riots. The economic impact of any
of these types of events may also be felt in areas beyond the region immediately
affected by the disaster or disturbance. The Mortgage Loans securing certain
series of Certificates may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset
Pool
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past due
or are nonperforming. However, Mortgage Loans which are seriously delinquent
loans (that is, loans more than 60 days delinquent or as to which foreclosure
has been commenced) will not constitute a material concentration of the Mortgage
Loans in any Trust Fund, based on principal balance at the time such Trust Fund
is formed. If so specified in the related Prospectus Supplement, the servicing
of such Mortgage Loans will be performed by the Special Servicer; however, the
same entity may act as both Master Servicer and Special Servicer. Credit Support
provided with respect to a particular series of Certificates may not cover all
losses related to such delinquent or nonperforming Mortgage Loans, and investors
should consider the risk that the inclusion of such Mortgage Loans in the Trust
Fund may adversely affect the rate of defaults and prepayments in respect of the
subject Mortgage Asset Pool and the yield on the Offered Certificates of such
series. See "Description of the Trust Funds-Mortgage Loans-General".
Termination
If so provided in the related Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to solicit bids for the purchase of all
the Mortgage Assets of the related Trust Fund, or of a sufficient portion of
such Mortgage Assets to retire such class or classes, under the circumstances
and in the manner set forth therein. The solicitation of bids will be conducted
in a commercially reasonable manner and, generally, assets will be sold at their
fair market value. In addition, if so specified in the related Prospectus
Supplement, upon the reduction of the aggregate principal balance of some or all
of the Mortgage Assets by a specified percentage, a party or parties designated
therein may be authorized to purchase such Mortgage Assets, generally at a price
equal to, in the case of any Mortgage Asset, the unpaid principal balance
thereof plus accrued interest (or, in some cases, at fair market value).
However, circumstances may arise in which such fair market value may be less
than the unpaid balance of the related Mortgage Assets, together with interest
thereon, sold and therefore, as a result of such a sale or purchase, the
Certificateholders of one or more Classes of Certificates may receive an amount
less than the Certificate Balance of, and accrued unpaid interest on, their
Certificates. See Description of the Certificates--Termination."
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DESCRIPTION OF THE TRUST FUNDS
General
The primary assets of each Trust Fund will consist of (i) various types of
multifamily or commercial mortgage loans ("Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
("MBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily or commercial mortgage loans or (iii) a
combination of Mortgage Loans and MBS (collectively, "Mortgage Assets"). Each
Trust Fund will be established by the Depositor. Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator of
such Mortgage Loan or the issuer of such MBS. The Mortgage Assets will not be
guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under the
heading "-Mortgage Loans", unless otherwise noted, applies equally to mortgage
loans underlying any MBS included in a particular Trust Fund.
Mortgage Loans
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create first or junior liens on fee or
leasehold estates in properties (the "Mortgaged Properties") consisting of one
or more of the following types of real property: (i) residential properties
("Multifamily Properties") consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures, and mobile home parks; and (ii)
commercial properties ("Commercial Properties") consisting of office buildings,
retail shopping facilities (such as shopping centers, malls and individual
stores), hotels or motels, health care-related facilities (such as hospitals,
skilled nursing facilities, nursing homes, congregate care facilities and senior
housing), recreational vehicle parks, warehouse facilities, mini-warehouse
facilities, self-storage facilities, industrial facilities, parking lots,
restaurants, mixed use properties (that is, any combination of the foregoing),
and unimproved land. However, neither restaurants nor health care-related
facilities will represent security for a material concentration of the Mortgage
Loans in any Trust Fund, based on principal balance at the time such Trust Fund
is formed. The Multifamily Properties may include mixed commercial and
residential structures and apartment buildings owned by private cooperative
housing corporations ("Cooperatives"). Unless otherwise specified in the related
Prospectus Supplement, each Mortgage will create a first priority mortgage lien
on a fee estate in a Mortgaged Property. If a Mortgage creates a lien on a
borrower's leasehold estate in a property, then, unless otherwise specified in
the related Prospectus Supplement, the term of any such leasehold will exceed
the term of the Mortgage Note by at least ten years. Unless otherwise specified
in the related Prospectus Supplement, each Mortgage Loan will have been
originated by a person (the "Originator") other than the Depositor.
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens, and
the loans secured by the related senior liens ("Senior Liens") may not be
included in the Mortgage Pool. The primary risk to holders of Mortgage Loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related Senior Liens to satisfy
fully both the Senior Liens and the Mortgage Loan. In the event that a holder of
a Senior Lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court costs
and fees in connection with the foreclosure, second to real estate taxes, third
in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the Senior
Liens. The claims of the holders of the Senior Liens will be satisfied in full
out of proceeds of the liquidation of the related Mortgage Property, if such
proceeds are sufficient, before the Trust
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Fund as holder of the junior lien receives any payments in respect of the
Mortgage Loan. If the Master Servicer were to foreclose on any Mortgage Loan, it
would do so subject to any related Senior Liens. In order for the debt related
to such Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to bid an amount sufficient to
pay off all sums due under the Mortgage Loan and any Senior Liens or purchase
the Mortgaged Property subject to such Senior Liens. In the event that such
proceeds from a foreclosure or similar sale of the related Mortgaged Property
are insufficient to satisfy all Senior Liens and the Mortgage Loan in the
aggregate, the Trust Fund, as the holder of the junior lien, and, accordingly,
holders of one or more classes of the Certificates of the related series bear
(i) the risk of delay in distributions while a deficiency judgment against the
borrower is obtained and (ii) the risk of loss if the deficiency judgment is not
obtained and satisfied. Moreover, deficiency judgments may not be available in
certain jurisdictions, or the particular Mortgage Loan may be a nonrecourse
loan, which means that, absent special facts, recourse in the case of default
will be limited to the Mortgaged Property and such other assets, if any, that
were pledged to secure repayment of the Mortgage Loan.
If so specified in the related Prospectus Supplement, the Mortgage Assets
for a particular series of Certificates may include Mortgage Loans that are
delinquent or nonperforming as of the date such Certificates are issued. In that
case, the related Prospectus Supplement will set forth, as to each such Mortgage
Loan, available information as to the period of such delinquency or
nonperformance, any forbearance arrangement then in effect, the condition of the
related Mortgaged Property and the ability of the Mortgaged Property to generate
income to service the mortgage debt. However, Mortgage Loans which are seriously
delinquent loans (that is, loans more than 60 days delinquent or as to which
foreclosure has been commenced) will not constitute a material concentration of
the Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed.
Default and Loss Considerations with Respect to the Mortgage Loans.
Mortgage loans secured by liens on income-producing properties are substantially
different from loans made on the security of owner-occupied single-family homes.
The repayment of a loan secured by a lien on an income-producing property is
typically dependent upon the successful operation of such property (that is, its
ability to generate income). Moreover, as noted above, some or all of the
Mortgage Loans included in a particular Trust Fund may be nonrecourse loans.
Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important factor in evaluating the likelihood
of default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income derived from the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments of principal and/or interest on the Mortgage Loan and any other loans
senior thereto that are secured by the related Mortgaged Property. Unless
otherwise defined in the related Prospectus Supplement, "Net Operating Income"
means, for any given period, the total operating revenues derived from a
Mortgaged Property during such period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than (i)
noncash items such as depreciation and amortization, (ii) capital expenditures
and (iii) debt service on the related Mortgage Loan or on any other loans that
are secured by such Mortgaged Property. The Net Operating Income of a Mortgaged
Property will generally fluctuate over time and may or may not be sufficient to
cover debt service on the related Mortgage Loan at any given time. As the
primary source of the operating revenues of a nonowner occupied,
income-producing property, rental income (and, with respect to a Mortgage Loan
secured by a Cooperative apartment building, maintenance payments from
tenant-stockholders of a Cooperative) may be affected by the condition of the
applicable real estate market and/or area economy. In addition, properties
typically leased, occupied or used on a short-term basis, such as certain health
care-related facilities, hotels and motels, and mini-warehouse and self-storage
facilities, tend to be affected more rapidly by changes in market or business
conditions than do properties typically leased for longer periods, such as
warehouses, retail stores, office buildings and industrial facilities.
Commercial Properties may be owner-occupied or leased to a small number of
tenants. Thus, the Net
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Operating Income of such a Mortgaged Property may depend substantially on the
financial condition of the borrower or a tenant, and Mortgage Loans secured by
liens on such properties may pose a greater likelihood of default and loss than
loans secured by liens on Multifamily Properties or on multi-tenant Commercial
Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the likelihood of default on a Mortgage Loan.
As may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a factor
in evaluating the likelihood of loss if a property must be liquidated following
a default. Unless otherwise defined in the related Prospectus Supplement, the
"Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of (i) the then outstanding principal balance of the
Mortgage Loan and any other loans senior thereto that are secured by the related
Mortgaged Property to (ii) the Value of the related Mortgaged Property. Unless
otherwise specified in the related Prospectus Supplement, the "Value" of a
Mortgaged Property will be its fair market value as determined by an appraisal
of such property conducted by or on behalf of the Originator in connection with
the origination of such loan. The lower the Loan-to-Value Ratio, the greater the
percentage of the borrower's equity in a Mortgaged Property, and thus (a) the
greater the incentive of the borrower to perform under the terms of the related
Mortgage Loan (in order to protect such equity) and (b) the greater the cushion
provided to the lender against loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure of
the likelihood of liquidation loss in a pool of Mortgage Loans. For example, the
value of a Mortgaged Property as of the date of initial issuance of the related
series of Certificates may be less than the Value determined at loan
origination, and will likely continue to fluctuate from time to time based upon
certain factors including changes in economic conditions and the real estate
market. Moreover, even when current, an appraisal is not necessarily a reliable
estimate of value. Appraised values of income-producing properties are generally
based on the market comparison method (recent resale value of comparable
properties at the date of the appraisal), the cost replacement method (the cost
of replacing the property at such date), the income capitalization method (a
projection of value based upon the property's projected net cash flow), or upon
a selection from or interpolation of the values derived from such methods. Each
of these appraisal methods can present analytical difficulties. It is often
difficult to find truly comparable properties that have recently been sold; the
replacement cost of a property may have little to do with its current market
value; and income capitalization is inherently based on inexact projections of
income and expense and the selection of an appropriate capitalization rate and
discount rate. Where more than one of these appraisal methods are used and
provide significantly different results, an accurate determination of value and,
correspondingly, a reliable analysis of the likelihood of default and loss, is
even more difficult.
Although there may be multiple methods for determining the value of a
Mortgaged Property, value will in all cases be affected by property performance.
As a result, if a Mortgage Loan defaults because the income generated by the
related Mortgaged Property is insufficient to cover operating costs and expenses
and pay debt service, then the value of the Mortgaged Property will reflect such
and a liquidation loss may occur.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans, there can be no
assurance that all of such factors will in fact have been prudently considered
by the Originators of the Mortgage Loans, or that, for a particular
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Mortgage Loan, they are complete or relevant. See "Risk Factors-Certain Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans-General" and
"-Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans-Increased Risk of Default Associated With Balloon Payments".
Payment Provisions of the Mortgage Loans. All of the Mortgage Loans will
(i) have had original terms to maturity of not more than 40 years and (ii)
provide for scheduled payments of principal, interest or both, to be made on
specified dates ("Due Dates") that occur monthly, quarterly, semi-annually or
annually. A Mortgage Loan (i) may provide for no accrual of interest or for
accrual of interest thereon at a Mortgage Rate that is fixed over its term or
that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, (ii) may provide for level payments to maturity or for
payments that adjust from time to time to accommodate changes in the Mortgage
Rate or to reflect the occurrence of certain events, and may permit negative
amortization, (iii) may be fully amortizing or may be partially amortizing or
nonamortizing, with a balloon payment due on its stated maturity date, and (iv)
may prohibit over its term or for a certain period prepayments (the period of
such prohibition, a "Lock-out Period" and its date of expiration, a "Lock-out
Date") and/or require payment of a premium or a yield maintenance payment (a
"Prepayment Premium") in connection with certain prepayments, in each case as
described in the related Prospectus Supplement. A Mortgage Loan may also contain
a provision that entitles the lender to a share of appreciation of the related
Mortgaged Property, or profits realized from the operation or disposition of
such Mortgaged Property or the benefit, if any, resulting from the refinancing
of the Mortgage Loan (any such provision, an "Equity Participation"), as
described in the related Prospectus Supplement.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans in
the related Trust Fund, which, to the extent then applicable, will generally
include the following: (i) the aggregate outstanding principal balance and the
largest, smallest and average outstanding principal balance of the Mortgage
Loans, (ii) the type or types of property that provide security for repayment of
the Mortgage Loans, (iii) the earliest and latest origination date and maturity
date of the Mortgage Loans, (iv) the original and remaining terms to maturity of
the Mortgage Loans, or the respective ranges thereof, and the weighted average
original and remaining terms to maturity of the Mortgage Loans, (v) the
Loan-to-Value Ratios of the Mortgage Loans (either at origination or as of a
more recent date), or the range thereof, and the weighted average of such
Loan-to-Value Ratios, (vi) the Mortgage Rates borne by the Mortgage Loans, or
the range thereof, and the weighted average Mortgage Rate borne by the Mortgage
Loans, (vii) with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
Loans"), the index or indices upon which such adjustments are based, the
adjustment dates, the range of gross margins and the weighted average gross
margin, and any limits on Mortgage Rate adjustments at the time of any
adjustment and over the life of the ARM Loan, (viii) information regarding the
payment characteristics of the Mortgage Loans, including, without limitation,
balloon payment and other amortization provisions, Lockout Periods and
Prepayment Premiums, (ix) the Debt Service Coverage Ratios of the Mortgage Loans
(either at origination or as of a more recent date), or the range thereof, and
the weighted average of such Debt Service Coverage Ratios, and (x) the
geographic distribution of the Mortgaged Properties on a state-by-state basis.
In appropriate cases, the related Prospectus Supplement will also contain
certain information available to the Depositor that pertains to the provisions
of leases and the nature of tenants of the Mortgaged Properties. If the
Depositor is unable to provide the specific information described above at the
time Offered Certificates of a series are initially offered, more general
information of the nature described above will be provided in the related
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of those Certificates at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Commission within fifteen days following such issuance.
If any Mortgage Loan, or group of related Mortgage Loans, constitutes a
concentration of credit risk, financial statements or other financial
information with respect to the related Mortgaged Property or Mortgaged
Properties will be included in the related Prospectus Supplement.
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If and to the extent available and relevant to an investment decision in
the Offered Certificates of the related series, information regarding the
prepayment experience of a Master Servicer's multifamily and/or commercial
mortgage loan servicing portfolio will be included in the related Prospectus
Supplement. However, many servicers do not maintain records regarding such
matters or, at least, not in a format that can be readily aggregated. In
addition, the relevant characteristics of a Master Servicer's servicing
portfolio may be so materially different from those of the related Mortgage
Asset Pool that such prepayment experience would not be meaningful to an
investor. For example, differences in geographic dispersion, property type
and/or loan terms (e.g., mortgage rates, terms to maturity and/or prepayment
restrictions) between the two pools of loans could render the Master Servicer's
prepayment experience irrelevant. Because of the nature of the assets to be
serviced and administered by a Special Servicer, no comparable prepayment
information will be presented with respect to the Special Servicer's multifamily
and/or commercial mortgage loan servicing portfolio.
MBS
MBS may include (i) private-label (that is, not issued, insured or
guaranteed by the United States or any agency or instrumentality thereof)
mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates issued and/or insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA"), the Governmental National Mortgage
Association ("GNMA") or the Federal Agricultural Mortgage Corporation ("FAMC"),
provided that, unless otherwise specified in the related Prospectus Supplement,
each MBS will evidence an interest in, or will be secured by a pledge of,
mortgage loans that conform to the descriptions of the Mortgage Loans contained
herein.
Except in the case of a pro rata mortgage participation in a single
mortgage loan or a pool of mortgage loans, each MBS included in a Mortgage Asset
Pool: (a) either will (i) have been previously registered under the Securities
Act of 1933, as amended, (ii) be exempt from such registration requirements or
(iii) have been held for at least the holding period specified in Rule 144(k)
under the Securities Act of 1933, as amended; and (b) either (i) will have been
acquired (other than from the Depositor or an affiliate thereof) in bona fide
secondary market transactions or (ii) if so specified in the related Prospectus
Supplement, may be derived from the Depositor's (or an affiliate's) unsold
allotments from the Depositor (or an affiliate's) previous offerings.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). The issuer of the MBS (the "MBS Issuer") and/or the
servicer of the underlying mortgage loans (the "MBS Servicer") will be parties
to the MBS Agreement, generally together with a trustee (the "MBS Trustee") or,
in the alternative, with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Issuer, the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. The MBS
Issuer or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit support, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
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The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify: (i) the aggregate approximate initial and
outstanding principal amount(s) and type of the MBS to be included in the Trust
Fund, (ii) the original and remaining term(s) to stated maturity of the MBS, if
applicable, (iii) the pass-through or bond rate(s) of the MBS or the formula for
determining such rate(s), (iv) the payment characteristics of the MBS, (v) the
MBS Issuer, MBS Servicer and MBS Trustee, as applicable, of each of the MBS,
(vi) a description of the related credit support, if any, (vii) the
circumstances under which the related underlying mortgage loans, or the MBS
themselves, may be purchased prior to their maturity, (viii) the terms on which
mortgage loans may be substituted for those originally underlying the MBS, (ix)
the type of mortgage loans underlying the MBS and, to the extent appropriate
under the circumstances, such other information in respect of the underlying
mortgage loans described under "-Mortgage Loans-Mortgage Loan Information in
Prospectus Supplements", and (x) the characteristics of any cash flow agreements
that relate to the MBS.
The Depositor will provide the same information regarding the MBS in any
Trust Fund in its reports filed under the Exchange Act with respect to such
Trust Fund as was provided by the related MBS Issuer in its own such reports if
such MBS was publicly offered or the reports the related MBS Issuer provides the
related MBS Trustee if such MBS was privately issued.
Certificate Accounts
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which all payments and collections received or advanced
with respect to the Mortgage Assets and other assets in the Trust Fund will be
deposited to the extent described herein and in the related Prospectus
Supplement. See "Description of the Pooling Agreements-Certificate Account".
Credit Support
If so provided in the Prospectus Supplement for a series of Certificates,
partial or full protection against certain defaults and losses on the Mortgage
Assets in the related Trust Fund may be provided to one or more classes of
Certificates of such series in the form of subordination of one or more other
classes of Certificates of such series or by one or more other types of Credit
Support, which may include a letter of credit, a surety bond, an insurance
policy, a guarantee, a reserve fund, or any combination thereof. The amount and
types of such Credit Support, the identity of the entity providing it (if
applicable) and related information with respect to each type of Credit Support,
if any, will be set forth in the Prospectus Supplement for a series of
Certificates. See "Risk Factors-Credit Support Limitations" and "Description of
Credit Support".
Cash Flow Agreements
If so provided in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include guaranteed investment contracts pursuant to
which moneys held in the funds and accounts established for such series will be
invested at a specified rate. The Trust Fund may also include interest rate
exchange agreements, interest rate cap or floor agreements, or other agreements
designed to reduce the effects of interest rate fluctuations on the Mortgage
Assets on one or more classes of Certificates. The principal terms of any such
Cash Flow Agreement, including, without limitation, provisions relating to the
timing, manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the related Prospectus Supplement. The
related Prospectus Supplement will also identify the obligor under the Cash Flow
Agreement.
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YIELD AND MATURITY CONSIDERATIONS
General
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount and
timing of distributions on the Certificate. See "Risk Factors-Effect of
Prepayments on Average Life of Certificates". The following discussion
contemplates a Trust Fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying an MBS can generally
be expected to have the same effect on the yield to maturity and/or weighted
average life of a class of Certificates as will the characteristics and behavior
of comparable Mortgage Loans, the effect may differ due to the payment
characteristics of the MBS. If a Trust Fund includes MBS, the related Prospectus
Supplement will discuss the effect, if any, that the payment characteristics of
the MBS may have on the yield to maturity and weighted average lives of the
Offered Certificates of the related series.
Pass-Through Rate
The Certificates of any class within a series may have a fixed, variable or
adjustable Pass-Through Rate, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related Trust Fund. The Prospectus
Supplement with respect to any series of Certificates will specify the
Pass-Through Rate for each class of Offered Certificates of such series or, in
the case of a class of Offered Certificates with a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the effect,
if any, of the prepayment of any Mortgage Loan on the Pass-Through Rate of one
or more classes of Offered Certificates; and whether the distributions of
interest on the Offered Certificates of any class will be dependent, in whole or
in part, on the performance of any obligor under a Cash Flow Agreement.
Payment Delays
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related Trust
Fund are due and the Distribution Date on which such payments are passed through
to Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on the date they were due.
Certain Shortfalls in Collections of Interest
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest on the amount of such prepayment only
through the date of such prepayment, instead of through the Due Date for the
next succeeding scheduled payment. However, interest accrued on any series of
Certificates and distributable thereon on any Distribution Date will generally
correspond to interest accrued on the Mortgage Loans to their respective Due
Dates during the related Due Period. A "Due Period" will be a specified time
period (generally corresponding in length to the period between Distribution
Dates) and all scheduled payments on the Mortgage Loans in the related Trust
Fund that are due during a given Due Period will, to the extent received by a
specified date (the "Determination Date") or otherwise advanced by the related
Master Servicer, Special Servicer or other specified person, be distributed to
the holders of the Certificates of such series on the next succeeding
Distribution Date. Consequently, if a prepayment on any Mortgage Loan is
distributable to Certificateholders on a particular Distribution Date, but such
prepayment is not accompanied by interest thereon to the Due Date for such
Mortgage Loan in the related Due Period, then the interest charged to the
borrower (net of servicing and administrative fees) may be less (such shortfall,
a "Prepayment Interest Shortfall") than the corresponding amount of interest
accrued and otherwise payable on the Certificates of the related series. If and
to the extent that any such shortfall is allocated to a class of Offered
Certificates, the yield thereon will be adversely affected. The Prospectus
Supplement for each series
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of Certificates will describe the manner in which any such shortfalls will be
allocated among the classes of such Certificates. The related Prospectus
Supplement will also describe any amounts available to offset such shortfalls.
Yield and Prepayment Considerations
A Certificate's yield to maturity will be affected by the rate of principal
payments on the Mortgage Loans in the related Trust Fund and the allocation
thereof to reduce the principal balance (or notional amount, if applicable) of
such Certificate. The rate of principal payments on the Mortgage Loans in any
Trust Fund will in turn be affected by the amortization schedules thereof
(which, in the case of ARM Loans, may change periodically to accommodate
adjustments to the Mortgage Rates thereon), the dates on which any balloon
payments are due, and the rate of principal prepayments thereon (including for
this purpose, voluntary prepayments by borrowers and also prepayments resulting
from liquidations of Mortgage Loans due to defaults, casualties or condemnations
affecting the related Mortgaged Properties, or purchases of Mortgage Loans out
of the related Trust Fund). Because the rate of principal prepayments on the
Mortgage Loans in any Trust Fund will depend on future events and a variety of
factors (as described below), no assurance can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend upon
the degree to which they are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans in the related Trust
Fund are in turn distributed on such Certificates (or, in the case of a class of
Stripped Interest Certificates, result in the reduction of the Notional Amount
thereof). An investor should consider, in the case of any Offered Certificate
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans in the related Trust Fund could result
in an actual yield to such investor that is lower than the anticipated yield
and, in the case of any Offered Certificate purchased at a premium, the risk
that a faster than anticipated rate of principal payments on such Mortgage Loans
could result in an actual yield to such investor that is lower than the
anticipated yield. In addition, if an investor purchases an Offered Certificate
at a discount (or premium), and principal payments are made in reduction of the
principal balance or notional amount of such investor's Offered Certificates at
a rate slower (or faster) than the rate anticipated by the investor during any
particular period, any consequent adverse effects on such investor's yield would
not be fully offset by a subsequent like increase (or decrease) in the rate of
principal payments.
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related Trust Fund or (ii) equal the Certificate
Balances of one or more of the other classes of Certificates of the same series.
Accordingly, the yield on such Stripped Interest Certificates will be inversely
related to the rate at which payments and other collections of principal are
received on such Mortgage Assets or distributions are made in reduction of the
Certificate Balances of such classes of Certificates, as the case may be.
Consistent with the foregoing, if a class of Certificates of any series
consists of Stripped Interest Certificates or Stripped Principal Certificates, a
lower than anticipated rate of principal prepayments on the Mortgage Loans in
the related Trust Fund will negatively affect the yield to investors in Stripped
Principal Certificates, and a higher than anticipated rate of principal
prepayments on such Mortgage Loans will negatively affect the yield to investors
in Stripped Interest Certificates. If the Offered Certificates of a series
include any such Certificates, the related Prospectus Supplement will include a
table showing the effect of various constant assumed levels of prepayment on
yields on such Certificates. Such tables will be intended to illustrate the
sensitivity of yields to various constant assumed prepayment rates and will not
be intended to predict, or to provide information that will enable investors to
predict, yields or prepayment rates.
The extent of prepayments of principal of the Mortgage Loans in any Trust
Fund may be affected by a number of factors, including, without limitation, the
availability of mortgage credit, the relative economic vitality of the area in
which the Mortgaged Properties are located, the quality of management of the
Mortgaged Properties, the servicing of the Mortgage
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Loans, possible changes in tax laws and other opportunities for investment. In
general, those factors which increase the attractiveness of selling a Mortgaged
Property or refinancing a Mortgage Loan or which enhance a borrower's ability to
do so, as well as those factors which increase the likelihood of default under a
Mortgage Loan, would be expected to cause the rate of prepayment in respect of
any Mortgage Asset Pool to accelerate. In contrast, those factors having an
opposite effect would be expected to cause the rate of prepayment of any
Mortgage Asset Pool to slow.
The rate of principal payments on the Mortgage Loans in any Trust Fund may
also be affected by the existence of Lock-out Periods and requirements that
principal prepayments be accompanied by Prepayment Premiums, and by the extent
to which such provisions may be practicably enforced. To the extent enforceable,
such provisions could constitute either an absolute prohibition (in the case of
a Lock-out Period) or a disincentive (in the case of a Prepayment Premium) to a
borrower's voluntarily prepaying its Mortgage Loan, thereby slowing the rate of
prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be affected
by prevailing market interest rates for mortgage loans of a comparable type,
term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Even in the case of ARM Loans, as prevailing market interest
rates decline, and without regard to whether the Mortgage Rates on such ARM
Loans decline in a manner consistent therewith, the related borrowers may have
an increased incentive to refinance for purposes of either (i) converting to a
fixed rate loan and thereby "locking in" such rate or (ii) taking advantage of a
different index, margin or rate cap or floor on another adjustable rate mortgage
loan. Therefore, as prevailing market interest rates decline, prepayment speeds
would be expected to accelerate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits. The Depositor
makes no representation as to the particular factors that will affect the
prepayment of the Mortgage Loans in any Trust Fund, as to the relative
importance of such factors, as to the percentage of the principal balance of
such Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment on such Mortgage Loans.
Weighted Average Life and Maturity
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average life
of one or more classes of the Certificates of such series. Unless otherwise
specified in the related Prospectus Supplement, weighted average life refers to
the average amount of time that will elapse from the date of issuance of an
instrument until each dollar allocable as principal of such instrument is repaid
to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related Mortgage
Loans, whether in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes voluntary prepayments by borrowers and
also prepayments resulting from liquidations of Mortgage Loans due to default,
casualties or condemnations affecting the related Mortgaged Properties and
purchases of Mortgage Loans out of the related Trust Fund), is paid to such
class. Prepayment rates on loans are commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents
an assumed constant rate of prepayment each month (expressed as an annual
percentage) relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage) relative to
the then outstanding principal balance of a pool of mortgage loans, with
different prepayment assumptions often
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expressed as percentages of SPA. For example, a prepayment assumption of 100% of
SPA assumes prepayment rates of 0.2% per annum of the then outstanding principal
balance of such loans in the first month of the life of the loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month, and in each month thereafter during the life
of the loans, 100% of SPA assumes a constant prepayment rate of 6% per annum
each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. Thus, it is unlikely that the
prepayment experience of the Mortgage Loans included in any Trust Fund will
conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Certificates of such series with a Certificate Balance,
and the percentage of the initial Certificate Balance of each such class that
would be outstanding on specified Distribution Dates, based on the assumptions
stated in such Prospectus Supplement, including assumptions that prepayments on
the related Mortgage Loans are made at rates corresponding to various
percentages of CPR or SPA, or at such other rates specified in such Prospectus
Supplement. Such tables and assumptions will illustrate the sensitivity of the
weighted average lives of the Certificates to various assumed prepayment rates
and will not be intended to predict, or to provide information that will enable
investors to predict, the actual weighted average lives of the Certificates.
Other Factors Affecting Yield, Weighted Average Life and Maturity
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage Loans
included in a particular Trust Fund may require that balloon payments be made at
maturity. Because the ability of a borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a possibility that Mortgage Loans that require
balloon payments may default at maturity, or that the maturity of such a
Mortgage Loan may be extended in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things, bankruptcy
of the borrower or adverse conditions in the market where the property is
located. In order to minimize losses on defaulted Mortgage Loans, the Master
Servicer or the Special Servicer, to the extent and under the circumstances set
forth herein and in the related Prospectus Supplement, may be authorized to
modify Mortgage Loans that are in default or as to which a payment default is
imminent. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan may delay distributions of principal on a class of
Offered Certificates and thereby extend the weighted average life of such
Certificates and, if such Certificates were purchased at a discount, reduce the
yield thereon.
Negative Amortization. The weighted average life of a class of Certificates
can be affected by Mortgage Loans that permit negative amortization to occur
(that is, Mortgage Loans that provide for the current payment of interest
calculated at a rate lower than the rate at which interest accrues thereon, with
the unpaid portion of such interest being added to the related principal
balance). Negative amortization on one or more Mortgage Loans in any Trust Fund
may result in negative amortization on the Offered Certificates of the related
series. The related Prospectus Supplement will describe, if applicable, the
manner in which negative amortization in respect of the Mortgage Loans in any
Trust Fund is allocated among the respective classes of Certificates of the
related series. The portion of any Mortgage Loan negative amortization allocated
to a class of Certificates may result in a deferral of some or all of the
interest payable thereon, which deferred interest may be added to the
Certificate Balance thereof. In addition, an ARM Loan that permits negative
amortization would be expected during a period of increasing interest rates to
amortize at a slower rate (and perhaps not at all) than if interest rates were
declining or were remaining constant. Such slower rate of Mortgage Loan
amortization would correspondingly be reflected in a slower rate of amortization
for one or more classes of Certificates of the related series. Accordingly, the
weighted
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average lives of Mortgage Loans that permit negative amortization (and that of
the classes of Certificates to which any such negative amortization would be
allocated or that would bear the effects of a slower rate of amortization on
such Mortgage Loans) may increase as a result of such feature.
Negative amortization may occur in respect of an ARM Loan that (i) limits
the amount by which its scheduled payment may adjust in response to a change in
its Mortgage Rate, (ii) provides that its scheduled payment will adjust less
frequently than its Mortgage Rate or (iii) provides for constant scheduled
payments notwithstanding adjustments to its Mortgage Rate. Accordingly, during a
period of declining interest rates, the scheduled payment on such a Mortgage
Loan may exceed the amount necessary to amortize the loan fully over its
remaining amortization schedule and pay interest at the then applicable Mortgage
Rate, thereby resulting in the accelerated amortization of such Mortgage Loan.
Any such acceleration in amortization of its principal balance will shorten the
weighted average life of such Mortgage Loan and, correspondingly, the weighted
average lives of those classes of Certificates entitled to a portion of the
principal payments on such Mortgage Loan.
The extent to which the yield on any Offered Certificate will be affected
by the inclusion in the related Trust Fund of Mortgage Loans that permit
negative amortization, will depend upon (i) whether such Offered Certificate was
purchased at a premium or a discount and (ii) the extent to which the payment
characteristics of such Mortgage Loans delay or accelerate the distributions of
principal on such Certificate (or, in the case of a Stripped Interest
Certificate, delay or accelerate the reduction of the notional amount thereof).
See "-Yield and Prepayment Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance with
their terms will affect the weighted average lives of those Mortgage Loans and,
accordingly, the weighted average lives of and yields on the Certificates of the
related series. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceedings or otherwise, may also
have an effect upon the payment patterns of particular Mortgage Loans and thus
the weighted average lives of and yields on the Certificates of the related
series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
Offered Certificates of any series will directly depend on the extent to which
such holders are required to bear the effects of any losses or shortfalls in
collections arising out of defaults on the Mortgage Loans in the related Trust
Fund and the timing of such losses and shortfalls. In general, the earlier that
any such loss or shortfall occurs, the greater will be the negative effect on
yield for any class of Certificates that is required to bear the effects
thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by (i) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of Certificates and/or (ii)
establishing a priority of payments among such classes of Certificates.
The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the holders
thereof to a specified portion (which may during specified periods range from
none to all) of the principal payments received on the Mortgage Assets in the
related Trust
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Fund, one or more classes of Certificates of any series, including one or more
classes of Offered Certificates of such series, may provide for distributions of
principal thereof from (i) amounts attributable to interest accrued but not
currently distributable on one or more classes of Accrual Certificates, (ii)
Excess Funds or (iii) any other amounts described in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
"Excess Funds" will, in general, represent that portion of the amounts
distributable in respect of the Certificates of any series on any Distribution
Date that represent (i) interest received or advanced on the Mortgage Assets in
the related Trust Fund that is in excess of the interest currently accrued on
the Certificates of such series, or (ii) Prepayment Premiums, payments from
Equity Participations or any other amounts received on the Mortgage Assets in
the related Trust Fund that do not constitute interest thereon or principal
thereof.
The amortization of any class of Certificates out of the sources described
in the preceding paragraph would shorten the weighted average life of such
Certificates and, if such Certificates were purchased at a premium, reduce the
yield thereon. The related Prospectus Supplement will discuss the relevant
factors to be considered in determining whether distributions of principal of
any class of Certificates out of such sources is likely to have any material
effect on the rate at which such Certificates are amortized and the consequent
yield with respect thereto.
THE DEPOSITOR
The Depositor is a special purpose corporation incorporated in the State of
Delaware on March 22, 1996, for the purpose of engaging in the business, among
other things, of acquiring and depositing mortgage assets in trust in exchange
for certificates evidencing interest in such trusts and selling or otherwise
distributing such certificates. The Depositor is not an affiliate of Deutsche
Bank AG. The principal executive offices of the Depositor are located at One
International Place, Room 608, Boston, Massachusetts 02110. Its telephone number
is (617) 951-7690. The Depositor's capitalization is nominal. All of the shares
of capital stock of the Depositor are held by The Deutsche Mortgage & Asset
Receiving Trust, a Massachusetts charitable lead trust (the "DMARC Trust")
formed by J H Management Corporation and J H Holdings Corporation, both of which
are Massachusetts corporations. J H Holdings Corporation is the trustee of the
DMARC Trust, which holds no assets other than the stock of the Depositor. All of
the stock of J H Holdings Corporation and of J H Management Corporation is held
by the 1960 Trust, an independent charitable organization qualified under
Section 501(c)(3) of the Code, and operated for the benefit of a Massachusetts
charitable institution.
None of the Depositor, J H Management Corporation, Deutsche Bank A.G. or
any of their respective affiliates will insure or guarantee distributions on the
Certificates of any series.
DEUTSCHE BANK AG
It is anticipated that the assets conveyed to the Trust Fund by the
Depositor will have been acquired by the Depositor from Deutsche Bank AG or an
affiliate thereof. Deutsche Bank AG is the largest banking institution in the
Federal Republic of Germany and one of the largest in the world. It is the
parent company of a group (the "Deutsche Bank Group") consisting of commercial
banks, investment banking and fund management companies, mortgage banks and
property finance companies, installment financing and leasing companies,
insurance companies, research and consultancy companies and other domestic and
foreign companies. The Deutsche Bank Group employs over 74,000 staff members at
more than 2,400 branches and offices around the world.
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DESCRIPTION OF THE CERTIFICATES
General
Each series of Certificates will represent the entire beneficial ownership
interest in the Trust Fund created pursuant to the related Pooling Agreement. As
described in the related Prospectus Supplement, the Certificates of each series,
including the Offered Certificates of such series, may consist of one or more
classes of Certificates that, among other things: (i) provide for the accrual of
interest on the Certificate Balance or Notional Amount thereof at a fixed,
variable or adjustable rate; (ii) constitute Senior Certificates or Subordinate
Certificates; (iii) constitute Stripped Interest Certificates or Stripped
Principal Certificates; (iv) provide for distributions of interest thereon or
principal thereof that commence only after the occurrence of certain events,
such as the retirement of one or more other classes of Certificates of such
series; (v) provide for distributions of principal thereof to be made, from time
to time or for designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower) than
the rate at which payments or other collections of principal are received on the
Mortgage Assets in the related Trust Fund; (vi) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology; or (vii) provide for
distributions based on collections on the Mortgage Assets in the related Trust
Fund attributable to Prepayment Premiums and Equity Participations.
If so specified in the related Prospectus Supplement, a class of
Certificates may have two or more component parts, each having characteristics
that are otherwise described herein as being attributable to separate and
distinct classes. For example, a class of Certificates may have a Certificate
Balance on which it accrues interest at a fixed, variable or adjustable rate.
Such class of Certificates may also have certain characteristics attributable to
Stripped Interest Certificates insofar as it may also entitle the holders
thereof to distributions of interest accrued on a Notional Amount at a different
fixed, variable or adjustable rate. In addition, a class of Certificates may
accrue interest on one portion of its Certificate Balance at one fixed, variable
or adjustable rate and on another portion of its Certificate Balance at a
different fixed, variable or adjustable rate.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the principal balances or, in case of certain
classes of Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully registered,
definitive form (such Certificates, "Definitive Certificates") or may be offered
in book-entry format (such Certificates, "Book-Entry Certificates") through the
facilities of DTC. The Offered Certificates of each series (if issued as
Definitive Certificates) may be transferred or exchanged, subject to any
restrictions on transfer described in the related Prospectus Supplement, at the
location specified in the related Prospectus Supplement, without the payment of
any service charges, other than any tax or other governmental charge payable in
connection therewith. Interests in a class of Book-Entry Certificates will be
transferred on the book-entry records of DTC and its participating
organizations. If so specified in the related Prospectus Supplement,
arrangements may be made for clearance and settlement through CEDEL, S.A. or the
Euroclear System, if they are participants in DTC.
Distributions
Distributions on the Certificates of each series will be made on each
Distribution Date from the Available Distribution Amount for such series and
such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the "Available Distribution Amount" for any series of Certificates
and any Distribution Date will refer to the total of all payments or other
collections (or advances in lieu thereof) on, under or in respect of the
Mortgage Assets and any other assets included in the related Trust Fund that are
available for distribution to the holders of Certificates of such series on such
date. The
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particular components of the Available Distribution Amount for any series and
Distribution Date will be more specifically described in the related Prospectus
Supplement. In general, the Distribution Date for a series of Certificates will
be the 25th day of each month (or, if any such 25th day is not a business day,
the next succeeding business day), commencing in the month immediately following
the month in which such series of Certificates is issued.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such class
in proportion to the respective Percentage Interests evidenced thereby unless
otherwise specified in the related Prospectus Supplement. Payments will be made
either by wire transfer in immediately available funds to the account of a
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder has provided the person required to make
such payments with wiring instructions no later than the related Record Date or
such other date specified in the related Prospectus Supplement (and, if so
provided in the related Prospectus Supplement, such Certificateholder holds
Certificates in the requisite amount or denomination specified therein), or by
check mailed to the address of such Certificateholder as it appears on the
Certificate Register; provided, however, that the final distribution in
retirement of any class of Certificates (whether Definitive Certificates or
Book-Entry Certificates) will be made only upon presentation and surrender of
such Certificates at the location specified in the notice to Certificateholders
of such final distribution. The undivided percentage interest (the "Percentage
Interest") represented by an Offered Certificate of a particular class will be
equal to the percentage obtained by dividing the initial principal balance or
notional amount of such Certificate by the initial Certificate Balance or
Notional Amount of such class.
Distributions of Interest on the Certificates
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC Residual
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which in each case may be fixed, variable or adjustable. The related
Prospectus Supplement will specify the Pass-Through Rate or, in the case of a
variable or adjustable Pass-Through Rate, the method for determining the
Pass-Through Rate, for each class of Offered Certificates. Unless otherwise
specified in the related Prospectus Supplement, interest on the Certificates of
each series will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Distributions of interest in respect of any class of Certificates (other
than a class of Accrual Certificates, which will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement, and other than
any class of Stripped Principal Certificates or REMIC Residual Certificates that
is not entitled to any distributions of interest) will be made on each
Distribution Date based on the Accrued Certificate Interest for such class and
such Distribution Date, subject to the sufficiency of that portion, if any, of
the Available Distribution Amount allocable to such class on such Distribution
Date. Prior to the time interest is distributable on any class of Accrual
Certificates, the amount of Accrued Certificate Interest otherwise distributable
on such class will be added to the Certificate Balance thereof on each
Distribution Date or otherwise deferred as described in the related Prospectus
Supplement. With respect to each class of Certificates (other than certain
classes of Stripped Interest Certificates and certain classes of REMIC Residual
Certificates), the "Accrued Certificate Interest" for each Distribution Date
will be equal to interest at the applicable Pass-Through Rate accrued for a
specified period (generally the most recently ended calendar month) on the
outstanding Certificate Balance of such class of Certificates immediately prior
to such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the Accrued Certificate Interest for each Distribution Date on a
class of
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Stripped Interest Certificates will be similarly calculated except that it will
accrue on a Notional Amount that is either (i) based on the principal balances
of some or all of the Mortgage Assets in the related Trust Fund or (ii) equal to
the Certificate Balances of one or more other classes of Certificates of the
same series. Reference to a Notional Amount with respect to a class of Stripped
Interest Certificates is solely for convenience in making certain calculations
and does not represent the right to receive any distributions of principal. If
so specified in the related Prospectus Supplement, the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Certificates, that may otherwise be added to the Certificate Balance of)
one or more classes of the Certificates of a series may be reduced to the extent
that any Prepayment Interest Shortfalls, as described under "Yield and Maturity
Considerations-Certain Shortfalls in Collections of Interest", exceed the amount
of any sums that are applied to offset the amount of such shortfalls. The
particular manner in which such shortfalls will be allocated among some or all
of the classes of Certificates of that series will be specified in the related
Prospectus Supplement. The related Prospectus Supplement will also describe the
extent to which the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise be
added to the Certificate Balance of) a class of Offered Certificates may be
reduced as a result of any other contingencies, including delinquencies, losses
and deferred interest on or in respect of the Mortgage Assets in the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement, any
reduction in the amount of Accrued Certificate Interest otherwise distributable
on a class of Certificates by reason of the allocation to such class of a
portion of any deferred interest on or in respect of the Mortgage Assets in the
related Trust Fund will result in a corresponding increase in the Certificate
Balance of such class. See "Risk Factors-Effect of Prepayments on Average Life
of Certificates" and "-Effect of Prepayments on Yield of Certificates" and
"Yield and Maturity Considerations-Certain Shortfalls in Collections of
Interest".
Distributions of Principal of the Certificates
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of Certificates of such class will be
entitled to receive as principal out of the future cash flow on the Mortgage
Assets and other assets included in the related Trust Fund. The outstanding
Certificate Balance of a class of Certificates will be reduced by distributions
of principal made thereon from time to time and, if and to the extent so
provided in the related Prospectus Supplement, further by any losses incurred in
respect of the related Mortgage Assets allocated thereto from time to time. In
turn, the outstanding Certificate Balance of a class of Certificates may be
increased as a result of any deferred interest on or in respect of the related
Mortgage Assets being allocated thereto from time to time, and will be
increased, in the case of a class of Accrual Certificates prior to the
Distribution Date on which distributions of interest thereon are required to
commence, by the amount of any Accrued Certificate Interest in respect thereof
(reduced as described above). The initial aggregate Certificate Balance of all
classes of a series of Certificates will not be greater than the aggregate
outstanding principal balance of the related Mortgage Assets as of a specified
date (the "Cut-off Date"), after application of scheduled payments due on or
before such date, whether or not received. The initial Certificate Balance of
each class of a series of Certificates will be specified in the related
Prospectus Supplement. As and to the extent described in the related Prospectus
Supplement, distributions of principal with respect to a series of Certificates
will be made on each Distribution Date to the holders of the class or classes of
Certificates of such series entitled thereto until the Certificate Balances of
such Certificates have been reduced to zero. Distributions of principal with
respect to one or more classes of Certificates may be made at a rate that is
faster (and, in some cases, substantially faster) than the rate at which
payments or other collections of principal are received on the Mortgage Assets
in the related Trust Fund. Distributions of principal with respect to one or
more classes of Certificates may not commence until the occurrence of certain
events, such as the retirement of one or more other classes of Certificates of
the same series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund.
Distributions of principal with respect to one or more classes of Certificates
(each such class, a "Controlled Amortization Class") may be made, subject to
available funds, based on a specified principal payment schedule. Distributions
of principal
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with respect to one or more other classes of Certificates (each such class, a
"Companion Class") may be contingent on the specified principal payment schedule
for a Controlled Amortization Class of the same series and the rate at which
payments and other collections of principal on the Mortgage Assets in the
related Trust Fund are received. Unless otherwise specified in the related
Prospectus Supplement, distributions of principal of any class of Offered
Certificates will be made on a pro rata basis among all of the Certificates of
such class.
Distributions on the Certificates in Respect of Prepayment Premiums or in
Respect of Equity Participations
If so provided in the related Prospectus Supplement, Prepayment Premiums or
payments in respect of Equity Participations received on or in connection with
the Mortgage Assets in any Trust Fund will be distributed on each Distribution
Date to the holders of the class of Certificates of the related series entitled
thereto in accordance with the provisions described in such Prospectus
Supplement. Alternatively, such items may be retained by the Depositor or any of
its affiliates or by any other specified person and/or may be excluded as Trust
Assets.
Allocation of Losses and Shortfalls
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by (i) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of Certificates and/or (ii)
establishing a priority of payments among such classes of Certificates. See
"Description of Credit Support".
Advances in Respect of Delinquencies
If and to the extent provided in the related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the Master Servicer, the Special Servicer,
the Trustee, any provider of Credit Support and/or any other specified person
may be obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of Certificates for such Distribution Date, an
amount up to the aggregate of any payments of principal (other than the
principal portion of any balloon payments) and interest that were due on or in
respect of such Mortgage Loans during the related Due Period and were delinquent
on the related Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made out of a specific entity's own funds will be reimbursable out of
related recoveries on the Mortgage Loans (including amounts drawn under any fund
or instrument constituting Credit Support) respecting which such advances were
made (as to any Mortgage Loan, "Related Proceeds") and such other specific
sources as may be identified in the related Prospectus Supplement, including, in
the case of a series that includes one or more classes of Subordinate
Certificates, if so identified, collections on other Mortgage Assets in the
related Trust Fund that would otherwise be distributable to the holders of one
or more classes of such Subordinate Certificates. No advance will be required to
be made by a Master Servicer, Special Servicer or Trustee if, in the judgment of
the Master Servicer, Special Servicer or Trustee, as the case may be, such
advance would not be recoverable from Related Proceeds or another specifically
identified source (any such advance, a "Nonrecoverable Advance"); and, if
previously made by a Master Servicer, Special Servicer or Trustee, a
Nonrecoverable Advance will be reimbursable thereto from any amounts in the
related Certificate Account prior to any distributions being made to the related
series of Certificateholders.
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If advances have been made by a Master Servicer, Special Servicer, Trustee
or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will be
required to replace such funds in such Certificate Account on or prior to any
future Distribution Date to the extent that funds in such Certificate Account on
such Distribution Date are less than payments required to be made to the related
series of Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer, Special Servicer,
Trustee or other entity to make advances may be secured by a cash advance
reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest on certain or all of
such advances for a specified period during which such advances are outstanding
at the rate specified in such Prospectus Supplement, and such entity will be
entitled to payment of such interest periodically from general collections on
the Mortgage Loans in the related Trust Fund prior to any payment to the related
series of Certificateholders or as otherwise provided in the related Pooling
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a party
to the related MBS Agreement.
Reports to Certificateholders
On each Distribution Date, together with the distribution to the holders of
each class of the Offered Certificates of a series, a Master Servicer, Manager
or Trustee, as provided in the related Prospectus Supplement, will forward to
each such holder, a statement (a "Distribution Date Statement") that, unless
otherwise provided in the related Prospectus Supplement, will set forth, among
other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of Offered
Certificates that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of such class of Offered
Certificates that was applied to pay Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of such class of
Offered Certificates that was allocable to (A) Prepayment Premiums and (B)
payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of Offered Certificates are entitled;
(v) if the related Trust Fund includes Mortgage Loans, the aggregate amount
of advances included in such distribution;
(vi) if the related Trust Fund includes Mortgage Loans, the amount of
servicing compensation received by the related Master Servicer (and, if payable
directly out of the related Trust Fund, by any Special Servicer and any
Sub-Servicer) and, if the related Trust Fund includes MBS, the amount of
administrative compensation received by the MBS Administrator;
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(vii) information regarding the aggregate principal balance of the related
Mortgage Assets on or about such Distribution Date;
(viii) if the related Trust Fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of such Mortgage Loans that
are delinquent;
(ix) if the related Trust Fund includes Mortgage Loans, information
regarding the aggregate amount of losses incurred and principal prepayments made
with respect to such Mortgage Loans during the related Prepayment Period (that
is, the specified period, generally corresponding in length to the period
between Distribution Dates, during which prepayments and other unscheduled
collections on the Mortgage Loans in the related Trust Fund must be received in
order to be distributed on a particular Distribution Date);
(x) the Certificate Balance or Notional Amount, as the case may be, of such
class of Certificates at the close of business on such Distribution Date,
separately identifying any reduction in such Certificate Balance or Notional
Amount due to the allocation of any losses in respect of the related Mortgage
Assets, any increase in such Certificate Balance or Notional Amount due to the
allocation of any negative amortization in respect of the related Mortgage
Assets and any increase in the Certificate Balance of a class of Accrual
Certificates, if any, in the event that Accrued Certificate Interest has been
added to such balance;
(xi) if such class of Offered Certificates has a variable Pass-Through Rate
or an adjustable Pass-Through Rate, the Pass-Through Rate applicable thereto for
such Distribution Date and, if determinable, for the next succeeding
Distribution Date;
(xii) the amount deposited in or withdrawn from any reserve fund on such
Distribution Date, and the amount remaining on deposit in such reserve fund as
of the close of business on such Distribution Date;
(xiii) if the related Trust Fund includes one or more instruments of Credit
Support, such as a letter of credit, an insurance policy and/or a surety bond,
the amount of coverage under each such instrument as of the close of business on
such Distribution Date; and
(xiv) the amount of Credit Support being afforded by any classes of
Subordinate Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per specified
denomination of the relevant class of Offered Certificates or as a percentage.
The Prospectus Supplement for each series of Certificates may describe
additional information to be included in reports to the holders of the Offered
Certificates of such series.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer, Manager or Trustee for a series of Certificates, as the case
may be, will be required to furnish to each person who at any time during the
calendar year was a holder of an Offered Certificate of such series a statement
containing the information set forth in subclauses (i)-(iii) above, aggregated
for such calendar year or the applicable portion thereof during which such
person was a Certificateholder. Such obligation will be deemed to have been
satisfied to the extent that substantially comparable information is provided
pursuant to any requirements of the Code as are from time to time in force. See,
however, "-Book-Entry Registration and Definitive Certificates" below.
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If the Trust Fund for a series of Certificates includes MBS, the ability of
the related Master Servicer, Manager or Trustee, as the case may be, to include
in any Distribution Date Statement information regarding the mortgage loans
underlying such MBS will depend on the reports received with respect to such
MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the Offered Certificates of that series
in connection with distributions made to them. The Depositor will provide the
same information with respect to any MBSs in its own reports that were publicly
offered and the reports the related MBS Issuer provides to the Trustee if
privately issued.
Voting Rights
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes of
such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except with
respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement. See
"Description of the Pooling Agreements-Amendment". The holders of specified
amounts of Certificates of a particular series will have the right to act as a
group to remove the related Trustee and also upon the occurrence of certain
events which if continuing would constitute an Event of Default on the part of
the related Master Servicer, Special Servicer or REMIC Administrator. See
"Description of the Pooling Agreements-Events of Default", "-Rights Upon Event
of Default" and "-Resignation and Removal of the Trustee".
Termination
The obligations created by the Pooling Agreement for each series of
Certificates will terminate following (i) the final payment or other liquidation
of the last Mortgage Asset subject thereto or the disposition of all property
acquired upon foreclosure of any Mortgage Loan subject thereto and (ii) the
payment (or provision for payment) to the Certificateholders of that series of
all amounts required to be paid to them pursuant to such Pooling Agreement.
Written notice of termination of a Pooling Agreement will be given to each
Certificateholder of the related series, and the final distribution will be made
only upon presentation and surrender of the Certificates of such series at the
location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the repurchase
of the Mortgage Assets in the related Trust Fund by the party or parties
specified therein, under the circumstances and in the manner set forth therein.
In addition, if so provided in the related Prospectus Supplement upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount or upon a specified date, a
party designated therein may be authorized or required to solicit bids for the
purchase of all the Mortgage Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth therein. The solicitation of
bids will be conducted in a commercially reasonable manner and, generally,
assets will be sold at their fair market value. Circumstances may arise in which
such fair market value may be less than the unpaid balance of the Mortgage Loans
sold and therefore, as a result of such a sale, the Certificateholders of one or
more Classes of Certificates may receive an amount less than the Certificate
Balance of, and accrued unpaid interest on, their Certificates.
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Book-Entry Registration and Definitive Certificates
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of the Offered Certificates of such series will be offered
in book-entry format through the facilities of DTC, and each such class will be
represented by one or more global Certificates registered in the name of The
Depository Trust Company ("DTC") or its nominee. If so provided in the
Prospectus Supplement, arrangements may be made for clearance and settlement
through the Euroclear System or CEDEL, S.A., if they are participants in DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking corporation" 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 Exchange Act. DTC
was created to hold securities for its participating organizations ("DTC
Participants") and facilitate the clearance and settlement of securities
transactions between DTC Participants through electronic computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement of
securities certificates. DTC Participants that maintain accounts with DTC
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. DTC is owned by a number of
DTC Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with a DTC Participant that maintains as account with
DTC. The rules applicable to DTC and DTC Participants are on file with the
Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through, and 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 Certificates 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). Therefore, the beneficial owner must rely on the foregoing
procedures to evidence its beneficial ownership of such Certificates. The
beneficial ownership interest of the owner of a Book-Entry Certificate (a
"Certificate Owner") may only be transferred by compliance with the rules,
regulations and procedures of such Financial Intermediaries and DTC
Participants.
DTC has no knowledge of the actual Certificate Owners; DTC's records
reflect only the identity of the DTC Participants to whose accounts such
Certificates are credited, which may or may not be the Certificate Owners. The
DTC Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants
and by DTC Participants to Financial Intermediaries and Certificate Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such date.
Disbursement of such distributions by DTC Participants to Financial
Intermediaries and Certificate Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of each such DTC Participant (and not of DTC, the Depositor or
any Trustee, Master Servicer, Special Servicer
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or Manager), subject to any statutory or regulatory requirements as may be in
effect from time to time. Accordingly, under a book-entry system, Certificate
Owners may receive payments after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the only
"Certificateholder" (as such term is used in the related Pooling Agreement) of
Book-Entry Certificates will be the nominee of DTC, and the Certificate Owners
will not be recognized as Certificateholders under the Pooling Agreement.
Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly through
the DTC Participants who in turn will exercise their rights through DTC. The
Depositor has been informed that DTC will take action permitted to be taken by a
Certificateholder under a Pooling Agreement only at the direction of one or more
DTC Participants to whose account with DTC interests in the Book-Entry
Certificates are credited. DTC may take conflicting actions with respect to the
Book-Entry Certificates to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Certificates.
Because DTC can act only on behalf of DTC Participants, who in turn act on
behalf of Financial Intermediaries and certain Certificate Owners, the ability
of a Certificate Owner to pledge its interest in Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of its interest in Book-Entry Certificates, may be limited
due to the lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, 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 such Certificates and the Depositor is unable to locate a
qualified successor or (ii) the Depositor, at its option, elects to terminate
the book-entry system through DTC with respect to such Certificates. Upon the
occurrence of either of the events described in the preceding sentence, DTC will
be required to notify all DTC Participants of the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the certificate or
certificates representing a class of Book-Entry Certificates, together with
instructions for registration, the Trustee for the related series or other
designated party will be required to issue to the Certificate Owners identified
in such instructions the Definitive Certificates to which they are entitled, and
thereafter the holders of such Definitive Certificates will be recognized as
"Certificateholders" under and within the meaning of the related Pooling
Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
General
The Certificates of each series will be issued pursuant to a Pooling
Agreement. In general, the parties to a Pooling Agreement will include the
Depositor, the Trustee, the Master Servicer, the Special Servicer and, if one or
more REMIC elections have been made with respect to the Trust Fund, the REMIC
Administrator. However, a Pooling Agreement that relates to a Trust Fund that
includes MBS may include a Manager as a party, but may not include a Master
Servicer, Special Servicer or other servicer as a party. All parties to each
Pooling Agreement under which Certificates of a series are issued will be
identified in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Mortgage Asset Seller or an affiliate thereof may
perform the functions of Master Servicer, Special Servicer, Manager or REMIC
Administrator. If so specified in the related Prospectus Supplement, the Master
Servicer may also perform the duties of Special Servicer, and the Master
Servicer, the Special Servicer or the Trustee may also perform the duties of
REMIC Administrator. Any party to a Pooling Agreement or any affiliate thereof
may own Certificates issued thereunder; however, except in limited circumstances
(including with respect to required consents to certain amendments to a Pooling
Agreement),
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Certificates issued thereunder that are held by the Master Servicer or Special
Servicer for the related Series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. However, the
provisions of each Pooling Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions that may appear in a Pooling
Agreement under which Certificates that evidence interests in Mortgage Loans
will be issued. The Prospectus Supplement for a series of Certificates will
describe any provision of the related Pooling Agreement that materially differs
from the description thereof contained in this Prospectus and, if the related
Trust Fund includes MBS, will summarize all of the material provisions of the
related Pooling Agreement. The summaries herein do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all of
the provisions of the Pooling Agreement for each series of Certificates and the
description of such provisions in the related Prospectus Supplement. The
Depositor will provide a copy of the Pooling Agreement (without exhibits) that
relates to any series of Certificates without charge upon written request of a
holder of a Certificate of such series addressed to it at its principal
executive offices specified herein under "The Depositor".
Assignment of Mortgage Loans; Repurchases
At the time of issuance of any series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Mortgage Loans to
be included in the related Trust Fund, together with, unless otherwise specified
in the related Prospectus Supplement, all principal and interest to be received
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. The Trustee will,
concurrently with such assignment, deliver the Certificates to or at the
direction of the Depositor in exchange for the Mortgage Loans and the other
assets to be included in the Trust Fund for such series. Each Mortgage Loan will
be identified in a schedule appearing as an exhibit to the related Pooling
Agreement. Such schedule generally will include detailed information that
pertains to each Mortgage Loan included in the related Trust Fund, which
information will typically include the address of the related Mortgaged Property
and type of such property; the Mortgage Rate and, if applicable, the applicable
index, gross margin, adjustment date and any rate cap information; the original
and remaining term to maturity; the amortization term; and the original and
outstanding principal balance.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Mortgage Loan to be included in a
Trust Fund, deliver, or cause to be delivered, to the related Trustee (or to a
custodian appointed by the Trustee as described below) the Mortgage Note
endorsed, without recourse, either in blank or to the order of such Trustee (or
its nominee), the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office), an assignment
of the Mortgage in blank or to the Trustee (or its nominee) in recordable form,
together with any intervening assignments of the Mortgage with evidence of
recording thereon (except for any such assignment not returned from the public
recording office), and, if applicable, any riders or modifications to such
Mortgage Note and Mortgage, together with certain other documents at such times
as set forth in the related Pooling Agreement. Such assignments may be blanket
assignments covering Mortgages on Mortgaged Properties located in the same
county, if permitted by law. Notwithstanding the foregoing, a Trust Fund may
include Mortgage Loans where the original Mortgage Note is not delivered to the
Trustee if the Depositor delivers, or causes to be delivered, to the related
Trustee (or such custodian) a copy or a duplicate original of the Mortgage Note,
together with an affidavit certifying that the original thereof has been lost or
destroyed. In addition, if the Depositor cannot deliver, with respect to any
Mortgage Loan, the Mortgage or any intervening assignment with evidence of
recording thereon concurrently with the execution and delivery of the related
Pooling Agreement because of a delay caused by the public recording office, the
Depositor will deliver, or cause to be delivered, to the related Trustee (or
such custodian) a true and correct photocopy of such Mortgage or assignment as
submitted for recording. The
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Depositor will deliver, or cause to be delivered, to the related Trustee (or
such custodian) such Mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office. If the Depositor
cannot deliver, with respect to any Mortgage Loan, the Mortgage or any
intervening assignment with evidence of recording thereon concurrently with the
execution and delivery of the related Pooling Agreement because such Mortgage or
assignment has been lost, the Depositor will deliver, or cause to be delivered,
to the related Trustee (or such custodian) a true and correct photocopy of such
Mortgage or assignment with evidence of recording thereon. Unless otherwise
specified in the related Prospectus Supplement, assignments of Mortgage to the
Trustee (or its nominee) will be recorded in the appropriate public recording
office, except in states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interests in
the Mortgage Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor or the originator of such Mortgage
Loan.
The Trustee (or a custodian appointed by the Trustee) for a series of
Certificates will be required to review the Mortgage Loan documents delivered to
it within a specified period of days after receipt thereof, and the Trustee (or
such custodian) will hold such documents in trust for the benefit of the
Certificateholders of such series. Unless otherwise specified in the related
Prospectus Supplement, if any such document is found to be missing or defective,
and such omission or defect, as the case may be, materially and adversely
affects the interests of the Certificateholders of the related series, the
Trustee (or such custodian) will be required to notify the Master Servicer, the
Special Servicer and the Depositor, and one of such persons will be required to
notify the relevant Mortgage Asset Seller. In that case, and if the Mortgage
Asset Seller cannot deliver the document or cure the defect within a specified
number of days after receipt of such notice, then, except as otherwise specified
below or in the related Prospectus Supplement, the Mortgage Asset Seller will be
obligated to repurchase the related Mortgage Loan from the Trustee at a price
generally equal to the unpaid principal balance thereof, together with accrued
but unpaid interest through a date on or about the date of purchase, or at such
other price as will be specified in the related Prospectus Supplement (in any
event, the "Purchase Price"). If so provided in the Prospectus Supplement for a
series of Certificates, a Mortgage Asset Seller, in lieu of repurchasing a
Mortgage Loan as to which there is missing or defective loan documentation, will
have the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of Certificates, to replace such
Mortgage Loan with one or more other mortgage loans, in accordance with
standards that will be described in the Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation will constitute the sole remedy to holders of the Certificates of any
series or to the related Trustee on their behalf for missing or defective
Mortgage Loan documentation, and neither the Depositor nor, unless it is the
Mortgage Asset Seller, the Master Servicer or the Special Servicer will be
obligated to purchase or replace a Mortgage Loan if a Mortgage Asset Seller
defaults on its obligation to do so.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage Loans
in any Trust Fund and to maintain possession of and, if applicable, to review
the documents relating to such Mortgage Loans, in any case as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Certificates will be set forth in the related Prospectus
Supplement.
Representations and Warranties; Repurchases
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example: (i) the
accuracy of the information set forth for such Mortgage Loan on the schedule of
Mortgage Loans appearing as an exhibit to the related Pooling Agreement; (ii)
the enforceability of the related Mortgage Note and Mortgage and the existence
of title insurance insuring the lien priority of the related Mortgage; (iii) the
Warranting Party's title to the Mortgage Loan and the authority of the
Warranting Party to sell the Mortgage Loan; and (iv) the payment status of the
Mortgage Loan. It
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is expected that in most cases the Warranting Party will be the Mortgage Asset
Seller; however, the Warranting Party may also be an affiliate of the Mortgage
Asset Seller, the Depositor or an affiliate of the Depositor, the Master
Servicer, the Special Servicer or another person acceptable to the Depositor.
The Warranting Party, if other than the Mortgage Asset Seller, will be
identified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Certificateholders of the
related series. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will be
obligated to repurchase such Mortgage Loan from the Trustee at the applicable
Purchase Price. If so provided in the Prospectus Supplement for a series of
Certificates, a Warranting Party, in lieu of repurchasing a Mortgage Loan as to
which a breach has occurred, will have the option, exercisable upon certain
conditions and/or within a specified period after initial issuance of such
series of Certificates, to replace such Mortgage Loan with one or more other
mortgage loans, in accordance with standards that will be described in the
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, this repurchase or substitution obligation will constitute the sole
remedy available to holders of the Certificates of any series or to the related
Trustee on their behalf for a breach of representation and warranty by a
Warranting Party, and neither the Depositor nor the Master Servicer, in either
case unless it is the Warranting Party, will be obligated to purchase or replace
a Mortgage Loan if a Warranting Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan as of a date prior to the date upon which the related
series of Certificates is issued, and thus may not address events that may occur
following the date as of which they were made. However, the Depositor will not
include any Mortgage Loan in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties made in respect of such Mortgage Loan
will not be accurate in all material respects as of the date of issuance. The
date as of which the representations and warranties regarding the Mortgage Loans
in any Trust Fund were made will be specified in the related Prospectus
Supplement.
Collection and Other Servicing Procedures
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer and the Special Servicer for any Mortgage Pool, directly or through
Sub-Servicers, will each be obligated under the related Pooling Agreement to
service and administer the Mortgage Loans in such Mortgage Pool for the benefit
of the related Certificateholders, in accordance with applicable law and further
in accordance with the terms of such Pooling Agreement, such Mortgage Loans and
any instrument of Credit Support included in the related Trust Fund. Subject to
the foregoing, the Master Servicer and the Special Servicer will each have full
power and authority to do any and all things in connection with such servicing
and administration that it may deem necessary and desirable.
As part of its servicing duties, each of the Master Servicer and the
Special Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans that it
services and will be obligated to follow such collection procedures as it would
follow with respect to mortgage loans that are comparable to such Mortgage Loans
and held for its own account, provided (i) such procedures are consistent with
the terms of the related Pooling Agreement and (ii) do not impair recovery under
any instrument of Credit Support included in the related Trust Fund. Consistent
with the foregoing, the Master Servicer and the Special Servicer will each be
permitted, in its discretion, unless otherwise specified in the related
Prospectus Supplement, to waive any Prepayment Premium, late payment charge or
other charge in connection with any Mortgage Loan.
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The Master Servicer and the Special Servicer for any Trust Fund, either
separately or jointly, directly or through Sub-Servicers, will also be required
to perform as to the Mortgage Loans in such Trust Fund various other customary
functions of a servicer of comparable loans, including maintaining escrow or
impound accounts, if required under the related Pooling Agreement, for payment
of taxes, insurance premiums, ground rents and similar items, or otherwise
monitoring the timely payment of those items; attempting to collect delinquent
payments; supervising foreclosures; negotiating modifications; conducting
property inspections on a periodic or other basis; managing (or overseeing the
management of) Mortgaged Properties acquired on behalf of such Trust Fund
through foreclosure, deed-in-lieu of foreclosure or otherwise (each, an "REO
Property"); and maintaining servicing records relating to such Mortgage Loans.
The related Prospectus Supplement will specify when and the extent to which
servicing of a Mortgage Loan is to be transferred from the Master Servicer to
the Special Servicer. In general, and subject to the discussion in the related
Prospectus Supplement, a Special Servicer will be responsible for the servicing
and administration of: (i) Mortgage Loans that are delinquent in respect of a
specified number of scheduled payments; (ii) Mortgage Loans as to which the
related borrower has entered into or consented to bankruptcy, appointment of a
receiver or conservator or similar insolvency proceeding, or the related
borrower has become the subject of a decree or order for such a proceeding which
shall have remained in force undischarged or unstayed for a specified number of
days; and (iii) REO Properties. If so specified in the related Prospectus
Supplement, a Pooling Agreement also may provide that if a default on a Mortgage
Loan has occurred or, in the judgment of the related Master Servicer, a payment
default is reasonably foreseeable, the related Master Servicer may elect to
transfer the servicing thereof, in whole or in part, to the related Special
Servicer. Unless otherwise provided in the related Prospectus Supplement, when
the circumstances no longer warrant a Special Servicer's continuing to service a
particular Mortgage Loan (e.g., the related borrower is paying in accordance
with the forbearance arrangement entered into between the Special Servicer and
such borrower), the Master Servicer will resume the servicing duties with
respect thereto. If and to the extent provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Special Servicer may
perform certain limited duties in respect of Mortgage Loans for which the Master
Servicer is primarily responsible (including, if so specified, performing
property inspections and evaluating financial statements); and a Master Servicer
may perform certain limited duties in respect of any Mortgage Loan for which the
Special Servicer is primarily responsible (including, if so specified,
continuing to receive payments on such Mortgage Loan (including amounts
collected by the Special Servicer), making certain calculations with respect to
such Mortgage Loan and making remittances and preparing certain reports to the
Trustee and/or Certificateholders with respect to such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be responsible for filing and settling claims in respect of particular
Mortgage Loans under any applicable instrument of Credit Support. See
"Description of Credit Support".
A mortgagor's failure to make required Mortgage Loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a mortgagor that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and otherwise to maintain and insure the
related Mortgaged Property. In general, the related Special Servicer will be
required to monitor any Mortgage Loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related Mortgaged Property and take such other actions as it deems necessary
and appropriate. A significant period of time may elapse before the Special
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Special Servicer can make
the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Certificateholders of the related series
may vary considerably depending on the particular Mortgage Loan, the Mortgaged
Property, the mortgagor, the presence of an acceptable party to assume the
Mortgage Loan and the laws of the jurisdiction in which the Mortgaged Property
is located. If a mortgagor files a bankruptcy petition, the Special Servicer may
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not be permitted to accelerate the maturity of the Mortgage Loan or to foreclose
on the related Mortgaged Property for a considerable period of time. See
"Certain Legal Aspects of Mortgage Loans-Bankruptcy Laws."
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. In general, the Master Servicer may approve such a request if
it has determined, exercising its business judgment in accordance with the
applicable servicing standard, that such approval will not adversely affect the
security for, or the timely and full collectability of, the related Mortgage
Loan. Any fee collected by the Master Servicer for processing such request will
be retained by the Master Servicer as additional servicing compensation.
In the case of Mortgage Loans secured by junior liens on the related
Mortgaged Properties, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be required to file (or cause to be filed)
of record a request for notice of any action by a superior lienholder under the
Senior Lien for the protection of the related Trustee's interest, where
permitted by local law and whenever applicable state law does not require that a
junior lienholder be named as a party defendant in foreclosure proceedings in
order to foreclose such junior lienholder's equity of redemption. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
also will be required to notify any superior lienholder in writing of the
existence of the Mortgage Loan and request notification of any action (as
described below) to be taken against the mortgagor or the Mortgaged Property by
the superior lienholder. If the Master Servicer is notified that any superior
lienholder has accelerated or intends to accelerate the obligations secured by
the related Senior Lien, or has declared or intends to declare a default under
the mortgage or the promissory note secured thereby, or has filed or intends to
file an election to have the related Mortgaged Property sold or foreclosed,
then, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and the Special Servicer will each be required to take, on
behalf of the related Trust Fund, whatever actions are necessary to protect the
interests of the related Certificateholders and/or to preserve the security of
the related Mortgage Loan, subject to the application of the REMIC Provisions.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or Special Servicer, as applicable, will be required to advance the
necessary funds to cure the default or reinstate the Senior Lien, if such
advance is in the best interests of the related Certificateholders and the
Master Servicer or Special Servicer, as applicable, determines such advances are
recoverable out of payments on or proceeds of the related Mortgage Loan.
Sub-Servicers
A Master Servicer or Special Servicer may delegate its servicing
obligations in respect of the Mortgage Loans serviced thereby to one or more
third-party servicers (each, a "Sub-Servicer"); provided that, unless otherwise
specified in the related Prospectus Supplement, such Master Servicer or Special
Servicer will remain obligated under the related Pooling Agreement. Unless
otherwise provided in the related Prospectus Supplement, each sub-servicing
agreement between a Master Servicer and a Sub-Servicer (a "Sub-Servicing
Agreement") must provide for servicing of the applicable Mortgage Loans
consistent with the related Pooling Agreement. The Master Servicer and Special
Servicer in respect of any Mortgage Asset Pool will each be required to monitor
the performance of Sub-Servicers retained by it and will have the right to
remove a Sub-Servicer retained by it at any time it considers such removal to be
in the best interests of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, a Master
Servicer or Special Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, irrespective of whether the Master Servicer's or Special
Servicer's compensation pursuant to the related Pooling Agreement is sufficient
to pay such fees. Each Sub-Servicer will be reimbursed by the Master Servicer or
Special Servicer, as the case may be, that retained it for certain expenditures
which it makes, generally to the same extent such Master Servicer or Special
Servicer would be reimbursed under a Pooling Agreement. See "-Certificate
Account" and "-Servicing Compensation and Payment of Expenses".
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Certificate Account
General. The Master Servicer, the Trustee and/or the Special Servicer will,
as to each Trust Fund that includes Mortgage Loans, establish and maintain or
cause to be established and maintained the corresponding Certificate Account,
which will be established so as to comply with the standards of each Rating
Agency that has rated any one or more classes of Certificates of the related
series. A Certificate Account may be maintained as an interest-bearing or a
noninterest-bearing account and the funds held therein may be invested pending
each succeeding Distribution Date in United States government securities and
other obligations that are acceptable to each Rating Agency that has rated any
one or more classes of Certificates of the related series ("Permitted
Investments"). Unless otherwise provided in the related Prospectus Supplement,
any interest or other income earned on funds in a Certificate Account will be
paid to the related Master Servicer, Trustee or Special Servicer as additional
compensation. A Certificate Account may be maintained with the related Master
Servicer, Special Servicer, Trustee or Mortgage Asset Seller or with a
depository institution that is an affiliate of any of the foregoing or of the
Depositor, provided that it complies with applicable Rating Agency standards. If
permitted by the applicable Rating Agency or Agencies, a Certificate Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds representing payments on mortgage loans
owned by the related Master Servicer or Special Servicer or serviced by either
on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the following payments and
collections received or made by the Master Servicer, the Trustee or the Special
Servicer subsequent to the Cut-off Date (other than payments due on or before
the Cut-off Date) are to be deposited in the Certificate Account for each Trust
Fund that includes Mortgage Loans, within a certain period following receipt (in
the case of collections on or in respect of the Mortgage Loans) or otherwise as
provided in the related Pooling Agreement:
(i) all payments on account of principal, including principal prepayments,
on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion thereof retained
by the Master Servicer or the Special Servicer as its servicing compensation or
as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial condemnation of
a Mortgaged Property (other than proceeds applied to the restoration of the
property or released to the related borrower) ("Insurance Proceeds" and
"Condemnation Proceeds", respectively) and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans or
property acquired in respect thereof, by foreclosure or otherwise (such amounts,
together with those amounts listed in clause (vii) below, "Liquidation
Proceeds"), together with the net operating income (less reasonable reserves for
future expenses) derived from the operation of any Mortgaged Properties acquired
by the Trust Fund through foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates;
(v) any advances made with respect to delinquent scheduled payments of
principal and interest on the Mortgage Loans;
(vi) any amounts paid under any Cash Flow Agreement;
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(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller or any
other specified person as described under "-Assignment of Mortgage Loans;
Repurchases" and "-Representations and Warranties; Repurchases", all proceeds of
the purchase of any defaulted Mortgage Loan as described under "-Realization
Upon Defaulted Mortgage Loans", and all proceeds of any Mortgage Asset purchased
as described under "Description of the Certificates-Termination; Retirement of
Certificates";
(viii) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or the Special Servicer and is not
otherwise retained by the Depositor or another specified person, any payments on
account of modification or assumption fees, late payment charges, Prepayment
Premiums or Equity Participations with respect to the Mortgage Loans;
(ix) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy as described
under "-Hazard Insurance Policies";
(x) any amount required to be deposited by the Master Servicer, the Special
Servicer or the Trustee in connection with losses realized on investments for
the benefit of the Master Servicer, the Special Servicer or the Trustee, as the
case may be, of funds held in the Certificate Account; and
(xi) any other amounts received on or in respect of the Mortgage Loans
required to be deposited in the Certificate Account as provided in the related
Pooling Agreement and described in the related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, a Master Servicer, Trustee or
Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund that includes Mortgage Loans for any of the following purposes:
(i) to make distributions to the Certificateholders on each Distribution
Date;
(ii) to pay the Master Servicer or the Special Servicer any servicing fees
not previously retained thereby, such payment to be made out of payments and
other collections of interest on the particular Mortgage Loans as to which such
fees were earned;
(iii) to reimburse the Master Servicer, the Special Servicer or any other
specified person for unreimbursed advances of delinquent scheduled payments of
principal and interest made by it, and certain unreimbursed servicing expenses
incurred by it, with respect to Mortgage Loans in the Trust Fund and properties
acquired in respect thereof, such reimbursement to be made out of amounts that
represent late payments collected on the particular Mortgage Loans, Liquidation
Proceeds, Insurance Proceeds and Condemnation Proceeds collected on the
particular Mortgage Loans and properties, and net income collected on the
particular properties, with respect to which such advances were made or such
expenses were incurred or out of amounts drawn under any form of Credit Support
with respect to such Mortgage Loans and properties, or if in the judgment of the
Master Servicer, the Special Servicer or such other person, as applicable, such
advances and/or expenses will not be recoverable from such amounts, such
reimbursement to be made from amounts collected on other Mortgage Loans in the
same Trust Fund or, if and to the extent so provided by the related Pooling
Agreement and described in the related Prospectus Supplement, only from that
portion of amounts collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of Subordinate Certificates of the related
series;
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(iv) if and to the extent described in the related Prospectus Supplement,
to pay the Master Servicer, the Special Servicer or any other specified person
interest accrued on the advances and servicing expenses described in clause
(iii) above incurred by it while such remain outstanding and unreimbursed;
(v) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged Properties
that constitute security for defaulted Mortgage Loans, and for any containment,
clean-up or remediation of hazardous wastes and materials present on such
Mortgaged Properties, as described under "-Realization Upon Defaulted Mortgage
Loans";
(vi) to reimburse the Master Servicer, the Special Servicer, the REMIC
Administrator, the Depositor, the Trustee, or any of their respective directors,
officers, employees and agents, as the case may be, for certain expenses, costs
and liabilities incurred thereby, as and to the extent described under "-Certain
Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor" and "-Certain Matters Regarding the Trustee";
(vii) if and to the extent described in the related Prospectus Supplement,
to pay the fees of the Trustee, the REMIC Administrator and any provider of
Credit Support;
(viii) if and to the extent described in the related Prospectus Supplement,
to reimburse prior draws on any form of Credit Support;
(ix) to pay the Master Servicer, the Special Servicer or the Trustee, as
appropriate, interest and investment income earned in respect of amounts held in
the Certificate Account as additional compensation;
(x) to pay any servicing expenses not otherwise required to be advanced by
the Master Servicer, the Special Servicer or any other specified person;
(xi) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local taxes
imposed on the Trust Fund or its assets or transactions, as and to the extent
described under "Certain Federal Income Tax Consequences-REMICs-Prohibited
Transactions Tax and Other Taxes";
(xii) to pay for the cost of various opinions of counsel obtained pursuant
to the related Pooling Agreement for the benefit of Certificateholders;
(xiii) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xiv) to clear and terminate the Certificate Account upon the termination
of the Trust Fund.
Modifications, Waivers and Amendments of Mortgage Loans
The Master Servicer and the Special Servicer may each agree to modify,
waive or amend any term of any Mortgage Loan serviced by it in a manner
consistent with the applicable Servicing Standard; provided that, unless
otherwise set forth in the related Prospectus Supplement, the modification,
waiver or amendment (i) will not affect the amount or timing of any scheduled
payments of principal or interest on the Mortgage Loan, (ii) will not, in the
judgment of the Master Servicer or the Special Servicer, as the case may be,
materially impair the security for the Mortgage Loan or reduce the likelihood of
timely payment of amounts due thereon and (iii) will not adversely affect the
coverage under any applicable instrument of
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Credit Support. Unless otherwise provided in the related Prospectus Supplement,
the Special Servicer also may agree to any other modification, waiver or
amendment if, in its judgment, (i) a material default on the Mortgage Loan has
occurred or a payment default is imminent, (ii) such modification, waiver or
amendment is reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation and (iii) such modification, waiver or amendment will not adversely
affect the coverage under any applicable instrument of Credit Support.
Realization Upon Defaulted Mortgage Loans
If a default on a Mortgage Loan has occurred or, in the Special Servicer's
judgment, a payment default is imminent, the Special Servicer, on behalf of the
Trustee, may at any time institute foreclosure proceedings, exercise any power
of sale contained in the related Mortgage, obtain a deed in lieu of foreclosure,
or otherwise acquire title to the related Mortgaged Property, by operation of
law or otherwise. Unless otherwise specified in the related Prospectus
Supplement, the Special Servicer may not, however, acquire title to any
Mortgaged Property, have a receiver of rents appointed with respect to any
Mortgaged Property or take any other action with respect to any Mortgaged
Property that would cause the Trustee, for the benefit of the related series of
Certificateholders, or any other specified person to be considered to hold title
to, to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator"
of such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Special Servicer has previously received a report prepared by a
person who regularly conducts environmental audits (which report will be an
expense of the Trust Fund) and either:
(i) such report indicates that (a) the Mortgaged Property is in
compliance with applicable environmental laws and regulations and (b) there
are no circumstances or conditions present at the Mortgaged Property that
have resulted in any contamination for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under
any applicable environmental laws and regulations; or
(ii) the Special Servicer, based solely (as to environmental matters
and related costs) on the information set forth in such report, determines
that taking such actions as are necessary to bring the Mortgaged Property
into compliance with applicable environmental laws and regulations and/or
taking the actions contemplated by clause (i)(b) above, is reasonably
likely to produce a greater recovery, taking into account the time value of
money, than not taking such actions. See "Certain Legal Aspects of Mortgage
Loans-Environmental Considerations".
A Pooling Agreement may grant to the Master Servicer, the Special Servicer,
a provider of Credit Support and/or the holder or holders of certain classes of
the related series of Certificates a right of first refusal to purchase from the
Trust Fund, at a predetermined price (which, if less than the Purchase Price,
will be specified in the related Prospectus Supplement), any Mortgage Loan as to
which a specified number of scheduled payments are delinquent. In addition,
unless otherwise specified in the related Prospectus Supplement, the Special
Servicer may offer to sell any defaulted Mortgage Loan if and when the Special
Servicer determines, consistent with its normal servicing procedures, that such
a sale would produce a greater recovery, taking into account the time value of
money, than would liquidation of the related Mortgaged Property. In the absence
of any such sale, the Special Servicer will generally be required to proceed
against the related Mortgaged Property, subject to the discussion above.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Special Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within two years of acquisition, unless
(i) the Internal Revenue Service (the "IRS") grants an extension of time to sell
such property or (ii) the Trustee receives an opinion of independent counsel to
the effect that the holding of the property by the Trust Fund for more than two
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund (or any designated portion thereof) to fail
to qualify as a REMIC under
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the Code at any time that any Certificate is outstanding. Subject to the
foregoing and any other tax-related limitations, the Special Servicer will
generally be required to attempt to sell any Mortgaged Property so acquired on
the same terms and conditions it would if it were the owner. Unless otherwise
provided in the related Prospectus Supplement, if title to any Mortgaged
Property is acquired by a Trust Fund as to which a REMIC election has been made,
the Special Servicer will also be required to ensure that the Mortgaged Property
is administered so that it constitutes "foreclosure property" within the meaning
of Code Section 860G(a)(8) at all times, that the sale of such property does not
result in the receipt by the Trust Fund of any income from nonpermitted assets
as described in Code Section 860F(a)(2)(B), and that the Trust Fund does not
derive any "net income from foreclosure property" within the meaning of Code
Section 860G(c)(2), with respect to such property. If the Trust Fund acquires
title to any Mortgaged Property, the Special Servicer, on behalf of the Trust
Fund, may retain an independent contractor to manage and operate such property.
The retention of an independent contractor, however, will not relieve the
Special Servicer of its obligation to manage such Mortgaged Property as required
under the related Pooling Agreement.
If Liquidation Proceeds collected with respect to a defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon plus the aggregate amount of reimbursable expenses
incurred by the Special Servicer and/or the Master Servicer in connection with
such Mortgage Loan, then, to the extent that such shortfall is not covered by
any instrument or fund constituting Credit Support, the Trust Fund will realize
a loss in the amount of such shortfall. The Special Servicer and/or the Master
Servicer will be entitled to reimbursement out of the Liquidation Proceeds
recovered on any defaulted Mortgage Loan, prior to the distribution of such
Liquidation Proceeds to Certificateholders, any and all amounts that represent
unpaid servicing compensation in respect of the Mortgage Loan, unreimbursed
servicing expenses incurred with respect to the Mortgage Loan and any
unreimbursed advances of delinquent payments made with respect to the Mortgage
Loan. In addition, if and to the extent set forth in the related Prospectus
Supplement, amounts otherwise distributable on the Certificates may be further
reduced by interest payable to the Master Servicer and/or Special Servicer on
such servicing expenses and advances.
If any Mortgaged Property suffers damage such that the proceeds, if any, of
the related hazard insurance policy are insufficient to restore fully the
damaged property, neither the Special Servicer nor the Master Servicer will be
required to expend its own funds to effect such restoration unless (and to the
extent not otherwise provided in the related Prospectus Supplement) it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Special Servicer or the Master Servicer, as the case may be, for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds and/or amounts
drawn on any instrument or fund constituting Credit Support.
Hazard Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer (or the Special Servicer with
respect to Mortgage Loans serviced thereby) to use reasonable efforts to cause
each Mortgage Loan borrower to maintain a hazard insurance policy that provides
for such coverage as is required under the related Mortgage or, if the Mortgage
permits the holder thereof to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, such coverage as is consistent
with the Master Servicer's (or Special Servicer's) normal servicing procedures.
Unless otherwise specified in the related Prospectus Supplement, such coverage
generally will be in an amount equal to the lesser of the principal balance
owing on such Mortgage Loan and the replacement cost of the related Mortgaged
Property. The ability of a Master Servicer (or Special Servicer) to assure that
hazard insurance proceeds are appropriately applied may be dependent upon its
being named as an additional insured under any hazard insurance policy and under
any other insurance policy referred to below, or upon the extent to which
information concerning covered losses is furnished by borrowers. All amounts
collected by a Master Servicer (or Special Servicer) under any such policy
(except for
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amounts to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with the Master Servicer's (or Special
Servicer's) normal servicing procedures and/or to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the related
Certificate Account. The Pooling Agreement may provide that the Master Servicer
(or Special Servicer) may satisfy its obligation to cause each borrower to
maintain such a hazard insurance policy by maintaining a blanket policy insuring
against hazard losses on the Mortgage Loans in a Trust Fund. If such blanket
policy contains a deductible clause, the Master Servicer (or Special Servicer)
will be required, in the event of a casualty covered by such blanket policy, to
deposit in the related Certificate Account all additional sums that would have
been deposited therein under an individual policy but were not because of such
deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin and domestic animals. Accordingly, a Mortgaged
Property may not be insured for losses arising from any such cause unless the
related Mortgage specifically requires, or permits the holder thereof to
require, such coverage.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the improvements on the property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clauses generally provide that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (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.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale or
other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage Loan
upon the creation of any other lien or encumbrance upon the Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer (or Special Servicer) will determine whether to exercise any right the
Trustee may have under any such provision in a manner consistent with the Master
Servicer's (or Special Servicer's) normal servicing procedures. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or Special
Servicer, as applicable, will be entitled to retain as additional servicing
compensation any fee collected in connection with the permitted transfer of a
Mortgaged Property. See "Certain Legal Aspects of Mortgage Loans-Due-on-Sale and
Due-on-Encumbrance".
Servicing Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion of
the interest payments on each Mortgage Loan in the related Trust Fund, including
Mortgage Loans serviced by the related Special Servicer. If and to the extent
described in the related Prospectus Supplement, a Special Servicer's primary
compensation with respect to a
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series of Certificates may consist of any or all of the following components:
(i) a specified portion of the interest payments on each Mortgage Loan in the
related Trust Fund, whether or not serviced by it; (ii) an additional specified
portion of the interest payments on each Mortgage Loan then currently serviced
by it; and (iii) subject to any specified limitations, a fixed percentage of
some or all of the collections and proceeds received with respect to each
Mortgage Loan which was at any time serviced by it, including Mortgage Loans for
which servicing was returned to the Master Servicer. Insofar as any portion of
the Master Servicer's or Special Servicer's compensation consists of a specified
portion of the interest payments on a Mortgage Loan, such compensation will
generally be based on a percentage of the principal balance of such Mortgage
Loan outstanding from time to time and, accordingly, will decrease with the
amortization of the Mortgage Loan. As additional compensation, a Master Servicer
or Special Servicer may be entitled to retain all or a portion of late payment
charges, Prepayment Premiums, modification fees and other fees collected from
borrowers and any interest or other income that may be earned on funds held in
the related Certificate Account. A more detailed description of each Master
Servicer's and Special Servicer's compensation will be provided in the related
Prospectus Supplement. Any Sub-Servicer will receive as its sub-servicing
compensation a portion of the servicing compensation to be paid to the Master
Servicer or Special Servicer that retained such Sub-Servicer.
In addition to amounts payable to any Sub-Servicer, a Master Servicer or
Special Servicer may be required, to the extent provided in the related
Prospectus Supplement, to pay from amounts that represent its servicing
compensation certain expenses incurred in connection with the administration of
the related Trust Fund, including, without limitation, payment of the fees and
disbursements of independent accountants, payment of fees and disbursements of
the Trustee and any custodians appointed thereby and payment of expenses
incurred in connection with distributions and reports to Certificateholders.
Certain other expenses, including certain expenses related to Mortgage Loan
defaults and liquidations and, to the extent so provided in the related
Prospectus Supplement, interest on such expenses at the rate specified therein,
may be required to be borne by the Trust Fund.
Evidence as to Compliance
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will provide that on or before a specified date in each year,
beginning the first such date that is at least a specified number of months
after the Cut-off Date, there will be furnished to the related Trustee a report
of a firm of independent certified public accountants stating that (i) it has
obtained a letter of representation regarding certain matters from the
management of the Master Servicer which includes an assertion that the Master
Servicer has complied with certain minimum mortgage loan servicing standards (to
the extent applicable to commercial and multifamily mortgage loans), identified
in the Uniform Single Attestation Program for Mortgage Bankers established by
the Mortgage Bankers Association of America, with respect to the Master
Servicer's servicing of commercial and multifamily mortgage loans during the
most recently completed calendar year and (ii) on the basis of an examination
conducted by such firm in accordance with standards established by the American
Institute of Certified Public Accountants, such representation is fairly stated
in all material respects, subject to such exceptions and other qualifications
that, in the opinion of such firm, such standards require it to report. In
rendering its report such firm may rely, as to the matters relating to the
direct servicing of commercial and multifamily mortgage loans by Sub-Servicers,
upon comparable reports of firms of independent public accountants rendered on
the basis of examinations conducted in accordance the same standards (rendered
within one year of such report) with respect to those Sub-Servicers. The
Prospectus Supplement may provide that additional reports of independent
certified public accountants relating to the servicing of mortgage loans may be
required to be delivered to the Trustee.
Each Pooling Agreement will also provide that, on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, the Master Servicer and Special
Servicer shall each deliver to the related Trustee an annual statement signed by
one or more officers of the Master Servicer or the Special
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Servicer, as the case may be, to the effect that, to the best knowledge of each
such officer, the Master Servicer or the Special Servicer, as the case may be,
has fulfilled in all material respects its obligations under the Pooling
Agreement throughout the preceding year or, if there has been a material default
in the fulfillment of any such obligation, such statement shall specify each
such known default and the nature and status thereof. Such statement may be
provided as a single form making the required statements as to more than one
Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer or Special Servicer may be obtained by Certificateholders upon
written request to the Trustee.
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor
Unless otherwise specified in the Prospectus Supplement for a series of
Certificates, the related Pooling Agreement will permit the Master Servicer, the
Special Servicer and any REMIC Administrator to resign from its obligations
thereunder only upon (a) the appointment of, and the acceptance of such
appointment by, a successor thereto and receipt by the Trustee of written
confirmation from each applicable Rating Agency that such resignation and
appointment will not have an adverse effect on the rating assigned by such
Rating Agency to any class of Certificates of such series or (b) a determination
that such obligations are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it. No such resignation will become effective until the Trustee or other
successor has assumed the obligations and duties of the resigning Master
Servicer, Special Servicer or REMIC Administrator, as the case may be, under the
Pooling Agreement. The Master Servicer and Special Servicer for each Trust Fund
will be required to maintain a fidelity bond and errors and omissions policy or
their equivalent that provides coverage against losses that may be sustained as
a result of an officer's or employee's misappropriation of funds or errors and
omissions, subject to certain limitations as to amount of coverage, deductible
amounts, conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Special Servicer, the REMIC Administrator, the Depositor or any director,
officer, employee or agent of any of them will be under any liability to the
related Trust Fund or Certificateholders for any action taken, or not taken, in
good faith pursuant to the Pooling Agreement or for errors in judgment;
provided, however, that none of the Master Servicer, the Special Servicer, the
REMIC Administrator, the Depositor or any such person will be protected against
any liability that would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of obligations or duties
thereunder or by reason of reckless disregard of such obligations and duties.
Unless otherwise specified in the related Prospectus Supplement, each Pooling
Agreement will further provide that the Master Servicer, the Special Servicer,
the REMIC Administrator, the Depositor and any director, officer, employee or
agent of any of them will be entitled to indemnification by the related Trust
Fund against any loss, liability or expense incurred in connection with any
legal action that relates to such Pooling Agreement or the related series of
Certificates; provided, however, that such indemnification will not extend to
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or duties under such
Pooling Agreement, or by reason of reckless disregard of such obligations or
duties. In addition, each Pooling Agreement will provide that none of the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor will be
under any obligation to appear in, prosecute or defend any legal action that is
not incidental to its respective responsibilities under the Pooling Agreement
and that in its opinion may involve it in any expense or liability. However,
each of the Master Servicer, the Special Servicer, the REMIC Administrator and
the Depositor will be permitted, in the exercise of its discretion, to undertake
any such action that it may deem necessary or desirable with respect to the
enforcement and/or protection of the rights and duties of the parties to the
Pooling Agreement and the interests of the related series of 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
related series of Certificateholders,
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and the Master Servicer, the Special Servicer, the REMIC Administrator or the
Depositor, as the case may be, will be entitled to charge the related
Certificate Account therefor.
Any person into which the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Master Servicer, the
Special Servicer, the REMIC Administrator or the Depositor is a party, or any
person succeeding to the business of the Master Servicer, the Special Servicer,
the REMIC Administrator or the Depositor, will be the successor of the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor, as the
case may be, under the related Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, a REMIC
Administrator will be entitled to perform any of its duties under the related
Pooling Agreement either directly or by or through agents or attorneys, and the
REMIC Administrator will not be responsible for any willful misconduct or gross
negligence on the part of any such agent or attorney appointed by it with due
care.
Events of Default
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include, without limitation, (i) any failure by the Master Servicer to
distribute or cause to be distributed to the Certificateholders of such series,
or to remit to the Trustee for distribution to such Certificateholders, any
amount required to be so distributed or remitted, which failure continues
unremedied for five days after written notice thereof has been given to the
Master Servicer by any other party to the related Pooling Agreement, or to the
Master Servicer, with a copy to each other party to the related Pooling
Agreement, by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series; (ii) any failure by the Special Servicer to remit to the Master
Servicer or the Trustee, as applicable, any amount required to be so remitted,
which failure continues unremedied for five days after written notice thereof
has been given to the Special Servicer by any other party to the related Pooling
Agreement, or to the Special Servicer, with a copy to each other party to the
related Pooling Agreement, by the Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights of such series; (iii) any failure by the Master Servicer or
the Special Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after written notice thereof has
been given to the Master Servicer or the Special Servicer, as the case may be,
by any other party to the related Pooling Agreement, or to the Master Servicer
or the Special Servicer, as the case may be, with a copy to each other party to
the related Pooling Agreement, by Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights for such series; (iv) any failure by a REMIC Administrator (if
other than the Trustee) duly to observe or perform in any material respect any
of its covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after written notice thereof has
been given to the REMIC Administrator by any other party to the related Pooling
Agreement, or to the REMIC Administrator, with a copy to each other party to the
related Pooling Agreement, by Certificateholders entitled to not less than 25%
(or such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series; and (v) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings in respect of or relating to the Master Servicer, the Special
Servicer or the REMIC Administrator (if other than the Trustee), and certain
actions by or on behalf of the Master Servicer, the Special Servicer or the
REMIC Administrator (if other than the Trustee) indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events of
Default (other than to add thereto or shorten cure periods or eliminate notice
requirements) will be specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, when a single entity
acts as Master Servicer, Special Servicer and REMIC Administrator, or in any two
of the foregoing capacities, for any Trust Fund, an Event of Default in one
capacity will constitute an Event of Default in each capacity.
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Rights Upon Event of Default
If an Event of Default occurs with respect to the Master Servicer, the
Special Servicer or a REMIC Administrator under a Pooling Agreement, then, in
each and every such case, so long as the Event of Default remains unremedied,
the Depositor or the Trustee will be authorized, and at the direction of
Certificateholders of the related series entitled to not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series, the Trustee will be required, to terminate all of the
rights and obligations of the defaulting party as Master Servicer, Special
Servicer or REMIC Administrator, as applicable, under the Pooling Agreement,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the defaulting party as Master Servicer, Special Servicer or
REMIC Administrator, as applicable, under the Pooling Agreement (except that if
the defaulting party is required to make advances thereunder regarding
delinquent Mortgage Loans, but the Trustee is prohibited by law from obligating
itself to make such advances, or if the related Prospectus Supplement so
specifies, the Trustee will not be obligated to make such advances) and will be
entitled to similar compensation arrangements. Unless otherwise specified in the
related Prospectus Supplement, if the Trustee is unwilling or unable so to act,
it may (or, at the written request of Certificateholders of the related series
entitled to not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series, it will be required
to) appoint, or petition a court of competent jurisdiction to appoint, a loan
servicing institution or other entity that (unless otherwise provided in the
related Prospectus Supplement) is acceptable to each applicable Rating Agency to
act as successor to the Master Servicer, Special Servicer or REMIC
Administrator, as the case may be, under the Pooling Agreement. Pending such
appointment, the Trustee will be obligated to act in such capacity.
If the same entity is acting as both Trustee and REMIC Administrator, it
may be removed in both such capacities as described under "-Resignation and
Removal of the Trustee" below.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class 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 sixty days after receipt of such
request and indemnity has neglected or refused to institute any such proceeding.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Pooling Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates covered by such Pooling
Agreement, unless such Certificateholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement, each
Pooling Agreement may be amended by the parties thereto, without the consent of
any of the holders of Certificates covered by such Pooling Agreement, (i) to
cure any ambiguity, (ii) to correct or supplement any provision therein which
may be inconsistent with any other provision therein or to correct any error,
(iii) to change the timing and/or nature of deposits in the Certificate Account,
provided that (A) such change would not adversely affect in any material respect
the interests of any Certificateholder, as evidenced by an opinion of counsel,
and (B) such change would not adversely affect the then-current rating of any
rated classes of Certificates, as evidenced by a letter from each applicable
Rating Agency, (iv) if a REMIC election has been made with respect to the
related Trust Fund, to modify, eliminate or add to any of its provisions (A) to
such extent as shall be necessary to maintain the qualification of the Trust
Fund (or any designated portion thereof) as a REMIC or to avoid or minimize the
risk of imposition of any tax on the related Trust Fund, provided that the
Trustee has received an opinion of counsel to the effect that (1) such
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action is necessary or desirable to maintain such qualification or to avoid or
minimize such risk, and (2) such action will not adversely affect in any
material respect the interests of any holder of Certificates covered by the
Pooling Agreement, or (B) to restrict the transfer of the REMIC Residual
Certificates, provided that the Depositor has determined that the then-current
ratings of the classes of the Certificates that have been rated will not be
adversely affected, as evidenced by a letter from each applicable Rating Agency,
and that any such amendment will not give rise to any tax with respect to the
transfer of the REMIC Residual Certificates to a non-permitted transferee (See
"Certain Federal Income Tax Consequences-REMICs-Tax and Restrictions on
Transfers of REMIC Residual Certificates to Certain Organizations" herein), (v)
to make any other provisions with respect to matters or questions arising under
such Pooling Agreement or any other change, provided that such action will not
adversely affect in any material respect the interests of any Certificateholder,
or (vi) to amend specified provisions that are not material to holders of any
class of Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with the
consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66-2/3% (or such other percentage
specified in the related Prospectus Supplement) of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Pooling
Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that 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 a Certificate
of any class without the consent of the holder of such Certificate or (ii)
reduce the aforesaid percentage of Certificates of any class the holders of
which are required to consent to any such amendment without the consent of the
holders of all Certificates of such class covered by such Pooling Agreement then
outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be required to consent
to any amendment to a Pooling Agreement without having first received an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Master Servicer, the Special Servicer, the Depositor, the Trustee
or any other specified person in accordance with such amendment will not result
in the imposition of a tax on the related Trust Fund or cause such Trust Fund
(or any designated portion thereof) to fail to qualify as a REMIC.
List of Certificateholders
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders of record made for purposes
of communicating with other holders of Certificates of the same series with
respect to their rights under the related Pooling Agreement, the Trustee or
other specified person will afford such Certificateholders access during normal
business hours to the most recent list of Certificateholders of that series held
by such person. If such list is as of a date more than 90 days prior to the date
of receipt of such Certificateholders' request, then such person, if not the
registrar for such series of Certificates, will be required to request from such
registrar a current list and to afford such requesting Certificateholders access
thereto promptly upon receipt.
The Trustee
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any Master
Servicer, Special Servicer or REMIC Administrator and its affiliates.
Duties of the Trustee
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The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, such
Certificates or any underlying Mortgage Asset or related document and will not
be accountable for the use or application by or on behalf of any Master Servicer
or Special Servicer of any funds paid to the Master Servicer or Special Servicer
in respect of the Certificates or the underlying Mortgage Assets. If no Event of
Default has occurred and is continuing, the Trustee for each series of
Certificates will be required to perform only those duties specifically required
under the related Pooling Agreement. However, upon receipt of any of the various
certificates, reports or other instruments required to be furnished to it
pursuant to the related Pooling Agreement, a Trustee will be required to examine
such documents and to determine whether they conform to the requirements of such
agreement.
Certain Matters Regarding the Trustee
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the related
Master Servicer or other specified person or may be required to be borne by the
related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling Agreement;
provided, however, that such indemnification will not extend to any loss
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of this
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
Resignation and Removal of the Trustee
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates of the applicable series evidencing not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee. Notwithstanding anything herein to the
contrary, if any entity is acting as both Trustee and REMIC Administrator, then
any resignation or removal of such entity as the Trustee will also constitute
the resignation or removal of such entity as REMIC Administrator, and the
successor trustee will serve as successor to the REMIC Administrator as well.
DESCRIPTION OF CREDIT SUPPORT
General
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Credit Support may be provided with respect to one or more classes of the
Certificates of any series or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a surety bond, an insurance
policy or a guarantee, the establishment of one or more reserve funds, or any
combination of the foregoing. If and to the extent so provided in the related
Prospectus Supplement, any of the foregoing forms of Credit Support may provide
credit enhancement for more than one series of Certificates.
The Credit Support may not provide protection against all risks of loss and
will not guarantee payment to Certificateholders of all amounts to which they
are entitled under the related Pooling Agreement. If losses or shortfalls occur
that exceed the amount covered by the related Credit Support or that are of a
type not covered by such Credit Support, Certificateholders will bear their
allocable share of deficiencies. Moreover, if a form of Credit Support covers
the Offered Certificates of more than one series and losses on the related
Mortgage Assets exceed the amount of such Credit Support, it is possible that
the holders of Offered Certificates of one (or more) such series will be
disproportionately benefited by such Credit Support to the detriment of the
holders of Offered Certificates of one (or more) other such series.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature and
amount of coverage under such Credit Support, (ii) any conditions to payment
thereunder not otherwise described herein, (iii) the conditions (if any) under
which the amount of coverage under such Credit Support may be reduced and under
which such Credit Support may be terminated or replaced and (iv) the material
provisions relating to such Credit Support. Additionally, the related Prospectus
Supplement will set forth certain information with respect to the obligor, if
any, under any instrument of Credit Support. See "Risk Factors-Credit Support
Limitations".
Subordinate Certificates
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate Account
on any Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Certificates. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of certain
types of losses or shortfalls. The related Prospectus Supplement will set forth
information concerning the method and amount of subordination provided by a
class or classes of Subordinate Certificates in a series and the circumstances
under which such subordination will be available.
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of the related
series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
Insurance or Guarantees with Respect to Mortgage Loans
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. The related Prospectus
Supplement will describe the nature of such default risks and the extent of such
coverage.
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Letter of Credit
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or other financial institution specified in such Prospectus Supplement (the
"Letter of Credit Bank"). Under a letter of credit, the Letter of Credit Bank
will be obligated to honor draws thereunder in an aggregate fixed dollar amount,
net of unreimbursed payments thereunder, generally equal to a percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of some or all of the related Mortgage Assets on the related Cut-off
Date or of the initial aggregate Certificate Balance of one or more classes of
Certificates. If so specified in the related Prospectus Supplement, the letter
of credit may permit draws only in the event of certain types of losses and
shortfalls. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments thereunder and may
otherwise be reduced as described in the related Prospectus Supplement. The
obligations of the Letter of Credit Bank under the letter of credit for each
series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund.
Certificate Insurance and Surety Bonds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies or surety bonds provided
by one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Certificates of the related series, timely
distributions of interest or distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. The related Prospectus
Supplement will describe any limitations on the draws that may be made under any
such instrument.
Reserve Funds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments, a
demand note or a combination thereof will be deposited, in the amounts specified
in such Prospectus Supplement. If so specified in the related Prospectus
Supplement, the reserve fund for a series may also be funded over time by a
specified amount of certain collections received on the related Mortgage Assets.
Amounts on deposit in any reserve fund for a series will be applied for the
purposes, in the manner, and to the extent specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, reserve funds
may be established to provide protection only against certain types of losses
and shortfalls. Following each Distribution Date, amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from the
reserve fund under the conditions and to the extent specified in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, any reinvestment income or other
gain from such investments will be credited to the related reserve fund for such
series, and any loss resulting from such investments will be charged to such
reserve fund. However, such income may be payable to any related Master Servicer
or another service provider as additional compensation for its services. The
reserve fund, if any, for a series will not be a part of the Trust Fund unless
otherwise specified in the related Prospectus Supplement.
Credit Support with respect to MBS
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If so provided in the Prospectus Supplement for a series of Certificates,
any MBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify, as to each
such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by commercial and multifamily residential
properties. Because such legal aspects are governed by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular state, or to encompass the laws
of all states in which the security for the Mortgage Loans (or mortgage loans
underlying any MBS) is situated. Accordingly, the summaries are qualified in
their entirety by reference to the applicable laws of those states. See
"Description of the Trust Funds-Mortgage Loans". If a significant percentage of
Mortgage Loans (or mortgage loans underlying MBS), by balance, are secured by
properties in a particular state, relevant state laws, to the extent they vary
materially from this discussion, will be discussed in the Prospectus Supplement.
For purposes of the following discussion, "Mortgage Loan" includes a mortgage
loan underlying an MBS.
General
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages". A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property, irrevocably until the debt is paid, in trust
and generally with a power of sale, to the trustee to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties, pursuant to which the borrower, or grantor, conveys title to the
real property to the grantee, or lender, generally with a power of sale, until
such time as the debt is repaid. In a case where the borrower is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the borrower.
At origination of a mortgage loan involving a land trust, the borrower may
execute a separate undertaking to make payments on the mortgage note. In no
event is the land trustee personally liable for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed by
the express provisions of the related instrument, the law of the state in which
the real property is located, certain federal laws and, in some deed of trust
transactions, the directions of the beneficiary.
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Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the borrower
as additional security for the loan. In general, the lender must file financing
statements in order to perfect its security interest in the room rates and must
file continuation statements, generally every five years, to maintain perfection
of such security interest. In certain cases, Mortgage Loans secured by hotels or
motels may be included in a Trust Fund even if the security interest in the room
rates was not perfected or the requisite UCC filings were allowed to lapse. Even
if the lender's security interest in room rates is perfected under applicable
nonbankruptcy law, it will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default. In the bankruptcy setting,
however, the lender will be stayed from enforcing its rights to collect room
rates, but those room rates (in light of certain revisions to the Bankruptcy
Code which are effective for all bankruptcy cases commenced on or after October
22, 1994) constitute "cash collateral" and therefore cannot be used by the
bankruptcy debtor without a hearing or lender's consent and unless the lender's
interest in the room rates is given adequate protection (e.g., cash payment for
otherwise encumbered funds or a replacement lien on unencumbered property, in
either case equal in value to the amount of room rates that the debtor proposes
to use, or other similar relief). See "-Bankruptcy Laws".
Personalty
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the borrower
and not previously pledged) may constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the UCC. Accordingly, if a borrower pledges personal
property as security for a mortgage loan, the lender generally must file UCC
financing statements in order to perfect its security interest therein, and must
file continuation statements, generally every five years, to maintain that
perfection. In certain cases, Mortgage Loans secured in part by personal
property may be included in a Trust Fund even if the security interest in such
personal property was not perfected or the requisite UCC filings were allowed to
lapse.
Foreclosure
General. Foreclosure is a legal procedure that allows the lender to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the lender has the right to institute foreclosure
proceedings to sell the real property at public auction to satisfy the
indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and nonjudicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, but they
are either infrequently used or available only in limited circumstances.
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A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses are raised or counterclaims are interposed, and sometimes
requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
Upon successful completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
officer to conduct a public sale of the mortgaged property, the proceeds of
which are used to satisfy the judgment. Such sales are made in accordance with
procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain Provisions.
United States courts have traditionally imposed general equitable principles to
limit the remedies available to lenders in foreclosure actions. These principles
are generally designed to relieve borrowers from the effects of mortgage
defaults perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative actions to determine the cause of 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 and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a nonmonetary default, such as a failure to
adequately maintain the mortgaged property or an impermissible further
encumbrance of the mortgaged property. Finally, some courts have addressed the
issue of whether federal or state constitutional provisions reflecting due
process concerns for adequate notice require that a borrower receive notice in
addition to statutorily-prescribed minimum notice. For the most part, these
cases have upheld the reasonableness of the notice provisions or have found that
a public sale under a mortgage providing for a power of sale does not involve
sufficient state action to trigger constitutional protections.
In addition, some states may have statutory protection such as the right of
the borrower to reinstate mortgage loans after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained in
any other type of mortgage instrument if applicable law so permits. A power of
sale under a deed of trust allows a nonjudicial public sale to be conducted
generally following a request from the beneficiary/lender to the trustee to sell
the property upon default by the borrower and after notice of sale is given in
accordance with the terms of the mortgage and applicable state law. In some
states, prior to such sale, the trustee under the deed of trust must record a
notice of default and notice of sale and send a copy to the borrower and to any
other party who has recorded a request for a copy of a notice of default and
notice of sale. In addition, in some states the trustee must provide notice to
any other party having an interest of record in the real property, including
junior lienholders. A notice of sale must be posted in a public place and, in
most states, published for a specified period of time in one or more newspapers.
The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without regard to the acceleration of the
indebtedness), plus the lender's expenses incurred in enforcing the obligation.
In other states, the borrower or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, state law governs the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time periods.
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Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other things, redemption rights
that may exist) and because of the possibility that physical deterioration of
the property may have occurred during the foreclosure proceedings. Therefore, it
is common for the lender to purchase the mortgaged property for an amount equal
to the secured indebtedness and accrued and unpaid interest plus the expenses of
foreclosure, in which event the borrower's debt will be extinguished, or for a
lesser amount in order to preserve its right to seek a deficiency judgment if
such is available under state law and under the terms of the Mortgage Loan
documents. (The Mortgage Loans, however, may be nonrecourse. See "Risk
Factors-Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans-Limited Recourse Nature of the Mortgage Loans".) Thereafter,
subject to the borrower's right in some states to remain in possession during a
redemption period, the lender will become the owner of the property and have
both the benefits and burdens of ownership, including the obligation to pay debt
service on any senior mortgages, to pay taxes, to obtain casualty insurance and
to make such repairs as are necessary to render the property suitable for sale.
The costs of operating and maintaining a commercial or multifamily residential
property may be significant and may be greater than the income derived from that
property. The lender also will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale or lease 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.
Moreover, because of the expenses associated with acquiring, owning and selling
a mortgaged property, a lender could realize an overall loss on a mortgage loan
even if the mortgaged property is sold at foreclosure, or resold after it is
acquired through foreclosure, for an amount equal to the full outstanding
principal amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all persons
who have interests in the property that are subordinate to that of the
foreclosing lender, from exercise of their "equity of redemption". The doctrine
of equity of redemption provides that, until the property encumbered by a
mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) right which should
be distinguished from post-sale statutory 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. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted 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 because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
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Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a mortgage loan by its terms provides
for recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of trust. A deficiency judgment is a personal judgment
against the former borrower equal to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes may require the lender to exhaust the security afforded
under a mortgage 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 those states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists will usually proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
Leasehold Considerations. Mortgage Loans may be secured by a mortgage on
the borrower's leasehold interest in a ground lease. Leasehold mortgage loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of the borrower. The most significant of these risks is
that if the borrower's leasehold were to be terminated upon a lease default, the
leasehold mortgagee would lose its security. This risk may be lessened if the
ground lease requires the lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them, permits the leasehold estate to
be assigned to and by the leasehold mortgagee or the purchaser at a foreclosure
sale, and contains certain other protective provisions typically included in a
"mortgageable" ground lease. Certain Mortgage Loans, however, may be secured by
ground leases which do not contain these provisions.
Cooperative Shares. Mortgage Loans may be secured by a security interest on
the borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto, allocable to cooperative dwelling units that may be vacant
or occupied by nonowner tenants. Such loans are subject to certain risks not
associated with mortgage loans secured by a lien on the fee estate of a borrower
in real property. Such a loan typically is subordinate to the mortgage, if any,
on the Cooperative's building which, if foreclosed, could extinguish the equity
in the building and the proprietary leases of the dwelling units derived from
ownership of the shares of the Cooperative. Further, transfer of shares in a
Cooperative are subject to various regulations as well as to restrictions under
the governing documents of the Cooperative, and the shares may be cancelled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the Cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on Cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given the debtor and
the method, manner, time, place and terms of the sale. 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. A 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 leases.
Bankruptcy Laws
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Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
Some bankruptcy courts have approved plans, based on the particular facts of the
reorganization case, that effected the cure of a mortgage loan default by paying
arrearages over a number of years. Also, a bankruptcy court may permit a debtor,
through its rehabilitative plan, to reinstate a loan mortgage payment schedule
even if the lender has obtained a final judgment of foreclosure prior to the
filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under the Bankruptcy
Code, a lender may be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents. Recent amendments to the
Bankruptcy code, however, may minimize the impairment of the lender's ability to
enforce the borrower's assignment of rents and leases. In addition to the
inclusion of hotel revenues within the definition of "cash collateral" as noted
previously in the section entitled "-Leases and Rents", the amendments provide
that a pre-petition security interest in rents or hotel revenues is designed to
overcome those cases holding that a security interest in rents is unperfected
under the laws of certain states until the lender has taken some further action,
such as commencing foreclosure or obtaining a receiver prior to activation of
the assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that ability
may be impaired by the commencement of a bankruptcy case relating to a lessee
under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition. In addition, the Bankruptcy Code generally provides that a
trustee or debtor-in-possession may, subject to approval of the court, (i)
assume the lease and retain it or assign it to a third party or (ii) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must cure any defaults under the lease, compensate the
lessor for its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease.
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Environmental Considerations
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Such environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In certain circumstances, a lender
may decide to abandon a contaminated mortgaged property as collateral for its
loan rather than foreclose and risk liability for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
participated in the management of such mortgaged property or the operations of
the borrower. Such liability may exist even if the lender did not cause or
contribute to the contamination and regardless of whether the lender has
actually taken possession of a mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, such liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator", however, is a person "who without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest". This is the so called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Act") amended, among other things, the provisions of CERCLA with respect
to lender liability and the secured creditor exemption. The Act offers
substantial protection to lenders by defining the activities in which a lender
can engage and still have the benefit of the secured creditor exemption. In
order for a lender to be deemed to have participated in the management of a
mortgaged property, the lender must actually participate in the operational
affairs of the property of the borrower. The Act provides that "merely having
the capacity to influence, or unexercised right to control" operations does not
constitute participation in management. A lender will lose the protection of the
secured creditor exemption only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property. The Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Certain Other Federal and State Laws. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption. In
addition, under federal law, there is potential liability relating to hazardous
wastes and underground storage tanks under the federal Resource Conservation and
Recovery Act.
In a few states, transfers of some types of properties are conditioned upon
cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
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Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury or damage to property) related to hazardous environmental
conditions on a property. While it may be more difficult to hold a lender liable
in such cases, unanticipated or uninsured liabilities of the borrower may
jeopardize the borrower's ability to meet its loan obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. Such costs may jeopardize the
borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard, but that individual or entity may be without
substantial assets. Accordingly, it is possible that such costs could become a
liability of the Trust Fund and occasion a loss to the Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related Prospectus Supplement, the Pooling Agreement will provide that neither
the Master Servicer nor the Special Servicer, acting on behalf of the Trustee,
may acquire title to a Mortgaged Property or take over its operation unless the
Special Servicer, based solely (as to environmental matters) on a report
prepared by a person who regularly conducts environmental audits, has made the
determination that it is appropriate to do so, as described under "Description
of the Pooling Agreements-Realization Upon Defaulted Mortgage Loans".
If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will be
required to operate the property in accordance with those laws and regulations.
Such compliance may entail substantial expense, especially in the case of
industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental conditions
on a property to government entities and/or to prospective buyers (including
prospective buyers at a foreclosure sale or following foreclosure). Such
disclosure may decrease the amount that prospective buyers are willing to pay
for the affected property, sometimes substantially, and thereby decrease the
ability of the lender to recoup its investment in a loan upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to the
issuance of the related Certificates. Environmental site assessments, however,
vary considerably in their content, quality and cost. Even when adhering to good
professional practices, environmental consultants will sometimes not detect
significant environmental problems because to do an exhaustive environmental
assessment would be far too costly and time-consuming to be practical.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such clauses
in many states. However, the Garn-St Germain Depository Institutions Act of 1982
(the "Garn Act") generally preempts state laws that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limitations as set forth in the Garn Act
and the regulations promulgated thereunder. Accordingly, a Master Servicer may
nevertheless have the right to accelerate the maturity of a Mortgage Loan
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that contains a "due-on-sale" provision upon transfer of an interest in the
property, without regard to the Master Servicer's ability to demonstrate that a
sale threatens its legitimate security interest.
Junior Liens; Rights of Holders of Senior Liens
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens, and
the loans secured by the related Senior Liens may not be included in the
Mortgage Pool. The primary risk to holders of Mortgage Loans secured by junior
liens is the possibility that adequate funds will not be received in connection
with a foreclosure of the related Senior Liens to satisfy fully both the Senior
Liens and the Mortgage Loan. In the event that a holder of a Senior Lien
forecloses on a Mortgaged Property, the proceeds of the foreclosure or similar
sale will be applied first to the payment of court costs and fees in connection
with the foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Liens. The claims of the holders
of the Senior Liens will be satisfied in full out of proceeds of the liquidation
of the related Mortgage Property, if such proceeds are sufficient, before the
Trust Fund as holder of the junior lien receives any payments in respect of the
Mortgage Loan. In the event that such proceeds from a foreclosure or similar
sale of the related Mortgaged Property are insufficient to satisfy all Senior
Liens and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of
the junior lien, and, accordingly, holders of one or more classes of the
Certificates of the related series bear (i) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (ii) the risk
of loss if the deficiency judgment is not realized upon. Moreover, deficiency
judgments may not be available in certain jurisdictions or the Mortgage Loan may
be nonrecourse.
Subordinate Financing
The terms of certain of the Mortgage Loans may not restrict the ability of
the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be unenforceable. Where a borrower
encumbers a mortgaged property with one or more junior liens, the senior lender
is subjected to additional risk. First, the borrower may have difficulty
servicing and repaying multiple loans. Moreover, if the subordinate financing
permits recourse to the borrower (as is frequently the case) and the senior loan
does not, a borrower may have more incentive to repay sums due on the
subordinate loan. Second, acts of the senior lender that prejudice the junior
lender or impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate payable on
the senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
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Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that 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.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or adoption)
be eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof are to be
construed in accordance with the laws of another state under which such interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that such choice of law provision would be given
effect.
Certain Laws and Regulations
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply (together
with an inability to remedy any such failure) could result in material
diminution in the value of a Mortgaged Property which could, together with the
possibility of limited alternative uses for a particular Mortgaged Property
(i.e., a nursing or convalescent home or hospital), result in a failure to
realize the full principal amount of the related Mortgage Loan.
Americans with Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
Soldiers' and Sailors' Civil Relief Act of 1940
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 was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise
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upon application of the lender. The Relief Act applies to individuals who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to individuals who enter military
service (including reservists who are called to active duty) after origination
of the related mortgage loan, no information can be provided as to the number of
loans with individuals as borrowers that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of a Master Servicer or Special Servicer to collect
full amounts of interest on certain of the Mortgage Loans. Any shortfalls in
interest collections resulting from the application of the Relief Act would
result in a reduction of the amounts distributable to the holders of the related
series of Certificates, and would not be covered by advances or, unless
otherwise specified in the related Prospectus Supplement, any form of Credit
Support provided in connection with such Certificates. In addition, the Relief
Act imposes limitations that would impair the ability of the Master Servicer or
Special Servicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status, and, under certain circumstances, during an
additional three month period thereafter.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following general discussion of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of Offered
Certificates of any series thereof, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of counsel to
the Depositor with respect to that series on the material matters associated
with such consequences, subject to any qualifications set forth herein. Unless
otherwise specified in the related Prospectus Supplement, counsel to the
Depositor for each series will be Thacher Proffitt & Wood. This discussion is
directed primarily to Certificateholders that hold the Certificates as "capital
assets" within the meaning of Section 1221 of the Code (although portions
thereof may also apply to Certificateholders who do not hold Certificates as
"capital assets") and it does not purport to discuss all federal income tax
consequences that may be applicable to the individual circumstances of
particular investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special treatment under the Code. Further,
the authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. Prospective investors should note that no rulings have been or
will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given the IRS will not
take contrary positions. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice
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on specific issues of law is not considered an income tax return preparer unless
the advice (i) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of an
entry on a tax return. Accordingly, taxpayers should consult their tax advisors
and tax return preparers regarding the preparation of any item on a tax return,
even where the anticipated tax treatment has been discussed herein. In addition
to the federal income tax consequences described herein, potential investors are
advised to consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of Offered Certificates. See "State and
Other Tax Consequences". Certificateholders are advised to consult their tax
advisors concerning the federal, state, local or other tax consequences to them
of the purchase, ownership and disposition of Offered Certificates.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the REMIC Administrator will elect to have treated as a
real estate mortgage investment conduit ("REMIC") under Sections 860A through
860G (the "REMIC Provisions") of the Code, and (ii) Grantor Trust Certificates
representing interests in a Trust Fund ("Grantor Trust Fund") as to which no
such election will be made. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election (or elections) will be made
for the related Trust Fund and, if such an election is to be made, will identify
all "regular interests" and "residual interests" in the REMIC. For purposes of
this tax discussion, references to a "Certificateholder" or a "holder" are to
the beneficial owner of a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that Mortgage
Assets held by a Trust Fund consist solely of Mortgage Loans. To the extent that
other Mortgage Assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a Trust Fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related Prospectus
Supplement. In addition, if Cash Flow Agreements other than guaranteed
investment contracts are included in a Trust Fund, the anticipated material tax
consequences associated with such Cash Flow Agreements also will be discussed in
the related Prospectus Supplement. See "Description of the Trust Funds-Cash Flow
Agreements".
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICs
Classification of REMICs. With respect to each series of REMIC
Certificates, counsel to the Depositor will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Trust Fund (or each applicable portion thereof) will
qualify as a REMIC and the REMIC Certificates offered with respect thereto will
be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in that REMIC within the meaning of the REMIC Provisions.
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of REMIC Certificates,
to the extent it relates to matters of law or legal conclusions with respect
thereto, represents the opinion of counsel to the Depositor for the applicable
series as specified in the related Prospectus Supplement, subject to any
qualifications set forth herein. In addition, counsel to the Depositor have
prepared or reviewed the statements in this Prospectus under the heading
"Certain Federal Income Tax Consequences--REMICs," and are of the opinion that
such statements are correct in all material respects. Such statements are
intended as an explanatory discussion of the possible effects of the
classification of any Trust Fund (or applicable portion
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thereof) as a REMIC for federal income tax purposes on investors generally and
of related tax matters affecting investors generally, but do not purport to
furnish information in the level of detail or with the attention to an
investor's specific tax circumstances that would be provided by an investor's
own tax advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in REMIC
Certificates.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling Agreement with respect to each REMIC will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be inadvertently terminated.
Characterization of Investments in REMIC Certificates. In general, unless
otherwise provided in the related Prospectus Supplement, the REMIC Certificates
will be "qualifying real property loans" within the meaning of Section 593(d) of
the Code, "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC underlying such Certificates would be so
treated. However, to the extent that the REMIC assets constitute mortgages on
property not used for residential or certain other prescribed purposes, the
REMIC Certificates will not be treated as assets qualifying under Section
7701(a)(19)(C). Moreover, if 95% or more of the assets of the REMIC qualify for
any of the foregoing characterizations at all times during a calendar year, the
REMIC Certificates will qualify for the corresponding status in their entirety
for that calendar year. Interest (including original issue discount) on the
REMIC Regular Certificates and income allocated to the REMIC Residual
Certificates will be interest described in Section 856(c)(3)(B) of the Code to
the extent that such Certificates are treated as "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code. In addition, the REMIC Regular
Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. The determination as to the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during such calendar
quarter. The REMIC Administrator will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale, and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections of the Code)
otherwise would receive the same treatment as the Mortgage Loans for purposes of
all of the foregoing sections of the Code. In addition, in some instances
Mortgage Loans may not be treated entirely as assets described in the foregoing
sections of the Code. If so, the related Prospectus Supplement will describe the
Mortgage Loans that may not be so treated. The REMIC Regulations do provide,
however, that cash received from payments on Mortgage Loans held pending
distribution is considered part of the Mortgage Loans for purposes of Sections
593(d) and 856(c)(5)(A) of the Code, and Treasury regulations provide that real
property acquired by foreclosure constitutes "qualifying real property loans"
for purposes of section 593(d) of the Code.
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Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. As to
each such series of REMIC Certificates, in the opinion of counsel to the
Depositor, assuming compliance with all provisions of the related Pooling
Agreement, the Tiered REMICs will each qualify as a REMIC and the REMIC
Certificates issued by the Tiered REMICs, will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates.
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the "constant yield" method described below,
in advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to Mortgage Loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor nor any other person will
make any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest".
"Qualified stated interest" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) at a single fixed
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rate, or at a "qualified floating rate", an "objective rate", a combination of a
single fixed rate and one or more "qualified floating rates" or one "qualified
inverse floating rate", or a combination of "qualified floating rates" that does
not operate in a manner that accelerates or defers interest payments on such
REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the IRS.
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on a
Distribution Date, in some cases, as a consequence of this "long first accrual
period", some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns provided to
the Certificateholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "-Taxation
of Owners of REMIC Regular Certificates-Market Discount" below for a description
of such election under the OID Regulations.
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If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated in the
related Prospectus Supplement, each period that begins on a date that
corresponds to a Distribution Date (or in the case of the first such period,
begins on the Closing Date) and ends on the day preceding the immediately
following Distribution Date, a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (a) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (b) the distributions made on
such REMIC Regular Certificate during the accrual period of amounts included in
the stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate will
be received in future periods based on the Mortgage Loans being prepaid at a
rate equal to the Prepayment Assumption, (ii) using a discount rate equal to the
original yield to maturity of the Certificate and (iii) taking into account
events (including actual prepayments) that have occurred before the close of the
accrual period. For these purposes, the original yield to maturity of the
Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price", in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest and
discount
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(including de minimis market or original issue discount) in income as interest,
and to amortize premium, based on a constant yield method. If such an election
were made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "-Taxation of Owners of REMIC
Regular Certificates-Premium" below. Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable except with the approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a
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REMIC Regular Certificate purchased with market discount. For these purposes,
the de minimis rule referred to above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount" above. The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171 of
the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its Certificate Balance has been reduced
to zero) and that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates.
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"-Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
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A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "-Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC until the
REMIC's termination. Ordinary income derived from REMIC Residual Certificates
will be "portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses".
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate from the
seller of such Certificate in connection with the acquisition of such REMIC
Residual Certificate will be taken into account in determining the income of
such holder for federal income tax purposes. Although it appears likely that any
such payment would be includible in income immediately upon its receipt, the IRS
might assert that such payment should be included in income over time according
to an amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of such
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions",
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return. Such disparity between income and
distributions may not be offset by corresponding losses or reductions of income
attributable to the REMIC Residual Certificateholder until subsequent tax years
and, then, may not be completely offset due to changes in the Code, tax rates or
character of the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by
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any premium on issuance) on the REMIC Regular Certificates (and any other class
of REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby), amortization of any premium on the Mortgage Loans, bad debt losses with
respect to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under "-Taxation
of Owners of REMIC Regular Certificates-Original Issue Discount". The issue
price of a REMIC Certificate received in exchange for an interest in the
Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the REMIC
Administrator may be required to estimate the fair market value of such
interests in order to determine the basis of the REMIC in the Mortgage Loans and
other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "-Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount", except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue
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Premium that is considered to be amortized or repaid in that year. Although the
matter is not entirely certain, it is likely that Issue Premium would be
amortized under a constant yield method in a manner analogous to the method of
accruing original issue discount described above under "-Taxation of Owners of
REMIC Regular Certificates-Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "-Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other noninterest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "-Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "-Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than
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an original holder in order to reflect any difference between the cost of such
REMIC Residual Certificate to such REMIC Residual Certificateholder and the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original holder see "-Taxation of Owners of REMIC Residual Certificates-General"
above.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will, with an exception discussed below for certain REMIC Residual
Certificates held by thrift institutions, be subject to federal income tax in
all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "-Foreign Investors
in REMIC Certificates" below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value". The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Although it
has not done so, the Treasury also has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value". The related Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered to have "significant
value" under the REMIC Regulations; provided, however, that any disclosure that
a REMIC Residual Certificate will have "significant value" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will have "significant value" for purposes of the
above-described rules. The above-described exception for thrift institutions
applies only to those residual interests held directly by, and deductions,
losses and loss carryovers incurred by, such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income tax
return with such thrift institution) or by certain wholly-owned direct
subsidiaries of such institutions formed or operated exclusively in connection
with the organization and operation of one or more REMICs.
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In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax". If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "-Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
Mark-to-Market Rules. On December 28, 1993, the IRS released temporary
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a "negative value" REMIC Residual Certificate is not
treated as a security and thus generally may not be marked to market. This
exclusion from the mark-to-market requirement is expanded to include all REMIC
Residual Certificates under proposed Treasury regulations published January 4,
1995 which provide that any REMIC Residual Certificate issued after January 4,
1995 will not be treated as a security and therefore generally may not be marked
to market. Prospective
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purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate 2% of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over such amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of such a holder of a REMIC Certificate that is an individual, estate or trust,
or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should consult with
their tax advisors prior to making an investment in such Certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described above
under "-Taxation of Owners of REMIC Residual Certificates-Basis Rules, Net
Losses and Distributions". Except as provided in the following four paragraphs,
any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code. The Code as of the date of this
Prospectus provides for a top marginal tax rate of 39.6% for individuals and a
maximum marginal rate for long-term capital gains of individuals of 28%. No such
rate differential exists for corporations. In addition, the distinction between
a capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be a
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to
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110% of the "applicable Federal rate" (generally, a rate based on an average of
current yields on Treasury securities having a maturity comparable to that of
the Certificate based on the application of the Prepayment Assumption to such
Certificate), determined as of the date of purchase of such REMIC Regular
Certificate, over (ii) the amount of ordinary income actually includible in the
seller's income prior to such sale. In addition, gain recognized on the sale of
a REMIC Regular Certificate by a seller who purchased such REMIC Regular
Certificate at a market discount will be taxable as ordinary income in an amount
not exceeding the portion of such discount that accrued during the period such
REMIC Certificate was held by such holder, reduced by any market discount
included in income under the rules described above under "-Taxation of Owners of
REMIC Regular Certificates-Market Discount" and "-Premium".
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions" (a
"Prohibited Transactions Tax"). In general, subject to certain specified
exceptions a prohibited transaction means the disposition of a Mortgage Loan,
the receipt of income from a source other than a Mortgage Loan or certain other
permitted investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the Mortgage Loans
for temporary investment pending distribution on the REMIC Certificates. It is
not anticipated that any REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions
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Tax"). Each Pooling Agreement will include provisions designed to prevent the
acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property", determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related REMIC Administrator, Master Servicer, Special Servicer, Manager or
Trustee, in any case out of its own funds, provided that such person has
sufficient assets to do so, and provided further that such tax arises out of a
breach of such person's obligations under the related Pooling Agreement and in
respect of compliance with applicable laws and regulations. Any such tax not
borne by a REMIC Administrator, a Master Servicer, Special Servicer, Manager or
Trustee will be charged against the related Trust Fund resulting in a reduction
in amounts payable to holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations. If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate) of the total anticipated
excess inclusions with respect to such REMIC Residual Certificate for periods
after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The anticipated excess inclusions must be determined
as of the date that the REMIC Residual Certificate is transferred and must be
based on events that have occurred up to the time of such transfer, the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that (i) residual interests in
such entity are not held by disqualified organizations and (ii) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in each Pooling Agreement, and will be discussed in any Prospectus
Supplement relating to the offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal
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federal income tax rate imposed on corporations. A pass-through entity will not
be subject to this tax for any period, however, if each record holder of an
interest in such pass-through entity furnishes to such pass-through entity (i)
such holder's social security number and a statement under penalties of perjury
that such social security number is that of the record holder or (ii) a
statement under penalties of perjury that such record holder is not a
disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination. A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Mortgage
Loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder should
(but may not) be treated as realizing a loss equal to the amount of such
difference, and such loss may be treated as a capital loss.
Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, the REMIC
Administrator, which generally will hold at least a nominal amount of REMIC
Residual Certificates, will file REMIC federal income tax returns on behalf of
the related REMIC, and will be designated as and will act as the "tax matters
person" with respect to the REMIC in all respects.
As the tax matters person, the REMIC Administrator, subject to certain
notice requirements and various restrictions and limitations, generally will
have the authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders generally will be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the REMIC Administrator, as tax matters person, and the IRS concerning
any such REMIC item. Adjustments made to the REMIC tax return may require a
REMIC Residual Certificateholder to make corresponding adjustments on its
return, and an audit of the REMIC's tax return, or the adjustments resulting
from such an audit, could result in an audit of a REMIC Residual
Certificateholder's return. No REMIC will be registered as a tax shelter
pursuant to Section 6111 of the Code because it is not anticipated that any
REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a REMIC Residual Certificate as a nominee for
another person may be required to furnish to the related REMIC, in a manner to
be provided in Treasury regulations, the name and address of such person and
other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates
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that are corporations, trusts, securities dealers and certain other
nonindividuals will be provided interest and original issue discount income
information and the information set forth in the following paragraph upon
request in accordance with the requirements of the applicable regulations. The
information must be provided by the later of 30 days after the end of the
quarter for which the information was requested, or two weeks after the receipt
of the request. The REMIC must also comply with rules requiring a REMIC Regular
Certificate issued with original issue discount to disclose on its face the
amount of original issue discount and the issue date, and requiring such
information to be reported to the IRS. Reporting with respect to REMIC Residual
Certificates, including income, excess inclusions, investment expenses and
relevant information regarding qualification of the REMIC's assets will be made
as required under the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount".
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the REMIC Administrator.
Backup Withholding with Respect to REMIC Certificates. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax. Furthermore, certain penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular Certificateholder
that is not a "United States Person" (as defined below) and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate will
not, unless otherwise disclosed in the related Prospectus Supplement, be subject
to United States federal income or withholding tax in respect of a distribution
on a REMIC Regular Certificate, provided that the holder complies to the extent
necessary with certain identification requirements (including delivery of a
statement, signed by the Certificateholder under penalties of perjury,
certifying that such Certificateholder is not a United States Person and
providing the name and address of such Certificateholder). For these purposes,
"United States Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof, or an estate or
trust whose income from sources without the United States is includible in gross
income for United States federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States. It
is possible that the IRS may assert that the foregoing tax exemption should not
apply with respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest in
the REMIC Residual Certificates. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a tax rate of 30%,
subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
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Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a nonresident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are nonresident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling Agreement.
Grantor Trust Funds
Classification of Grantor Trust Funds. With respect to each series of
Grantor Trust Certificates, counsel to the Depositor will deliver its opinion to
the effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. The following general discussion of the
anticipated federal income tax consequences of the purchase, ownership and
disposition of Grantor Trust Certificates, to the extent it relates to matters
of law or legal conclusions with respect thereto, represents the opinion of
counsel to the Depositor for the applicable series as specified in the related
Prospectus Supplement, subject to any qualifications set forth herein. In
addition, counsel to the Depositor have prepared or reviewed the statements in
this Prospectus under the heading "Certain Federal Income Tax
Consequences--Grantor Trust Funds," and are of the opinion that such statements
are correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Grantor Trust Fund as a grantor trust for federal income tax purposes on
investors generally and of related tax matters affecting investors generally,
but do not purport to furnish information in the level of detail or with the
attention to an investor's specific tax circumstances that would be provided by
an investor's own tax advisor. Accordingly, each investor is advised to consult
its own tax advisors with regard to the tax consequences to it of investing in
Grantor Trust Certificates.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate". A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees) and interest paid to the holders of Grantor Trust
Fractional Interest Certificates issued with respect to such Grantor Trust Fund
will be referred to as a "Grantor Trust Strip Certificate". A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
Characterization of Investments in Grantor Trust Certificates.
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Depositor will deliver an opinion
that, in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "qualifying real property loans" within the meaning of Section
593(d) of the Code; (ii) "loans . . . secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; (iii)
"obligation[s] (including any participation or Certificate of beneficial
ownership therein) which . . .[are] principally secured by an interest in real
property" within the meaning of Section 860G(a)(3) of the Code; and (iv) "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code. In
addition, counsel to the Depositor will deliver an opinion that interest on
Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code.
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Grantor Trust Strip Certificates. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of Mortgage Loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, "qualifying real property loans" within
the meaning of Section 593(d) of the Code, and "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code, and the interest on which is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(A) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying such sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that such characterization is appropriate. Counsel to the
Depositor will not deliver any opinion on these questions. Prospective
purchasers to which such characterization of an investment in Grantor Trust
Strip Certificates is material should consult their tax advisors regarding
whether the Grantor Trust Strip Certificates, and the income therefrom, will be
so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates.
General. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses) and
will be entitled to deduct their shares of any such reasonable servicing fees
and other expenses. Because of stripped interests, market or original issue
discount, or premium, the amount includible in income on account of a Grantor
Trust Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a Mortgage Asset. Further, the IRS has ruled that an unreasonably
high servicing fee
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retained by a seller or servicer will be treated as a retained ownership
interest in mortgages that constitutes a stripped coupon. The related Prospectus
Supplement will include information regarding servicing fees paid to a Master
Servicer, a Special Servicer, any Sub-Servicer or their respective affiliates.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-Market Discount" below. Under the stripped bond rules, the
holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser of the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest", if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest". In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "-Sales of Grantor Trust Certificates" below) and the yield of such Grantor
Trust Fractional Interest Certificate to such holder. Such yield would be
computed as the rate (compounded based on the regular interval between payment
dates) that, if used to discount the holder's share of future payments on the
Mortgage Loans, would cause the present value of those future payments to equal
the price at which the holder purchased such Certificate. In computing yield
under the stripped bond rules, a Certificateholder's share of future payments on
the Mortgage Loans will not include any payments made in respect of any
ownership interest in the Mortgage Loans retained by the Depositor, the Master
Servicer, the Special Servicer, any Sub-Servicer or their respective affiliates,
but will include such Certificateholder's share of any reasonable servicing fees
and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a reasonable prepayment assumption may be required or permitted without
reliance on these rules. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Fractional
Interest Certificate or, with respect to any holder, at the time of purchase of
the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively),
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the use of a reasonable prepayment assumption would increase or decrease such
yield, and thus accelerate or decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "-REMICs-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount" above. It is
unclear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor any other person will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "-Taxation of Owners of Grantor
Trust Fractional Interest Certificates-If Stripped Bond Rules Do Not Apply" and
"-Market Discount" below.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply, even if the stripped bond rules do not apply, to a
Grantor Trust Fractional Interest Certificate to the extent it evidences an
interest in Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. For a definition of "stated redemption price," see "-Taxation of
Owners
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of REMIC Regular Certificates-Original Issue Discount" above. In general, the
issue price of a Mortgage Loan will be the amount received by the borrower from
the lender under the terms of the Mortgage Loan, less any "points" paid by the
borrower, and the stated redemption price of a Mortgage Loan will equal its
principal amount, unless the Mortgage Loan provides for an initial "teaser," or
below-market interest rate. The determination as to whether original issue
discount will be considered to be de minimis will be calculated using the same
test as in the REMIC discussion. See "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee or
Master Servicer, as applicable, in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
Unless otherwise provided in the related Prospectus Supplement, the Trustee
or Master Servicer, as applicable, will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may reasonably
request from time to time with respect to original issue discount accruing on
Grantor Trust Fractional Interest Certificates. See "-Grantor Trust Reporting"
below.
Market Discount. If the stripped bond rules do not apply to a Grantor Trust
Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount", that is, in the case of a Mortgage
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Loan issued without original issue discount, at a purchase price less than its
remaining stated redemption price (as defined above), or in the case of a
Mortgage Loan issued with original issue discount, at a purchase price less than
its adjusted issue price (as defined above). If market discount is in excess of
a de minimis amount (as described below), the holder generally will be required
to include in income in each month the amount of such discount that has accrued
(under the rules described in the next paragraph) through such month that has
not previously been included in income, but limited, in the case of the portion
of such discount that is allocable to any Mortgage Loan, to the payment of
stated redemption price on such Mortgage Loan that is received by (or, in the
case of accrual basis Certificateholders, due to) the Trust Fund in that month.
A Certificateholder may elect to include market discount in income currently as
it accrues (under a constant yield method based on the yield of the Certificate
to such holder) rather than including it on a deferred basis in accordance with
the foregoing under rules similar to those described in "-Taxation of Owners of
REMIC Regular Interests-Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
holder's option: (i) on the basis of a constant yield method, (ii) in the case
of a Mortgage Loan issued without original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above within the exception that it is less
likely that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
Further, under the rules described above in "-REMICs-Taxation of Owners of
REMIC Regular Certificates-Market Discount", any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to
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Mortgage Loans for which an amortization election is not made, should be
allocated among the payments of stated redemption price on the Mortgage Loan and
be allowed as a deduction as such payments are made (or, for a Certificateholder
using the accrual method of accounting, when such payments of stated redemption
price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "-Taxation of Owners of Grantor Trust
Fractional Interest Certificates-If Stripped Bond Rules Apply", no regulations
or published rulings under Section 1286 of the Code have been issued and some
uncertainty exists as to how it will be applied to securities such as the
Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their tax advisors concerning the method to be used
in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons", although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "-Possible Application of Proposed Contingent Payment Rules"
below and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
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The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
Possible Application of Proposed Contingent Payment Rules. The coupon
stripping rules' general treatment of stripped coupons is to regard them as
newly issued debt instruments in the hands of each purchaser. To the extent that
payments on the Grantor Trust Strip Certificates would cease if the Mortgage
Loans were prepaid in full, the Grantor Trust Strip Certificates could be
considered to be debt instruments providing for contingent payments. Under the
OID Regulations, debt instruments providing for contingent payments are not
subject to the same rules as debt instruments providing for noncontingent
payments, but no final regulations have been promulgated with respect to
contingent payment debt instruments. Proposed regulations were promulgated on
December 16, 1994 regarding contingent payment debt instruments. As in the case
of the OID Regulations, such proposed regulations do not specifically address
securities, such as the Grantor Trust Strip Certificates, that are subject to
the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply a "noncontingent bond method." Under that method, the issuer of a Grantor
Trust Strip Certificate would determine a projected payment schedule with
respect to such Grantor Trust Strip Certificate. Holders of Grantor Trust Strip
Certificates would be bound by the issuer's projected payment schedule, which
would consist of all noncontingent payments and a projected amount for each
contingent payment based on the projected yield (as described below) of the
Grantor Trust Strip Certificate. The projected amount of each payment would be
determined so that the projected payment schedule reflected the projected yield
reasonably expected to be received by the holder of a Grantor Trust Strip
Certificate. The projected yield referred to above would be a reasonable rate,
not less than the "applicable Federal rate" that, as of the issue date,
reflected general market conditions, the credit quality of the issuer, and the
terms and conditions of the Mortgage Loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the projected yield, and would add to, or subtract
from, such income any variation between the payment actually received in such
month and the payment originally projected to be made in such month.
In the absence of final Treasury regulations relating to debt instruments
providing for contingent payments, a projected payment schedule under the
"noncontingent bond method" is not intended to be provided to holders.
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Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.
Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this Prospectus provides a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for that taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Grantor Trust Reporting. Unless otherwise provided in the related
Prospectus Supplement, the Trustee or Master Servicer, as applicable, will
furnish to each holder of a Grantor Trust Certificate with each distribution a
statement setting forth the amount of such distribution allocable to principal
on the underlying Mortgage Loans and to interest thereon at the related
Pass-Through Rate. In addition, the Trustee or Master Servicer, as applicable,
will furnish, within a reasonable time after the end of each calendar year, to
each holder of a Grantor Trust Certificate who was such a holder at any time
during such year, information regarding the amount of servicing compensation
received by the Master Servicer, the Special Servicer or any Sub-Servicer, and
such other customary factual information as the Depositor or the reporting party
deems necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are uncertain
in various respects, there is no assurance the IRS will agree with the Trustee's
or Master Servicer's, as the case may be, information reports of such items of
income and expense. Moreover, such information reports, even if otherwise
accepted as accurate by the IRS, will in any event be accurate only
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as to the initial Certificateholders that bought their Certificates at the
representative initial offering price used in preparing such reports.
Backup Withholding. In general, the rules described above in
"-REMICs-Backup Withholding with Respect to REMIC Certificates" will also apply
to Grantor Trust Certificates.
Foreign Investors. In general, the discussion with respect to REMIC Regular
Certificates in "-REMICs-Foreign Investors in REMIC Certificates" above applies
to Grantor Trust Certificates except that Grantor Trust Certificates will,
unless otherwise disclosed in the related Prospectus Supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
nonresident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Offered Certificates. State tax law may differ substantially from the
corresponding federal law, and the discussion above does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their tax advisors with respect to the
various tax consequences of investments in the Offered Certificates.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans, and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts (and as applicable, insurance company general accounts) in which such
plans, accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code ("Plans"), and
on persons who are fiduciaries with respect to such Plans, in connection with
the investment of Plan assets. 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 Section
3(33) of ERISA) are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Offered Certificates without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal and state law. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons ("parties in interest" within the meaning of ERISA and "disqualified
persons" within
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the meaning of the Code; collectively, "Parties in Interest") who have certain
specified relationships to the Plan, unless a statutory or administrative
exemption is available. Certain Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code or a penalty imposed pursuant to Section 502(i) of
ERISA, unless a statutory or administrative exemption is available. These
prohibited transactions generally are set forth in Section 406 of ERISA and
Section 4975 of the Code.
Plan Asset Regulations
A Plan's investment in Offered Certificates may cause the underlying
Mortgage Assets and other assets included in a related Trust Fund to be deemed
assets of such Plan. Section 2510.3-101 of the regulations (the "Plan Asset
Regulations") of the United States Department of Labor (the "DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets include
both such equity interest and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions not applicable here apply, or
unless the equity participation in the entity by "benefit plan investors" (i.e.,
Plans and certain employee benefit plans not subject to ERISA) is not
"significant", both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. Equity participation in a Trust Fund will be significant
on any date if immediately after the most recent acquisition of any Certificate,
25% or more of any class of Certificates is held by benefit plan investors.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Depositor, the Master
Servicer, any Special Servicer, any Sub-Servicer, any Manager, the Trustee, the
obligor under any credit enhancement mechanism or certain affiliates thereof to
be considered or become Parties in Interest with respect to an investing Plan
(or of a Plan holding an interest in an investing entity). If so, the
acquisition or holding of Certificates by or on behalf of the investing Plan
could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Certificates
acquired by a Plan may be assets of that Plan. Under the Plan Asset Regulations,
the Trust Fund, including the Mortgage Asset Loans and the other assets held in
the Trust Fund, may also be deemed to be assets of each Plan that acquires
Certificates. Special caution should be exercised before Plan Assets are used to
acquire a Certificate in such circumstances, especially if, with respect to such
assets, the Depositor, the Master Servicer, any Special Servicer, any
Sub-Servicer, any Manager, the Trustee, the obligor under any credit enhancement
mechanism or an affiliate thereof either (i) has investment discretion with
respect to the investment of Plan Assets; or (ii) has authority or
responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such advice
will serve as a primary basis for investment decisions with respect to such Plan
assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Assets and other assets included in a Trust Fund
constitute Plan assets, then any party exercising management or discretionary
control regarding those assets, such as the Master Servicer, any Special
Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism, or certain affiliates thereof may be deemed to be a Plan
"fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code with respect to the
investing Plan. In addition, if the Mortgage Assets and other assets included in
a Trust Fund constitute Plan assets, the purchase of Certificates by a Plan, as
well as the operation of the Trust Fund, may constitute or involve a prohibited
transaction under ERISA or the Code.
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The Plan Asset Regulations provide that where a Plan acquires a "guaranteed
governmental mortgage pool certificate", the Plan's assets include such
certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Plan
Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" FHLMC Certificates, GNMA Certificates and FNMA
Certificates, but do not include FAMC Certificates. Accordingly, even if such
MBS (other than FAMC Certificates) included in a Trust Fund were deemed to be
assets of Plan investors, the mortgages underlying such MBS (other than FAMC
Certificates) would not be treated as assets of such Plans. Private label
mortgage participations, mortgage pass-through certificates, FAMC Certificates
or other mortgage-backed securities are not "guaranteed governmental mortgage
pool certificates" within the meaning of the Plan Asset Regulations. Potential
Plan investors should consult their counsel and review the ERISA discussion in
the related Prospectus Supplement before purchasing any such Certificates.
Prohibited Transaction Exemptions
In considering an investment in the Offered Certificates, a Plan fiduciary
should consider the availability of prohibited transaction exemptions
promulgated by the DOL including, among others, Prohibited Transaction Class
Exemption ("PTCE") 75-1, which exempts certain transactions involving Plans and
certain broker-dealers, reporting dealers and banks; PTCE 90-1, which exempts
certain transactions between insurance company separate accounts and Parties in
Interest; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; PTCE 95-60, which exempts certain transactions between insurance
company general accounts and Parties in Interest; and PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by an "in-house asset
manager". There can be no assurance that any of these class exemptions will
apply with respect to any particular Plan investment in the Certificates or,
even if it were deemed to apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such investment. The
Prospectus Supplement with respect to a series of Certificates may contain
additional information regarding the availability of other exemptions with
respect to the Certificates offered thereby.
Insurance Company General Accounts
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Notes should consult with their legal counsel with
respect to
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the applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Certificates after the date which is 18 months
after the date the 401(c) Regulations become final.
Consultation With Counsel
Any Plan fiduciary which proposes to purchase Offered Certificates on
behalf of or with assets of a Plan should consider its general fiduciary
obligations under ERISA and should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investment and the
availability of any prohibited transaction exemption in connection therewith.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences-REMICs-Taxation of
Owners of REMIC Residual Certificates-Excess Inclusions".
LEGAL INVESTMENT
If so specified in the related Prospectus Supplement, the Offered
Certificates will constitute "mortgage related securities" for purposes of
SMMEA. Generally, only classes of Offered Certificates that (i) are rated in one
of the two highest rating categories by one or more Rating Agencies and (ii) are
part of a series evidencing interests in a Trust Fund consisting of loans
secured by a single parcel of real estate upon which is located a dwelling or
mixed residential and commercial structure, such as certain Multifamily Loans,
and originated by types of Originators specified in SMMEA, will be "mortgage
related securities" for purposes of SMMEA. "Mortgage related securities" are
legal investments to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, insurance companies and pension
funds created pursuant to or existing under the laws of the United States or of
any state, the authorized investments of which are subject to state regulation).
Under SMMEA, if a state enacted legislation prior to October 3, 1991 that
specifically limits the legal investment authority of any such entities with
respect to "mortgage related securities", Offered Certificates would constitute
legal investments for entities subject to such legislation only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
Upon the issuance of final implementing regulations under the Riegle
Community Development and Regulatory Improvement Act of 1994 and subject to any
limitations such regulations may impose, a modification of the definition of
"mortgage related securities" will become effective to expand the types of loans
to which such securities may relate to include
<PAGE>
-97-
loans secured by "one or more parcels of real estate upon which is located one
or more commercial structures". In addition, the related legislative history
states that this expanded definition includes multifamily residential loans
secured by more than one parcel of real estate upon which is located more than
one structure. Until September 23, 2001 any state may enact legislation limiting
the extent to which "mortgage related securities" under this expanded definition
would constitute legal investments under that state's laws.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities". The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS (as defined herein). The
Policy Statement generally indicates that a mortgage derivative product will be
deemed to be high risk if it exhibits greater price volatility than a standard
fixed rate thirty-year mortgage security. According to the Policy Statement,
prior to purchase, a depository institution will be required to determine
whether a mortgage derivative product that it is considering acquiring is
high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance as
to which classes of Certificates, including Offered Certificates, will be
treated as high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision (the "OTS") issued a
bulletin, entitled "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Offered Certificates. In addition, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes of Offered Certificates. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Offered Certificates or to purchase any class of
Offered Certificates representing more than a specified percentage of the
investor's assets. The Depositor will make no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all investors whose investment activities are subject
to legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Certificates of any class
constitute legal investments or are subject to investment, capital or other
restrictions.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or will
be used by the Depositor to cover expenses related thereto. The Depositor
expects to sell the Certificates from time to time, but the timing and amount of
offerings of Certificates will depend on a number of factors, including the
volume of Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
<PAGE>
-98-
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Depositor from such sale.
The Depositor intends that Offered Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the Offered
Certificates of a particular series may be made through a combination of two or
more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public offering by one or more underwriters specified in the related
Prospectus Supplement;
2. By placements by the Depositor with institutional investors through
dealers; and
3. By direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, the Offered
Certificates of a series may be offered in whole or in part to the seller of the
related Mortgage Assets that would comprise the Trust Fund for such
Certificates.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. The
managing underwriter or underwriters with respect to the offer and sale of
Offered Certificates of a particular series will be set forth on the cover of
the Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Offered Certificates may be
deemed to be underwriters in connection with such Certificates, and any
discounts or commissions received by them from the Depositor and any profit on
the resale of Offered Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
the Offered Certificates of any series will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Depositor will indemnify the
several underwriters and the underwriters will indemnify the Depositor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Depositor and purchasers of
Offered Certificates of such series.
<PAGE>
-99-
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended, in connection with reoffers and sales by them of
Offered Certificates. Holders of Offered Certificates should consult with their
legal advisors in this regard prior to any such reoffer or sale.
As to any series of Certificates, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any unrated
class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or institutional investors.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the Depositor
by Thacher Proffitt & Wood.
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. The Depositor has determined that its financial statements will not
be material to the offering of any Offered Certificates.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by borrowers 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 Interest Certificates might, in extreme
cases fail to recoup their initial investments. Furthermore, ratings on mortgage
pass-through certificates do not address the price of such certificates or the
suitability of such certificates to the investor.
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.
<PAGE>
-100-
INDEX OF PRINCIPAL DEFINITIONS
401(c) Regulations......................................................95
Accrual Certificates.....................................................4
Accrual Period ......................................................71
Accrued Certificate Interest............................................29
Act ......................................................62
ADA ......................................................65
ARM Loans ......................................................19
Available Distribution Amount...........................................28
Book-Entry Certificates.................................................28
Call Risk ......................................................10
Cash Flow Agreement......................................................6
CERCLA ......................................................62
Certificate Account.....................................................21
Certificate Balance......................................................4
Certificate Owner ......................................................35
Certificates .......................................................i
Closing Date ......................................................69
Code .......................................................7
Commercial Properties.............................................i, 2, 16
Commission ......................................................iv
Committee Report ......................................................69
Companion Class ......................................................31
Condemnation Proceeds...................................................42
Contributions Tax ......................................................80
Controlled Amortization Class...........................................30
Controlled Amortization Classes..........................................3
Cooperatives ......................................................16
CPR ......................................................24
Credit Support .......................................................6
Crime Control Act ......................................................66
Cut-off Date ...................................................5, 30
Debt Service Coverage Ratio.............................................17
Definitive Certificates.................................................28
Depositor .......................................................i
Determination Date..................................................22, 29
Deutsche Bank Group.....................................................27
Distribution Date .......................................................4
Distribution Date Statement.............................................32
DMARC Trust ......................................................27
DOL ......................................................94
DTC ...................................................v, 35
DTC Participants ......................................................35
Due Dates ......................................................19
Due Period ......................................................22
Equity Participation....................................................19
ERISA ...................................................7, 93
Exchange Act .......................................................v
Extension Risk ......................................................10
FAMC ......................................................20
FHLMC ......................................................20
Financial Intermediary..................................................35
FNMA ......................................................20
Garn Act ......................................................63
GNMA ......................................................20
Grantor Trust Certificates...............................................7
Grantor Trust Fractional Interest Certificate...........................84
Grantor Trust Fund......................................................67
Insurance Proceeds......................................................42
IRS ..................................................45, 66
Issue Premium ......................................................75
Letter of Credit Bank...................................................55
Liquidation Proceeds....................................................42
Loan-to-Value Ratio.....................................................18
Lock-out Date ......................................................19
Lock-out Period ......................................................19
Manager .......................................................1
Mark-to-Market Regulations..............................................78
Master Servicer .......................................................1
MBS ................................................i, 3, 16
MBS Administrator .......................................................1
MBS Agreement ......................................................20
MBS Issuer ......................................................20
MBS Servicer ......................................................20
MBS Trustee ......................................................20
Mortgage ......................................................16
Mortgage Asset Pool......................................................i
Mortgage Asset Seller...................................................16
Mortgage Assets ...................................................i, 16
Mortgage Loans ................................................i, 1, 16
Mortgage Notes ......................................................16
Mortgage Rate .......................................................2
Mortgaged Properties....................................................16
Mortgages ......................................................56
Multifamily Properties.........................................i, 1, 2, 16
Net Leases ......................................................18
Net Operating Income....................................................17
Nonrecoverable Advance..................................................31
Notional Amount .......................................................4
Offered Certificates.....................................................i
OID Regulations ......................................................67
Originator ......................................................16
OTS ......................................................97
Parties in Interest.....................................................94
Pass-Through Rate .......................................................4
Percentage Interest.....................................................29
Permitted Investments...................................................42
<PAGE>
-101-
Plan Asset Regulations..................................................94
Plans ......................................................93
Policy Statement ......................................................97
Pooling and Servicing Agreement..........................................3
Prepayment Assumption...............................................69, 87
Prepayment Interest Shortfall...........................................22
Prepayment Period ......................................................33
Prepayment Premium......................................................19
Prohibited Transactions Tax.............................................80
Prospectus Supplement....................................................i
PTCE ......................................................95
Purchase Price ......................................................38
Rating Agency .......................................................7
Record Date ......................................................29
Related Proceeds ......................................................31
Relief Act ......................................................65
REMIC .................................................iii, 67
REMIC Administrator..................................................iv, 1
REMIC Certificates......................................................67
REMIC Provisions ......................................................67
REMIC Regular Certificates...............................................7
REMIC Regulations ......................................................67
REMIC Residual Certificates..............................................7
REO Property ......................................................40
Residual Owner ......................................................74
RICO ......................................................66
Senior Certificates......................................................3
Senior Liens ......................................................16
SMMEA .......................................................7
SPA ......................................................24
Special Servicer .......................................................1
Stripped Interest Certificates...........................................3
Stripped Principal Certificates..........................................3
Sub-Servicer ......................................................41
Sub-Servicing Agreement.................................................41
Subordinate Certificates.................................................3
Superlien ......................................................62
Tax Exempt Investor.....................................................96
Tiered REMICs ......................................................69
Title V ......................................................65
Trust Assets ......................................................iv
Trust Fund .......................................................i
Trustee .......................................................1
UBTI ......................................................96
UCC ......................................................57
Value ......................................................18
Voting Rights ......................................................34
Warranting Party ......................................................38
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ________, 199_
[Version 2 - Health Care Concentration]
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
Mortgage Pass-Through Certificates
The mortgage pass-through certificates offered hereby (the "Offered
Certificates") and by the supplements hereto (each, a "Prospectus Supplement")
will be offered from time to time in series. The Offered Certificates of any
series, together with any other mortgage pass-through certificates of such
series, are collectively referred to herein as the "Certificates".
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") to be formed by Deutsche Mortgage & Asset Receiving Corporation
(the "Depositor") and including a segregated pool (a "Mortgage Asset Pool") of
various types of multifamily and commercial mortgage loans ("Mortgage Loans"),
mortgage-backed securities ("MBS") that evidence interests in, or that are
secured by pledges of, one or more of various types of multifamily or commercial
mortgage loans, or a combination of Mortgage Loans and MBS (collectively,
"Mortgage Assets"). The Mortgage Loans in (and the mortgage loans underlying the
MBS in) any Trust Fund will be secured by first or junior liens on, or security
interests in, one or more of the following types of real property: (i)
residential properties consisting of five or more rental or cooperatively-owned
dwelling units and mobile home parks; and (ii) commercial properties consisting
of office buildings, retail shopping facilities, hotels and motels, Health
Care-Related Facilities (as defined herein), recreational vehicle parks,
warehouse facilities, mini-warehouse facilities, self-storage facilities,
industrial facilities, parking lots, restaurants, mixed use properties (that is,
any combination of the foregoing), and unimproved land. However, restaurants
will not represent security for a material concentration of the Mortgage Loans
in (or the mortgage loans underlying the MBS in) any Trust Fund, based on
principal balance at the time such Trust Fund is formed. If so specified in the
related Prospectus Supplement, the Trust Fund for a series of Certificates may
also include letters of credit, surety bonds, insurance policies, guarantees,
reserve funds, guaranteed investment contracts, interest rate exchange
agreements, interest rate cap or floor agreements, or other agreements designed
to reduce the effects of interest rate fluctuations on the Mortgage Assets. See
"Description of the Trust Funds", "Description of the Certificates" and
"Description of Credit Support".
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. See
"Yield and Maturity Considerations". A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination;
Retirement of the Certificates".
(cover continued on next page)
--------
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR ANY
OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE ASSETS
WILL BE GUARANTEED OR INSURED BY THE DEPOSITOR OR ANY OF ITS AFFILIATES OR,
UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------
Prospective investors should review the information appearing on page 8
herein under the caption "Risk Factors" and such information as may be set forth
under the caption "Risk Factors" in the related Prospectus Supplement before
purchasing any Offered Certificate.
The Offered Certificates of any series may be offered through one or more
different methods, including offerings through underwriters, as described under
"Method of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any
series prior to the offering thereof. There can be no assurance that a secondary
market for any Offered Certificates will develop or, if it does develop,
<PAGE>
(ii)
that it will continue. Unless otherwise provided in the related Prospectus
Supplement, the Certificates will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Offered Certificates of any series unless
accompanied by the Prospectus Supplement for such series.
--------
The date of this Prospectus is ______, 199_
<PAGE>
(iii)
(cover continued)
As described in the related Prospectus Supplement, the Certificates of each
series, including the Offered Certificates of such series, may consist of one or
more classes of Certificates that: (i) provide for the accrual of interest
thereon based on a fixed, variable or adjustable interest rate; (ii) are senior
or subordinate to one or more other classes of Certificates in entitlement to
certain distributions on the Certificates; (iii) are entitled to distributions
of principal, with disproportionate, nominal or no distributions of interest;
(iv) are entitled to distributions of interest, with disproportionate, nominal
or no distributions of principal; (v) provide for distributions of interest
thereon or principal thereof that commence only following the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of such series; (vi) provide for distributions of principal thereof
to be made, from time to time or for designated periods, at a rate that is
faster (and, in some cases, substantially faster) or slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund; or
(vii) provide for distributions of principal thereof to be made, subject to
available funds, based on a specified principal payment schedule or other
methodology. Distributions in respect of the Certificates of each series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. See "Description of the
Certificates".
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" (each, a "REMIC") for federal income
tax purposes. If applicable, the Prospectus Supplement for a series of
Certificates will specify which class or classes of such series of Certificates
will be considered to be regular interests in the related REMIC and which class
of Certificates or other interests will be designated as the residual interest
in the related REMIC. See "Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this Prospectus
specifying the location of definitions of important or frequently used defined
terms.
<PAGE>
(iv)
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to each series of Offered Certificates will, among other things, set forth, as
and to the extent appropriate: (i) a description of the class or classes of such
Offered Certificates, including the payment provisions with respect to each such
class, the aggregate principal amount, if any, of each such class, the rate at
which interest accrues from time to time, if at all, with respect to each such
class or the method of determining such rate, and whether interest with respect
to each such class will accrue from time to time on its aggregate principal
amount, if any, or on a specified notional amount, if at all; (ii) information
with respect to any other classes of Certificates of the same series; (iii) the
respective dates on which distributions are to be made; (iv) information as to
the assets, including the Mortgage Assets, constituting the related Trust Fund
(all such assets, with respect to the Certificates of any series, the "Trust
Assets"); (v) the circumstances, if any, under which the related Trust Fund may
be subject to early termination; (vi) additional information with respect to the
method of distribution of such Offered Certificates; (vii) whether one or more
REMIC elections will be made and the designation of the "regular interests" and
"residual interests" in each REMIC to be created and the identity of the person
(the "REMIC Administrator") responsible for the various tax-related duties in
respect of each REMIC to be created; (viii) the initial percentage ownership
interest in the related Trust Fund to be evidenced by each class of Certificates
of such series; (ix) information concerning the Trustee (as defined herein) of
the related Trust Fund; (x) if the related Trust Fund includes Mortgage Loans,
information concerning the Master Servicer and any Special Servicer (each as
defined herein) of such Mortgage Loans and the circumstances under which all or
a portion, as specified, of the servicing of a Mortgage Loan would transfer from
the Master Servicer to the Special Servicer; (xi) information as to the nature
and extent of subordination of any class of Certificates of such series,
including a class of Offered Certificates; and (xii) whether such Offered
Certificates will be initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to each
series of Offered Certificates contain 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, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http://www.sec.gov).
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or any related Prospectus Supplement, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Depositor or any other person. Neither the delivery of this Prospectus or
any related Prospectus Supplement nor any sale made hereunder or thereunder
shall under any circumstances create an implication that there has been no
change in the information herein since the date hereof or therein since the date
thereof. This Prospectus and any related Prospectus Supplement are not an offer
to sell or a solicitation of an offer to buy any security in any jurisdiction in
which it is unlawful to make such offer or solicitation.
<PAGE>
(v)
The Master Servicer, the Trustee or another specified person will cause to
be provided to registered holders of the Offered Certificates of each series
periodic unaudited reports concerning the related Trust Fund. If beneficial
interests in a class or series of Offered Certificates are being held and
transferred in book-entry format through the facilities of The Depository Trust
Company ("DTC") as described herein, then unless otherwise provided in the
related Prospectus Supplement, such reports will be sent on behalf of the
related Trust Fund to a nominee of DTC as the registered holder of the Offered
Certificates. Conveyance of notices and other communications by DTC to its
participating organizations, and directly or indirectly through such
participating organizations to the beneficial owners of the applicable Offered
Certificates, will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time. See
"Description of the Certificates--Reports to Certificateholders" and
"--Book-Entry Registration and Definitive Certificates".
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder. The Depositor intends to make a
written request to the staff of the Commission that the staff either (i) issue
an order pursuant to Section 12(h) of the Exchange Act exempting the Depositor
from certain reporting requirements under the Exchange Act with respect to each
Trust Fund or (ii) state that the staff will not recommend that the Commission
take enforcement action if the Depositor fulfills its reporting obligations as
described in its written request. If such request is granted, the Depositor will
file or cause to be filed with the Commission as to each Trust Fund the periodic
unaudited reports to holders of the Offered Certificates referenced in the
preceding paragraph; however, because of the nature of the Trust Funds, it is
unlikely that any significant additional information will be filed. In addition,
because of the limited number of Certificateholders expected for each series,
the Depositor anticipates that a significant portion of such reporting
requirements will be permanently suspended following the first fiscal year for
the related Trust Fund.
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 of 1934, as amended, prior
to the termination of an offering of Offered Certificates evidencing interests
therein. 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 Offered Certificates, upon written or oral request of
such person, 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 Offered Certificates, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by reference
in such documents). Such requests to the Depositor should be directed in writing
to the Depositor at One International Place, Room 608, Boston, Massachusetts
02110, Attention: Secretary, or by telephone at (617) 951-7690.
<PAGE>
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TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT........................................................................................................ iv
AVAILABLE INFORMATION........................................................................................................ iv
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................................................................ v
SUMMARY OF PROSPECTUS........................................................................................................ 1
RISK FACTORS................................................................................................................. 8
Limited Liquidity of Offered Certificates........................................................................... 8
Credit Support Limitations.......................................................................................... 9
Effect of Prepayments on Average Life of Certificates............................................................... 9
Effect of Prepayments on Yield of Certificates ..................................................................... 11
Limited Nature of Ratings........................................................................................... 11
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans................................... 11
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset Pool................................... 15
Termination......................................................................................................... 15
Risks Associated with Health Care-Related Properties................................................................ 15
DESCRIPTION OF THE TRUST FUNDS............................................................................................... 16
General............................................................................................................. 16
Mortgage Loans...................................................................................................... 16
MBS................................................................................................................. 22
Certificate Accounts................................................................................................ 23
Credit Support...................................................................................................... 23
Cash Flow Agreements................................................................................................ 23
YIELD AND MATURITY CONSIDERATIONS............................................................................................ 24
General............................................................................................................. 24
Pass-Through Rate................................................................................................... 24
Payment Delays...................................................................................................... 24
Certain Shortfalls in Collections of Interest....................................................................... 24
Yield and Prepayment Considerations................................................................................. 25
Weighted Average Life and Maturity.................................................................................. 26
Other Factors Affecting Yield, Weighted Average Life and Maturity................................................... 27
THE DEPOSITOR................................................................................................................ 29
DEUTSCHE BANK AG............................................................................................................. 29
DESCRIPTION OF THE CERTIFICATES.............................................................................................. 30
General............................................................................................................. 30
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Distributions of Interest on the Certificates....................................................................... 31
Distributions of Principal of the Certificates...................................................................... 32
Distributions on the Certificates in Respect of Prepayment Premiums or in Respect of Equity
Participations...................................................................................................... 33
Allocation of Losses and Shortfalls................................................................................. 33
Advances in Respect of Delinquencies................................................................................ 33
Reports to Certificateholders....................................................................................... 34
Voting Rights....................................................................................................... 36
Termination......................................................................................................... 36
Book-Entry Registration and Definitive Certificates................................................................. 37
DESCRIPTION OF THE POOLING AGREEMENTS........................................................................................ 38
General............................................................................................................. 38
Assignment of Mortgage Loans; Repurchases........................................................................... 39
Representations and Warranties; Repurchases......................................................................... 40
Collection and Other Servicing Procedures........................................................................... 41
Sub-Servicers....................................................................................................... 43
Certificate Account................................................................................................. 44
Modifications, Waivers and Amendments of Mortgage Loans............................................................. 46
Realization Upon Defaulted Mortgage Loans........................................................................... 47
Hazard Insurance Policies........................................................................................... 48
Due-on-Sale and Due-on-Encumbrance Provisions....................................................................... 49
Servicing Compensation and Payment of Expenses...................................................................... 49
Evidence as to Compliance........................................................................................... 50
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor........................................................................................................... 51
Events of Default................................................................................................... 52
Rights Upon Event of Default........................................................................................ 53
Amendment........................................................................................................... 53
List of Certificateholders.......................................................................................... 54
The Trustee......................................................................................................... 54
Duties of the Trustee............................................................................................... 55
Certain Matters Regarding the Trustee............................................................................... 55
Resignation and Removal of the Trustee.............................................................................. 55
DESCRIPTION OF CREDIT SUPPORT................................................................................................ 55
General............................................................................................................. 55
Subordinate Certificates............................................................................................ 56
Insurance or Guarantees with Respect to Mortgage Loans.............................................................. 56
Letter of Credit.................................................................................................... 57
Certificate Insurance and Surety Bonds.............................................................................. 57
Reserve Funds....................................................................................................... 57
Credit Support with respect to MBS.................................................................................. 57
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS...................................................................................... 58
General............................................................................................................. 58
</TABLE>
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Types of Mortgage Instruments....................................................................................... 58
Leases and Rents.................................................................................................... 59
Personalty.......................................................................................................... 59
Foreclosure......................................................................................................... 59
Bankruptcy Laws..................................................................................................... 63
Environmental Considerations........................................................................................ 64
Due-on-Sale and Due-on-Encumbrance Provisions....................................................................... 65
Junior Liens; Rights of Holders of Senior Liens..................................................................... 66
Subordinate Financing............................................................................................... 66
Default Interest and Limitations on Prepayments..................................................................... 66
Applicability of Usury Laws......................................................................................... 67
Certain Laws and Regulations........................................................................................ 67
Americans with Disabilities Act..................................................................................... 67
Soldiers' and Sailors' Civil Relief Act of 1940..................................................................... 68
Forfeitures in Drug and RICO Proceedings............................................................................ 68
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................................................................... 68
General............................................................................................................. 68
REMICs.............................................................................................................. 69
Grantor Trust Funds................................................................................................. 86
STATE AND OTHER TAX CONSEQUENCES............................................................................................. 95
ERISA CONSIDERATIONS......................................................................................................... 96
General............................................................................................................. 96
Plan Asset Regulations.............................................................................................. 96
Consultation With Counsel........................................................................................... 98
Tax Exempt Investors................................................................................................ 98
LEGAL INVESTMENT............................................................................................................. 98
USE OF PROCEEDS..............................................................................................................100
METHOD OF DISTRIBUTION.......................................................................................................100
LEGAL MATTERS................................................................................................................101
FINANCIAL INFORMATION........................................................................................................101
RATING.......................................................................................................................102
INDEX OF PRINCIPAL DEFINITIONS...............................................................................................103
</TABLE>
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing elsewhere
in this Prospectus and by reference to the information with respect to each
series of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
Securities Offered.................. Mortgage pass-through certificates.
Depositor........................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation. See
"The Depositor".
Trustee............................. The trustee (the "Trustee") for each
series of Certificates will be named in
the related Prospectus Supplement. See
"Description of the Pooling
Agreements-The Trustee".
Master Servicer..................... If a Trust Fund includes Mortgage Loans,
then the master servicer (the "Master
Servicer") for the corresponding series
of Certificates will be named in the
related Prospectus Supplement. See
"Description of the Pooling
Agreements-Certain Matters Regarding the
Master Servicer, the Special Servicer,
the REMIC Administrator and the
Depositor".
Special Servicer.................... If a Trust Fund includes Mortgage Loans,
then the special servicer (the "Special
Servicer") for the corresponding series
of Certificates will be named, or the
circumstances under which a Special
Servicer may be appointed will be
described, in the related Prospectus
Supplement. See "Description of the
Pooling Agreements-Collection and Other
Servicing Procedures".
MBS Administrator................... If a Trust Fund includes MBS, then the
entity responsible for administering
such MBS (the "MBS Administrator") will
be named in the related Prospectus
Supplement. If an entity other than the
Trustee and the Master Servicer is the
MBS Administrator, such entity will be
herein referred to as the "Manager".
REMIC Administrator................. The person (the "REMIC Administrator")
responsible for the various tax- related
administration duties for a series of
Certificates as to which one or more
REMIC elections have been made, will be
named in the related Prospectus
Supplement. See "Certain Federal Income
Tax Consequences-REMIC's-Reporting and
Other Administrative Matters."
The Mortgage Assets................. The Mortgage Assets will be the primary
assets of any Trust Fund. The Mortgage
Assets with respect to each series of
Certificates will, in general, consist
of a pool of mortgage loans ("Mortgage
Loans") secured by first or junior liens
on, or security interests in, one or
more of the following types of real
property: (i) residential properties
("Multifamily Properties") consisting of
five or more rental or
cooperatively-owned dwelling units in
high-rise, mid-rise or garden apartment
buildings or other residential
<PAGE>
-2-
structures, and mobile home parks; and
(ii) commercial properties ("Commercial
Properties") consisting of office
buildings, retail shopping facilities
(such as shopping centers, malls and
individual stores), hotels and motels,
Health Care-Related Facilities (as
defined herein), recreational vehicle
parks, warehouse facilities,
mini-warehouse facilities, self-storage
facilities, industrial facilities,
parking lots, restaurants, mixed use
properties (that is, any combination of
the foregoing), and unimproved land.
However, restaurants will not represent
security for a material concentration of
the Mortgage Loans in any Trust Fund,
based on principal balance at the time
such Trust Fund is formed. The Mortgage
Loans will not be guaranteed or insured
by the Depositor or any of its
affiliates or, unless otherwise provided
in the related Prospectus Supplement, by
any governmental agency or
instrumentality or by any other person.
If so specified in the related
Prospectus Supplement, some Mortgage
Loans may be delinquent or nonperforming
as of the date the related Trust Fund is
formed.
As and to the extent described in the
related Prospectus Supplement, a
Mortgage Loan (i) may provide for no
accrual of interest or for accrual of
interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its
term or that adjusts from time to time,
or that may be converted at the
borrower's election from an adjustable
to a fixed Mortgage Rate, or from a
fixed to an adjustable Mortgage Rate,
(ii) may provide for level payments to
maturity or for payments that adjust
from time to time to accommodate changes
in the Mortgage Rate or to reflect the
occurrence of certain events, and may
permit negative amortization, (iii) may
be fully amortizing or may be partially
amortizing or nonamortizing, with a
balloon payment due on its stated
maturity date, (iv) may prohibit over
its term or for a certain period
prepayments and/or require payment of a
premium or a yield maintenance payment
in connection with certain prepayments
and (v) may provide for payments of
principal, interest or both, on due
dates that occur monthly, quarterly,
semi-annually or at such other interval
as is specified in the related
Prospectus Supplement. Each Mortgage
Loan will have had an original term to
maturity of not more than 40 years. No
Mortgage Loan will have been originated
by the Depositor. See "Description of
the Trust Funds-Mortgage Loans".
If any Mortgage Loan, or group of
related Mortgage Loans, constitutes a
concentration of credit risk, financial
statements or other financial
information with respect to the related
Mortgaged Property or Mortgaged
Properties will be included in the
related Prospectus Supplement. See
"Description of the Trust Funds-Mortgage
Loans-Mortgage Loan Information in
Prospectus Supplements".
If and to the extent specified in the
related Prospectus Supplement, the
Mortgage Assets with respect to a series
of Certificates may also include, or
consist of, mortgage participations,
mortgage pass-through certificates
and/or
<PAGE>
-3-
other mortgage-backed securities
(collectively, "MBS"), that evidence an
interest in, or are secured by a pledge
of, one or more mortgage loans that
conform to the descriptions of the
Mortgage Loans contained herein and
which may or may not be issued, insured
or guaranteed by the United States or an
agency or instrumentality thereof. See
"Description of the Trust Funds-MBS".
The Certificates.................... Each series of Certificates will be
issued in one or more classes pursuant
to a pooling and servicing agreement or
other agreement specified in the related
Prospectus Supplement (in any case, a
"Pooling Agreement") and will represent
in the aggregate the entire beneficial
ownership interest in the related Trust
Fund.
As described in the related Prospectus
Supplement, the Certificates of each
series, including the Offered
Certificates of such series, may consist
of one or more classes of Certificates
that, among other things: (i) are senior
(collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate
Certificates") to one or more other
classes of Certificates in entitlement
to certain distributions on the
Certificates; (ii) are entitled to
distributions of principal, with
disproportionate, nominal or no
distributions of interest (collectively,
"Stripped Principal Certificates");
(iii) are entitled to distributions of
interest, with disproportionate, nominal
or no distributions of principal
(collectively, "Stripped Interest
Certificates"); (iv) provide for
distributions of interest thereon or
principal thereof that commence only
after the occurrence of certain events,
such as the retirement of one or more
other classes of Certificates of such
series; (v) provide for distributions of
principal thereof to be made, from time
to time or for designated periods, at a
rate that is faster (and, in some cases,
substantially faster) or slower (and, in
some cases, substantially slower) than
the rate at which payments or other
collections of principal are received on
the Mortgage Assets in the related Trust
Fund; (vi) provide for distributions of
principal thereof to be made, subject to
available funds, based on a specified
principal payment schedule or other
methodology; or (vii) provide for
distribution based on collections on the
Mortgage Assets in the related Trust
Fund attributable to prepayment
premiums, yield maintenance payments or
equity participations.
If so specified in the related
Prospectus Supplement, a series of
Certificates may include one or more
"Controlled Amortization Classes", which
will entitle the holders thereof to
receive principal distributions
according to a specified principal
payment schedule. Although prepayment
risk cannot be eliminated entirely for
any class of Certificates, a Controlled
Amortization Class will generally
provide a relatively stable cash flow so
long as the actual rate of prepayment on
the Mortgage Loans in the related Trust
Fund remains relatively constant at the
rate, or within the range of rates, of
prepayment used to establish the
specific principal payment schedule for
such Certificates. Prepayment risk with
respect to a given Mortgage Asset Pool
does not
<PAGE>
-4-
disappear, however, and the stability
afforded to a Controlled Amortization
Class comes at the expense of one or
more other classes of the same series,
any of which other classes may also be a
class of Offered Certificates. See "Risk
Factors-Effect of Prepayments on Average
Life of Certificates" and "-Effect of
Prepayments on Yield of Certificates".
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain classes of
REMIC Residual Certificates (as defined
herein), will have an initial stated
principal amount (a "Certificate
Balance"); and each class of
Certificates, other than certain classes
of Stripped Principal Certificates and
certain classes of REMIC Residual
Certificates, will accrue interest on
its Certificate Balance or, in the case
of certain classes of Stripped Interest
Certificates, on a notional amount (a
"Notional Amount"), based on a fixed,
variable or adjustable interest rate (a
"Pass-Through Rate"). The related
Prospectus Supplement will specify the
Certificate Balance, Notional Amount
and/or Pass-Through Rate (or, in the
case of a variable or adjustable
Pass-Through Rate, the method for
determining such rate), as applicable,
for each class of Offered Certificates.
If so specified in the related
Prospectus Supplement, a class of
Certificates may have two or more
component parts, each having
characteristics that are otherwise
described herein as being attributable
to separate and distinct classes.
The Certificates will not be guaranteed
or insured by the Depositor or any of
its affiliates, by any governmental
agency or instrumentality or by any
other person or entity, unless otherwise
provided in the related Prospectus
Supplement. See "Risk Factors-Limited
Assets".
Distributions of Interest on the
Certificates...................... Interest on each class of Offered
Certificates (other than certain classes
of Stripped Principal Certificates and
certain classes of REMIC Residual
Certificates) of each series will accrue
at the applicable Pass-Through Rate on
the Certificate Balance or, in the case
of certain classes of Stripped Interest
Certificates, the Notional Amount
thereof outstanding from time to time
and will be distributed to
Certificateholders as provided in the
related Prospectus Supplement (each of
the specified dates on which
distributions are to be made, a
"Distribution Date"). Distributions of
interest with respect to one or more
classes of Certificates (collectively,
"Accrual Certificates") may not commence
until the occurrence of certain events,
such as the retirement of one or more
other classes of Certificates, and
interest accrued with respect to a class
of Accrual Certificates prior to the
occurrence of such an event will either
be added to the Certificate Balance
thereof or otherwise deferred as
described in the related Prospectus
Supplement. Distributions of interest
with respect to one or more classes of
Certificates may be reduced to the
extent of certain delinquencies, losses
and other contingencies described herein
and
<PAGE>
-5-
in the related Prospectus Supplement.
See "Risk Factors-Effect of Prepayments
on Average Life of Certificates" and
"-Effect of Prepayments on Yield of
Certificates", "Yield and Maturity
Considerations-Certain Shortfalls in
Collections of Interest" and
"Description of the Certificates-
Distributions of Interest on the
Certificates".
Distributions of Principal of
the Certificates.................. Each class of Certificates of each
series (other than certain classes of
Stripped Interest Certificates and
certain classes of REMIC Residual
Certificates) will have a Certificate
Balance. The Certificate Balance of a
class of Certificates outstanding from
time to time will represent the maximum
amount that the holders thereof are then
entitled to receive in respect of
principal from future cash flow on the
assets in the related Trust Fund. The
initial aggregate Certificate Balance of
all classes of a series of Certificates
will not be greater than the outstanding
principal balance of the related
Mortgage Assets as of a specified date
(the "Cut-off Date"), after application
of scheduled payments due on or before
such date, whether or not received. As
and to the extent described in each
Prospectus Supplement, distributions of
principal with respect to the related
series of Certificates will be made on
each Distribution Date to the holders of
the class or classes of Certificates of
such series then entitled thereto until
the Certificate Balances of such
Certificates have been reduced to zero.
Distributions of principal with respect
to one or more classes of Certificates:
(i) may be made at a rate that is faster
(and, in some cases, substantially
faster) or slower (and, in some cases,
substantially slower) than the rate at
which payments or other collections of
principal are received on the Mortgage
Assets in the related Trust Fund; (ii)
may not commence until the occurrence of
certain events, such as the retirement
of one or more other classes of
Certificates of the same series; (iii)
may be made, subject to certain
limitations, based on a specified
principal payment schedule; or (iv) may
be contingent on the specified principal
payment schedule for another class of
the same series and the rate at which
payments and other collections of
principal on the Mortgage Assets in the
related Trust Fund are received. Unless
otherwise specified in the related
Prospectus Supplement, distributions of
principal of any class of Offered
Certificates will be made on a pro rata
basis among all of the Certificates of
such class. See "Description of the
Certificates-Distributions of Principal
of the Certificates".
Credit Support and
Cash Flow Agreements................ If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on
the Mortgage Assets in the related Trust
Fund may be provided to one or more
classes of Certificates of the related
series in the form of subordination of
one or more other classes of
Certificates of such series, which other
classes may include one or more classes
of Offered Certificates, or by one or
more other types of credit support,
which may include a letter of credit, a
surety bond, an insurance
<PAGE>
-6-
policy, a guarantee, a reserve fund, or
a combination thereof (any such coverage
with respect to the Certificates of any
series, "Credit Support"). If so
provided in the related Prospectus
Supplement, a Trust Fund may include:
(i) guaranteed investment contracts
pursuant to which moneys held in the
funds and accounts established for the
related series will be invested at a
specified rate; or (ii) interest rate
exchange agreements, interest rate cap
or floor agreements, or other agreements
designed to reduce the effects of
interest rate fluctuations on the
Mortgage Assets or on one or more
classes of Certificates (any such
agreement, in the case of clause (i) or
(ii), a "Cash Flow Agreement"). Certain
relevant information regarding any
applicable Credit Support or Cash Flow
Agreement will be set forth in the
Prospectus Supplement for a series of
Offered Certificates. See "Risk
Factors-Credit Support Limitations",
"Description of the Trust Funds-Credit
Support" and "-Cash Flow Agreements" and
"Description of Credit Support".
Advances............................ If and to the extent provided in the
related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the
Master Servicer, the Special Servicer,
the Trustee, any provider of Credit
Support and/or any other specified
person may be obligated to make, or have
the option of making, certain advances
with respect to delinquent scheduled
payments of principal and/or interest on
such Mortgage Loans. Any such advances
made with respect to a particular
Mortgage Loan will be reimbursable from
subsequent recoveries in respect of such
Mortgage Loan and otherwise to the
extent described herein and in the
related Prospectus Supplement. See
"Description of the Certificates
-Advances in Respect of Delinquencies".
If and to the extent provided in the
Prospectus Supplement for a series of
Certificates, any entity making such
advances may be entitled to receive
interest thereon for a specified period
during which certain or all of such
advances are outstanding, payable from
amounts in the related Trust Fund. See
"Description of the Certificates-
Advances in Respect of Delinquencies".
If a Trust Fund includes MBS, any
comparable advancing obligation of a
party to the related Pooling Agreement,
or of a party to the related MBS
Agreement, will be described in the
related Prospectus Supplement.
Optional Termination................ If so specified in the related
Prospectus Supplement, a series of
Certificates may be subject to optional
early termination through the repurchase
of the Mortgage Assets in the related
Trust Fund by the party or parties
specified therein, under the
circumstances and in the manner set
forth therein. If so provided in the
related Prospectus Supplement, upon the
reduction of the Certificate Balance of
a specified class or classes of
Certificates by a specified percentage
or amount or upon a specified date, a
party specified therein may be
authorized or required to solicit bids
for the purchase of all of the Mortgage
Assets of the related Trust Fund, or of
a sufficient portion of such Mortgage
Assets to retire such class or classes,
under the circumstances and in the
manner set forth therein. See
"Description of the Certificates-
Termination".
<PAGE>
-7-
Certain Federal Income Tax
Consequences...................... The Certificates of each series will
constitute or evidence ownership of
either (i) "regular interests" ("REMIC
Regular Certificates") and "residual
interests" ("REMIC Residual
Certificates") in a Trust Fund, or a
designated portion thereof, treated as a
REMIC under Sections 860A through 860G
of the Internal Revenue Code of 1986
(the "Code"), or (ii) interests
("Grantor Trust Certificates") in a
Trust Fund treated as a grantor trust
(or a partnership) under applicable
provisions of the Code.
Investors are advised to consult their
tax advisors concerning the specific tax
consequences to them of the purchase,
ownership and disposition of the Offered
Certificates and to review "Certain
Federal Income Tax Consequences" herein
and in the related Prospectus
Supplement.
ERISA Considerations................ Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh
plans, and collective investment funds
and separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that are
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of
Offered Certificates could give rise to
a transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Legal Investment.................... The Offered Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
amended ("SMMEA"), only if so specified
in the related Prospectus Supplement.
Investors whose investment authority is
subject to legal restrictions should
consult their legal advisors to
determine whether and to what extent the
Offered Certificates constitute legal
investments for them. See "Legal
Investment" herein and in the related
Prospectus Supplement.
Rating.............................. At their respective dates of issuance,
each class of Offered Certificates will
be rated not lower than investment grade
by one or more nationally recognized
statistical rating agencies (each, a
"Rating Agency"). See "Rating" herein
and in the related Prospectus
Supplement.
<PAGE>
-8-
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly pertain
to and be influenced by the characteristics or behavior of the mortgage loans
underlying any MBS included in such Trust Fund.
Limited Liquidity of Offered Certificates
General. The Offered Certificates of any series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related Prospectus
Supplement, Certificateholders will have no redemption rights, and the Offered
Certificates of each series are subject to early retirement only under certain
specified circumstances described herein and in the related Prospectus
Supplement. See "Description of the Certificates-Termination".
Lack of a Secondary Market. There can be no assurance that a secondary
market for the Offered Certificates of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any series of Offered Certificates may indicate that
an underwriter specified therein intends to establish a secondary market in such
Offered Certificates; however, no underwriter will be obligated to do so. Any
such secondary market may provide less liquidity to investors than any
comparable market for securities that evidence interests in single-family
mortgage loans. Unless otherwise provided in the related Prospectus Supplement,
the Certificates will not be listed on any securities exchange.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Certificates of any series, including
information regarding the status of the related Mortgage Assets and any Credit
Support for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling Agreement as
described herein under the heading "Description of the Certificates-Reports to
Certificateholders". There can be no assurance that any additional ongoing
information regarding the Offered Certificates of any series will be available
through any other source. The limited nature of such information in respect of a
series of Offered Certificates may adversely affect the liquidity thereof, even
if a secondary market for such Certificates does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any series of Offered Certificates
or class thereof, the market value of such Certificates will be affected by
several factors, including the perceived liquidity thereof, the anticipated cash
flow thereon (which may vary widely depending upon the prepayment and default
assumptions applied in respect of the underlying Mortgage Loans) and prevailing
interest rates. The price payable at any given time in respect of certain
classes of Offered Certificates (in particular, a class with a relatively long
average life, a Companion Class (as defined herein) or a class of Stripped
Interest Certificates or Stripped Principal Certificates) may be extremely
sensitive to small fluctuations in prevailing interest rates; and the relative
change in price for an Offered Certificate in response to an upward or downward
movement in prevailing interest rates may not necessarily equal the relative
change in price for such Offered Certificate in response to an equal but
opposite movement in such rates. Accordingly, the sale of Offered Certificates
by a holder in any secondary market that may develop may be at a discount from
the price paid by such holder. The Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis.
Limited Assets
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Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other person
or entity; and no Offered Certificate of any series will represent a claim
against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make payments
on a series of Offered Certificates, no other assets will be available for
payment of the deficiency, and the holders of one or more classes of such
Offered Certificates will be required to bear the consequent loss. Furthermore,
certain amounts on deposit from time to time in certain funds or accounts
constituting part of a Trust Fund, including the Certificate Account and any
accounts maintained as Credit Support, may be withdrawn under certain
conditions, if and to the extent described in the related Prospectus Supplement,
for purposes other than the payment of principal of or interest on the related
series of Certificates. If and to the extent so provided in the Prospectus
Supplement for a series of Certificates consisting of one or more classes of
Subordinate Certificates, on any Distribution Date in respect of which losses or
shortfalls in collections on the Mortgage Assets have been incurred, all or a
portion of the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Certificates, and, thereafter, by the remaining
classes of Certificates in the priority and manner and subject to the
limitations specified in such Prospectus Supplement.
Credit Support Limitations
Limitations Regarding Types of Losses Covered. The Prospectus Supplement
for a series of Certificates will describe any Credit Support provided with
respect thereto. Use of Credit Support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement. Moreover,
such Credit Support may not cover all potential losses; for example, Credit
Support may or may not cover loss by reason of fraud or negligence by a mortgage
loan originator or other parties. Any such losses not covered by Credit Support
may, at least in part, be allocated to one or more classes of Offered
Certificates.
Disproportionate Benefits to Certain Classes and Series. A series of
Certificates may include one or more classes of Subordinate Certificates (which
may include Offered Certificates), if so provided in the related Prospectus
Supplement. Although subordination is intended to reduce the likelihood of
temporary shortfalls and ultimate losses to holders of Senior Certificates, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Offered Certificates of a series are made in a specified order of priority, any
related Credit Support may be exhausted before the principal of the later paid
classes of Offered Certificates of such series has been repaid in full. As a
result, the impact of losses and shortfalls experienced with respect to the
Mortgage Assets may fall primarily upon those classes of Offered Certificates
having a later right of payment. Moreover, if a form of Credit Support covers
the Offered Certificates of more than one series and losses on the related
Mortgage Assets exceed the amount of such Credit Support, it is possible that
the holders of Offered Certificates of one (or more) such series will be
disproportionately benefited by such Credit Support to the detriment of the
holders of Offered Certificates of one (or more) other such series.
Limitations Regarding the Amount of Credit Support. The amount of any
applicable Credit Support supporting one or more classes of Offered
Certificates, including the subordination of one or more other classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level of
defaults, delinquencies and losses on the underlying Mortgage Assets and certain
other factors. There can, however, be no assurance that the loss experience on
the related Mortgage Assets will not exceed such assumed levels. See
"Description of the Certificates--Allocation of Losses and Shortfalls" and
"Description of Credit Support". If the losses on the related Mortgage Assets do
exceed such assumed levels, the holders of one or more classes of Offered
Certificates will be required to bear such additional losses.
Effect of Prepayments on Average Life of Certificates
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As a result of prepayments on the Mortgage Loans in any Trust Fund, the
amount and timing of distributions of principal and/or interest on the Offered
Certificates of the related series may be highly unpredictable. Prepayments on
the Mortgage Loans in any Trust Fund will result in a faster rate of principal
payments on one or more classes of the related series of Certificates than if
payments on such Mortgage Loans were made as scheduled. Thus, the prepayment
experience on the Mortgage Loans in a Trust Fund may affect the average life of
one or more classes of Certificates of the related series, including a class of
Offered Certificates. The rate of principal payments on pools of mortgage loans
varies among pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. For example, if
prevailing interest rates fall significantly below the Mortgage Rates borne by
the Mortgage Loans included in a Trust Fund, then, subject to the particular
terms of the Mortgage Loans (e.g., provisions that prohibit voluntary
prepayments during specified periods or impose penalties in connection
therewith) and the ability of borrowers to obtain new financing, principal
prepayments on such Mortgage Loans are likely to be higher than if prevailing
interest rates remain at or above the rates borne by those Mortgage Loans.
Conversely, if prevailing interest rates rise significantly above the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, then principal
prepayments on such Mortgage Loans are likely to be lower than if prevailing
interest rates remain at or below the mortgage rates borne by those Mortgage
Loans. There can be no assurance as to the actual rate of prepayment on the
Mortgage Loans in any Trust Fund or that such rate of prepayment will conform to
any model described herein or in any Prospectus Supplement. As a result,
depending on the anticipated rate of prepayment for the Mortgage Loans in any
Trust Fund, the retirement of any class of Certificates of the related series
could occur significantly earlier or later, and the average life thereof could
be significantly shorter or longer, than expected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the related
series will depend on the terms and provisions of such Certificates. A class of
Certificates, including a class of Offered Certificates, may provide that on any
Distribution Date the holders of such Certificates are entitled to a pro rata
share of the prepayments on the Mortgage Loans in the related Trust Fund that
are distributable on such date, to a disproportionately large share (which, in
some cases, may be all) of such prepayments, or to a disproportionately small
share (which, in some cases, may be none) of such prepayments. A class of
Certificates that entitles the holders thereof to a disproportionately large
share of the prepayments on the Mortgage Loans in the related Trust Fund
increases the likelihood of early retirement of such class ("Call Risk") if the
rate of prepayment is relatively fast; while a class of Certificates that
entitles the holders thereof to a disproportionately small share of the
prepayments on the Mortgage Loans in the related Trust Fund increases the
likelihood of an extended average life of such class ("Extension Risk") if the
rate of prepayment is relatively slow. As and to the extent described in the
related Prospectus Supplement, the respective entitlements of the various
classes of Certificateholders of any series to receive payments (and, in
particular, prepayments) of principal of the Mortgage Loans in the related Trust
Fund may vary based on the occurrence of certain events (e.g., the retirement of
one or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such Mortgage
Loans).
A series of Certificates may include one or more Controlled Amortization
Classes, which will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of Certificates, a
Controlled Amortization Class will generally provide a relatively stable cash
flow so long as the actual rate of prepayment on the Mortgage Loans in the
related Trust Fund remains relatively constant at the rate, or within the range
of rates, of prepayment used to establish the specific principal payment
schedule for such Certificates. Prepayment risk with respect to a given Mortgage
Asset Pool does not disappear, however, and the stability afforded to a
Controlled Amortization Class comes at the expense of one or more Companion
Classes of the same series, any of which Companion Classes may also be a class
of Offered Certificates. In general, and as more specifically described in the
related Prospectus Supplement, a Companion Class may entitle the holders thereof
to a disproportionately large share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively fast, and/or may
entitle the holders thereof to a disproportionately small share of prepayments
on the Mortgage Loans in the related Trust Fund
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when the rate of prepayment is relatively slow. As and to the extent described
in the related Prospectus Supplement, a Companion Class absorbs some (but not
all) of the Call Risk and/or Extension Risk that would otherwise belong to the
related Controlled Amortization Class if all payments of principal of the
Mortgage Loans in the related Trust Fund were allocated on a pro rata basis.
Effect of Prepayments on Yield of Certificates
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately large,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might fail to recover its original investment
under some prepayment scenarios. The extent to which the yield to maturity of
any class of Offered Certificates may vary from the anticipated yield will
depend upon the degree to which such Certificates are purchased at a discount or
premium and the amount and timing of distributions thereon. An investor should
consider, in the case of any Offered Certificate purchased at a discount, the
risk that a slower than anticipated rate of principal payments on the Mortgage
Loans could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Offered Certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield. See "Yield and Maturity Considerations".
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of such Offered
Certificates will receive payments to which such Certificateholders are entitled
under the related Pooling Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Mortgage
Loans will be made, the degree to which the rate of such prepayments might
differ from that originally anticipated or the likelihood of early optional
termination of the related Trust Fund. Furthermore, such rating will not address
the possibility that prepayment of the related Mortgage Loans at a higher or
lower rate than anticipated by an investor may cause such investor to experience
a lower than anticipated yield or that an investor that purchases an Offered
Certificate at a significant premium might fail to recover its initial
investment under certain prepayment scenarios. Hence, a rating assigned by a
Rating Agency does not guarantee or ensure the realization of any anticipated
yield on a class of Offered Certificates.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of the Certificates of such
series. Those criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Loans. In other cases, such
criteria may be based upon determinations of the values of the Mortgaged
Properties that provide security for the Mortgage Loans. However, no assurance
can be given that those values will not decline in the future. As a result, the
Credit Support required in respect of the Offered Certificates of any series may
be insufficient to fully protect the holders thereof from losses on the related
Mortgage Asset Pool. See "Description of Credit Support" and "Rating".
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans
General. The payment performance of the Offered Certificates of any series
will be directly related to the payment performance of the underlying Mortgage
Loans. Set forth below is a discussion of certain factors that will affect the
full and
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timely payment of the Mortgage Loans in any Trust Fund. In addition, a
description of certain material considerations associated with investments in
mortgage loans is included herein under "Certain Legal Aspects of Mortgage
Loans".
The Offered Certificates will be directly or indirectly backed by mortgage
loans secured by multifamily and/or commercial properties. Mortgage loans made
on the security of multifamily or commercial property may have a greater
likelihood of delinquency and foreclosure, and a greater likelihood of loss in
the event thereof, than loans made on the security of an owner-occupied
single-family property. See "Description of the Trust Funds-Mortgage
Loans-Default and Loss Considerations with Respect to the Mortgage Loans". The
ability of a borrower to repay a loan secured by an income-producing property
typically is dependent primarily upon the successful operation of such property
rather than upon the existence of independent income or assets of the borrower;
thus, the value of an income-producing property is directly related to the net
operating income derived from such property. If the net operating income of the
property is reduced (for example, if rental or occupancy rates decline or real
estate tax rates or other operating expenses increase), the borrower's ability
to repay the loan may be impaired. A number of the Mortgage Loans may be secured
by liens on owner-occupied Mortgaged Properties or on Mortgaged Properties
leased to a single tenant or a small number of significant tenants. Accordingly,
a decline in the financial condition of the borrower or a significant tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
Mortgaged Property may be adversely affected by factors generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate
tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; natural
disasters and civil disturbances such as earthquakes, hurricanes, floods,
eruptions or riots; and other circumstances, conditions or events beyond the
control of a Master Servicer or a Special Servicer. Additional considerations
may be presented by the type and use of a particular Mortgaged Property. For
instance, Mortgaged Properties that operate as hospitals and nursing homes are
subject to significant governmental regulation of the ownership, operation,
maintenance and financing of health care institutions. Hotel and motel
properties are often operated pursuant to franchise, management or operating
agreements that may be terminable by the franchisor or operator, and the
transferability of a hotel's operating, liquor and other licenses upon a
transfer of the hotel, whether through purchase or foreclosure, is subject to
local law requirements.
In addition, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be greater
than for pools of single-family loans because Mortgage Loans in a Trust Fund
will generally consist of a smaller number of higher balance loans than would a
pool of single-family loans of comparable aggregate unpaid principal balance.
Limited Recourse Nature of the Mortgage Loans. It is anticipated that some
or all of the Mortgage Loans included in any Trust Fund will be nonrecourse
loans or loans for which recourse may be restricted or unenforceable. As to any
such Mortgage Loan, recourse in the event of borrower default will be limited to
the specific real property and other assets, if any, that were pledged to secure
the Mortgage Loan. However, even with respect to those Mortgage Loans that
provide for recourse against the borrower and its assets generally, there can be
no assurance that enforcement of such recourse provisions will be practicable,
or that the assets of the borrower will be sufficient to permit a recovery in
respect of a defaulted Mortgage Loan in excess of the liquidation value of the
related Mortgaged Property. See "Certain Legal Aspects of Mortgage
Loans-Foreclosure--Anti-Deficiency Legislation".
Limitations on Enforceability of Cross-Collateralization. A Mortgage Pool
may include groups of Mortgage Loans which are cross-collateralized and
cross-defaulted. These arrangements are designed primarily to ensure that all of
the collateral pledged to secure the respective Mortgage Loans in a
cross-collateralized group, and the cash flows generated
<PAGE>
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thereby, are available to support debt service on, and ultimate repayment of,
the aggregate indebtedness evidenced by those Mortgage Loans. These arrangements
thus seek to reduce the risk that the inability of one or more of the Mortgaged
Properties securing any such group of Mortgage Loans to generate net operating
income sufficient to pay debt service will result in defaults and ultimate
losses.
There may not be complete identity of ownership of the Mortgaged Properties
securing a group of cross-collateralized Mortgage Loans. In such an instance,
creditors of one or more of the related borrowers could challenge the cross-
collateralization arrangement as a fraudulent conveyance. Generally, under
federal and state fraudulent conveyance statutes, the incurring of an obligation
or the transfer of property by a person will be subject to avoidance under
certain circumstances if the person did not receive fair consideration or
reasonably equivalent value in exchange for such obligation or transfer and was
then insolvent or was rendered insolvent by such obligation or transfer.
Accordingly, a creditor seeking ownership of a Mortgaged Property subject to
such cross-collateralization to repay such creditor's claim against the related
borrower could assert (i) that such borrower was insolvent at the time the
cross-collateralized Mortgage Loans were made and (ii) that such borrower did
not, when it allowed its property to be encumbered by a lien securing the
indebtedness represented by the other Mortgage Loans in the group of
cross-collateralized Mortgage Loans, receive fair consideration or reasonably
equivalent value for, in effect, "guaranteeing" the performance of the other
borrowers. Although the borrower making such "guarantee" will be receiving
"guarantees" from each of the other borrowers in return, there can be no
assurance that such exchanged "guarantees" would be found to constitute fair
consideration or be of reasonably equivalent value, and no unqualified legal
opinion to that effect will be obtained.
The cross-collateralized Mortgage Loans constituting any group thereof may
be secured by mortgage liens on Mortgaged Properties located in different
states. Because of various state laws governing foreclosure or the exercise of a
power of sale and because, in general, foreclosure actions are brought in state
court, and the courts of one state cannot exercise jurisdiction over property in
another state, it may be necessary upon a default under any such Mortgage Loan
to foreclose on the related Mortgaged Properties in a particular order rather
than simultaneously in order to ensure that the lien of the related Mortgages is
not impaired or released.
Increased Risk of Default Associated With Balloon Payments. Certain of the
Mortgage Loans included in a Trust Fund may be nonamortizing or only partially
amortizing over their terms to maturity and, thus, will require substantial
payments of principal and interest (that is, balloon payments) at their stated
maturity. Mortgage Loans of this type involve a greater likelihood of default
than self-amortizing loans because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to refinance the loan or
to sell the related Mortgaged Property. The ability of a borrower to accomplish
either of these goals will be affected by a number of factors, including the
value of the related Mortgaged Property, the level of available mortgage rates
at the time of sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition and operating history of the
borrower and the related Mortgaged Property, tax laws, rent control laws (with
respect to certain residential properties), Medicaid and Medicare reimbursement
rates (with respect to hospitals and nursing homes), prevailing general economic
conditions and the availability of credit for loans secured by multifamily or
commercial, as the case may be, real properties generally. Neither the Depositor
nor any of its affiliates will be required to refinance any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or the Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to which a
payment default is imminent. See "Description of the Pooling
Agreements-Realization Upon Defaulted Mortgage Loans". While the Master Servicer
or the Special Servicer generally will be required to determine that any such
extension or modification is reasonably likely to produce a greater recovery
than
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liquidation, taking into account the time value of money, there can be no
assurance that any such extension or modification will in fact increase the
present value of receipts from or proceeds of the affected Mortgage Loans.
Lender Difficulty in Collecting Rents Upon the Default and/or Bankruptcy of
Borrower. Each Mortgage Loan included in any Trust Fund secured by Mortgaged
Property that is subject to leases typically will be secured by an assignment of
leases and rents pursuant to which the borrower assigns to the lender its right,
title and interest as landlord under the leases of the related Mortgaged
Property, and the income derived therefrom, as further security for the related
Mortgage Loan, while retaining a license to collect rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect rents. Some state laws may require that the lender take
possession of the Mortgaged Property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
borrower, the lender's ability to collect the rents may be adversely affected.
See "Certain Legal Aspects of Mortgage Loans-Leases and Rents".
Limitations on Enforceability of Due-on-Sale and Debt-Acceleration Clauses.
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the Mortgage Loan if the borrower sells, transfers or
conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages also may include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or nonmonetary default of the
mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse the foreclosure of a mortgage or deed of trust when an acceleration
of the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
Risk of Liability Arising From Environmental Conditions. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, a lender may be liable, as
an "owner" or "operator", for costs of addressing releases or threatened
releases of hazardous substances at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether the environmental damage or threat was caused by the
borrower or a prior owner. A lender also risks such liability on foreclosure of
the mortgage. See "Certain Legal Aspects of Mortgage Loans-Environmental
Considerations".
Lack of Insurance Coverage for Certain Special Hazard Losses. Unless
otherwise specified in a Prospectus Supplement, the Master Servicer and Special
Servicer for the related Trust Fund will be required to cause the borrower on
each Mortgage Loan in such Trust Fund to maintain such insurance coverage in
respect of the related Mortgaged Property as is required under the related
Mortgage, including hazard insurance; provided that, as and to the extent
described herein and in the related Prospectus Supplement, each of the Master
Servicer and the Special Servicer may satisfy its obligation to cause hazard
insurance to be maintained with respect to any Mortgaged Property through
acquisition of a blanket policy. In general, the standard form of fire and
extended coverage policy covers physical damage to or destruction of the
improvements of the property by fire, lightning, explosion, smoke, windstorm and
hail, and riot, strike and civil commotion, subject to the conditions and
exclusions specified in each policy. Although the policies covering the
Mortgaged Properties will be underwritten by different insurers under different
state laws in accordance with different applicable state forms, and therefore
will not contain identical terms and conditions, most such policies typically do
not cover any physical damage resulting from war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), wet or dry rot, vermin, domestic animals
and certain other kinds of risks. Unless the related Mortgage specifically
requires the mortgagor to insure against physical damage arising from such
causes, then, to the extent any consequent losses are not covered by Credit
Support, such losses may be borne, at least in part, by the holders of one
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or more classes of Offered Certificates of the related series. See "Description
of the Pooling Agreements-Hazard Insurance Policies".
Risks of Geographic Concentration. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. For example, a
region's economic condition and housing market may be directly, or indirectly,
adversely affected by natural disasters or civil disturbances such as
earthquakes, hurricanes, floods, eruptions or riots. The economic impact of any
of these types of events may also be felt in areas beyond the region immediately
affected by the disaster or disturbance. The Mortgage Loans securing certain
series of Certificates may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset
Pool
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past due
or are nonperforming. However, Mortgage Loans which are seriously delinquent
loans (that is, loans more than 60 days delinquent or as to which foreclosure
has been commenced) will not constitute a material concentration of the Mortgage
Loans in any Trust Fund, based on principal balance at the time such Trust Fund
is formed. If so specified in the related Prospectus Supplement, the servicing
of such Mortgage Loans will be performed by the Special Servicer; however, the
same entity may act as both Master Servicer and Special Servicer. Credit Support
provided with respect to a particular series of Certificates may not cover all
losses related to such delinquent or nonperforming Mortgage Loans, and investors
should consider the risk that the inclusion of such Mortgage Loans in the Trust
Fund may adversely affect the rate of defaults and prepayments in respect of the
subject Mortgage Asset Pool and the yield on the Offered Certificates of such
series. See "Description of the Trust Funds-Mortgage Loans-General".
Termination
If so provided in the related Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to solicit bids for the purchase of all
the Mortgage Assets of the related Trust Fund, or of a sufficient portion of
such Mortgage Assets to retire such class or classes, under the circumstances
and in the manner set forth therein. The solicitation of bids will be conducted
in a commercially reasonable manner and, generally, assets will be sold at their
fair market value. In addition, if so specified in the related Prospectus
Supplement, upon the reduction of the aggregate principal balance of some or all
of the Mortgage Assets by a specified percentage, a party or parties designated
therein may be authorized to purchase such Mortgage Assets, generally at a price
equal to, in the case of any Mortgage Asset, the unpaid principal balance
thereof plus accrued interest (or, in some cases, at fair market value).
However, circumstances may arise in which such fair market value may be less
than the unpaid balance of the related Mortgage Assets, together with interest
thereon, sold and therefore, as a result of such a sale or purchase, the
Certificateholders of one or more Classes of Certificates may receive an amount
less than the Certificate Balance of, and accrued unpaid interest on, their
Certificates. See Description of the Certificates--Termination."
Risks Associated with Health Care-Related Properties
Government Reimbursement Programs. Certain types of Health Care-Related
Facilities typically receive a substantial portion of their revenues from
government reimbursement programs, primarily Medicaid and Medicare. Medicaid and
Medicare are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings, policy
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interpretations, delays by fiscal intermediaries and government funding
restrictions. Accordingly, there can be no assurance that payments under
government reimbursement programs will, in the future, be sufficient to fully
reimburse the cost of caring for program beneficiaries. If such payments are
insufficient, net operating income of those Health Care-Related Facilities that
receive revenues from those sources, and consequently the ability of the related
borrowers to meet their obligations under any Mortgage Loans secured thereby,
could be adversely affected.
Government Regulation. Health Care-Related Facilities are generally subject
to federal and state laws and licensing requirements that relate to the adequacy
of medical care, distribution of pharmaceuticals, rate setting, equipment,
personnel, operating policies and additions to facilities and services. The
failure of an operator to maintain or renew any required license or regulatory
approval could prevent it from continuing operations at a Health Care-Related
Facility or, if applicable, bar it from participation in government
reimbursement programs. Furthermore, under applicable federal and state laws and
regulations, Medicare and Medicaid reimbursements are generally not permitted to
be made to any person other than the provider who actually furnished the related
medical goods and services. Accordingly, in the event of foreclosure, none of
the Trustee, the Master Servicer, the Special Servicer or a subsequent lessee or
operator of a Health Care-Related Facility securing a defaulted Mortgage Loan
would generally be entitled to obtain from federal or state governments any
outstanding reimbursement payments relating to services furnished at such
property prior to such foreclosure. In those cases where Health Care-Related
Facilities constitute Mortgaged Properties, any of the aforementioned events may
adversely affect the ability of the related borrowers to meet their obligations
under the Mortgage Loans secured thereby.
DESCRIPTION OF THE TRUST FUNDS
General
The primary assets of each Trust Fund will consist of (i) various types of
multifamily or commercial mortgage loans ("Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
("MBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily or commercial mortgage loans or (iii) a
combination of Mortgage Loans and MBS (collectively, "Mortgage Assets"). Each
Trust Fund will be established by the Depositor. Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator of
such Mortgage Loan or the issuer of such MBS. The Mortgage Assets will not be
guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under the
heading "-Mortgage Loans", unless otherwise noted, applies equally to mortgage
loans underlying any MBS included in a particular Trust Fund.
Mortgage Loans
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create first or junior liens on fee or
leasehold estates in properties (the "Mortgaged Properties") consisting of one
or more of the following types of real property: (i) residential properties
("Multifamily Properties") consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures, and mobile home parks; and (ii)
commercial properties ("Commercial Properties") consisting of office buildings,
retail shopping facilities (such as shopping centers, malls and individual
stores), hotels or motels, Health Care-Related Facilities (as defined herein),
recreational vehicle parks, warehouse facilities, mini-warehouse facilities,
self-storage facilities, industrial facilities, parking lots, restaurants, mixed
use properties
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(that is, any combination of the foregoing), and unimproved land. However,
restaurants will not represent security for a material concentration of the
Mortgage Loans in (or the mortgage loans underlying the MBS in) any Trust Fund,
based on principal balance at the time such Trust Fund is formed. The
Multifamily Properties may include mixed commercial and residential structures
and apartment buildings owned by private cooperative housing corporations
("Cooperatives"). Unless otherwise specified in the related Prospectus
Supplement, each Mortgage will create a first priority mortgage lien on a fee
estate in a Mortgaged Property. If a Mortgage creates a lien on a borrower's
leasehold estate in a property, then, unless otherwise specified in the related
Prospectus Supplement, the term of any such leasehold will exceed the term of
the Mortgage Note by at least ten years. Unless otherwise specified in the
related Prospectus Supplement, each Mortgage Loan will have been originated by a
person (the "Originator") other than the Depositor.
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens, and
the loans secured by the related senior liens ("Senior Liens") may not be
included in the Mortgage Pool. The primary risk to holders of Mortgage Loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related Senior Liens to satisfy
fully both the Senior Liens and the Mortgage Loan. In the event that a holder of
a Senior Lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court costs
and fees in connection with the foreclosure, second to real estate taxes, third
in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the Senior
Liens. The claims of the holders of the Senior Liens will be satisfied in full
out of proceeds of the liquidation of the related Mortgage Property, if such
proceeds are sufficient, before the Trust Fund as holder of the junior lien
receives any payments in respect of the Mortgage Loan. If the Master Servicer
were to foreclose on any Mortgage Loan, it would do so subject to any related
Senior Liens. In order for the debt related to such Mortgage Loan to be paid in
full at such sale, a bidder at the foreclosure sale of such Mortgage Loan would
have to bid an amount sufficient to pay off all sums due under the Mortgage Loan
and any Senior Liens or purchase the Mortgaged Property subject to such Senior
Liens. In the event that such proceeds from a foreclosure or similar sale of the
related Mortgaged Property are insufficient to satisfy all Senior Liens and the
Mortgage Loan in the aggregate, the Trust Fund, as the holder of the junior
lien, and, accordingly, holders of one or more classes of the Certificates of
the related series bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment is not obtained and satisfied. Moreover, deficiency
judgments may not be available in certain jurisdictions, or the particular
Mortgage Loan may be a nonrecourse loan, which means that, absent special facts,
recourse in the case of default will be limited to the Mortgaged Property and
such other assets, if any, that were pledged to secure repayment of the Mortgage
Loan.
If so specified in the related Prospectus Supplement, the Mortgage Assets
for a particular series of Certificates may include Mortgage Loans that are
delinquent or nonperforming as of the date such Certificates are issued. In that
case, the related Prospectus Supplement will set forth, as to each such Mortgage
Loan, available information as to the period of such delinquency or
nonperformance, any forbearance arrangement then in effect, the condition of the
related Mortgaged Property and the ability of the Mortgaged Property to generate
income to service the mortgage debt. However, Mortgage Loans which are seriously
delinquent loans (that is, loans more than 60 days delinquent or as to which
foreclosure has been commenced) will not constitute a material concentration of
the Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed.
Default and Loss Considerations with Respect to the Mortgage Loans.
Mortgage loans secured by liens on income-producing properties are substantially
different from loans made on the security of owner-occupied single-family homes.
The repayment of a loan secured by a lien on an income-producing property is
typically dependent upon the successful operation of such property (that is, its
ability to generate income). Moreover, as noted above, some or all of the
Mortgage Loans included in a particular Trust Fund may be nonrecourse loans.
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Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important factor in evaluating the likelihood
of default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income derived from the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments of principal and/or interest on the Mortgage Loan and any other loans
senior thereto that are secured by the related Mortgaged Property. Unless
otherwise defined in the related Prospectus Supplement, "Net Operating Income"
means, for any given period, the total operating revenues derived from a
Mortgaged Property during such period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than (i)
noncash items such as depreciation and amortization, (ii) capital expenditures
and (iii) debt service on the related Mortgage Loan or on any other loans that
are secured by such Mortgaged Property. The Net Operating Income of a Mortgaged
Property will generally fluctuate over time and may or may not be sufficient to
cover debt service on the related Mortgage Loan at any given time. As the
primary source of the operating revenues of a nonowner occupied,
income-producing property, rental income (and, with respect to a Mortgage Loan
secured by a Cooperative apartment building, maintenance payments from
tenant-stockholders of a Cooperative) may be affected by the condition of the
applicable real estate market and/or area economy. In addition, properties
typically leased, occupied or used on a short-term basis, such as certain health
care-related facilities, hotels and motels, and mini-warehouse and self-storage
facilities, tend to be affected more rapidly by changes in market or business
conditions than do properties typically leased for longer periods, such as
warehouses, retail stores, office buildings and industrial facilities.
Commercial Properties may be owner-occupied or leased to a small number of
tenants. Thus, the Net Operating Income of such a Mortgaged Property may depend
substantially on the financial condition of the borrower or a tenant, and
Mortgage Loans secured by liens on such properties may pose a greater likelihood
of default and loss than loans secured by liens on Multifamily Properties or on
multi-tenant Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the likelihood of default on a Mortgage Loan.
As may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a factor
in evaluating the likelihood of loss if a property must be liquidated following
a default. Unless otherwise defined in the related Prospectus Supplement, the
"Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of (i) the then outstanding principal balance of the
Mortgage Loan and any other loans senior thereto that are secured by the related
Mortgaged Property to (ii) the Value of the related Mortgaged Property. Unless
otherwise specified in the related Prospectus Supplement, the "Value" of a
Mortgaged Property will be its fair market value as determined by an appraisal
of such property conducted by or on behalf of the Originator in connection with
the origination of such loan. The lower the Loan-to-Value Ratio, the greater the
percentage of the borrower's equity in a Mortgaged Property, and thus (a) the
greater the incentive of the borrower to perform under the terms of the related
Mortgage Loan (in order to protect such equity) and (b) the greater the cushion
provided to the lender against loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure of
the likelihood of liquidation loss in a pool of Mortgage Loans. For example, the
value of a Mortgaged Property as of the date of initial issuance of the related
series of Certificates may be less than the Value determined at loan
origination, and will likely continue to fluctuate from time to time based upon
certain factors including changes in economic conditions and the real estate
market. Moreover, even when current, an appraisal is not necessarily a reliable
estimate of value. Appraised values of income-producing properties are
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generally based on the market comparison method (recent resale value of
comparable properties at the date of the appraisal), the cost replacement method
(the cost of replacing the property at such date), the income capitalization
method (a projection of value based upon the property's projected net cash
flow), or upon a selection from or interpolation of the values derived from such
methods. Each of these appraisal methods can present analytical difficulties. It
is often difficult to find truly comparable properties that have recently been
sold; the replacement cost of a property may have little to do with its current
market value; and income capitalization is inherently based on inexact
projections of income and expense and the selection of an appropriate
capitalization rate and discount rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of the
likelihood of default and loss, is even more difficult.
Although there may be multiple methods for determining the value of a
Mortgaged Property, value will in all cases be affected by property performance.
As a result, if a Mortgage Loan defaults because the income generated by the
related Mortgaged Property is insufficient to cover operating costs and expenses
and pay debt service, then the value of the Mortgaged Property will reflect such
and a liquidation loss may occur.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans, there can be no
assurance that all of such factors will in fact have been prudently considered
by the Originators of the Mortgage Loans, or that, for a particular Mortgage
Loan, they are complete or relevant. See "Risk Factors-Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage Loans-General" and "-Certain
Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans-Increased Risk of Default Associated With Balloon Payments".
Payment Provisions of the Mortgage Loans. All of the Mortgage Loans will
(i) have had original terms to maturity of not more than 40 years and (ii)
provide for scheduled payments of principal, interest or both, to be made on
specified dates ("Due Dates") that occur monthly, quarterly, semi-annually or
annually. A Mortgage Loan (i) may provide for no accrual of interest or for
accrual of interest thereon at a Mortgage Rate that is fixed over its term or
that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, (ii) may provide for level payments to maturity or for
payments that adjust from time to time to accommodate changes in the Mortgage
Rate or to reflect the occurrence of certain events, and may permit negative
amortization, (iii) may be fully amortizing or may be partially amortizing or
nonamortizing, with a balloon payment due on its stated maturity date, and (iv)
may prohibit over its term or for a certain period prepayments (the period of
such prohibition, a "Lock-out Period" and its date of expiration, a "Lock-out
Date") and/or require payment of a premium or a yield maintenance payment (a
"Prepayment Premium") in connection with certain prepayments, in each case as
described in the related Prospectus Supplement. A Mortgage Loan may also contain
a provision that entitles the lender to a share of appreciation of the related
Mortgaged Property, or profits realized from the operation or disposition of
such Mortgaged Property or the benefit, if any, resulting from the refinancing
of the Mortgage Loan (any such provision, an "Equity Participation"), as
described in the related Prospectus Supplement.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans in
the related Trust Fund, which, to the extent then applicable, will generally
include the following: (i) the aggregate outstanding principal balance and the
largest, smallest and average outstanding principal balance of the Mortgage
Loans, (ii) the type or types of property that provide security for repayment of
the Mortgage Loans, (iii) the earliest and latest origination date and maturity
date of the Mortgage Loans, (iv) the original and remaining terms to maturity of
the Mortgage Loans, or the respective ranges thereof, and the weighted average
original and remaining terms to maturity of the Mortgage Loans, (v) the
Loan-to-Value Ratios of the Mortgage Loans (either at origination or as of a
more recent date), or the range thereof, and the weighted average of such
Loan-to-Value Ratios, (vi) the Mortgage Rates borne by the Mortgage
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Loans, or the range thereof, and the weighted average Mortgage Rate borne by the
Mortgage Loans, (vii) with respect to Mortgage Loans with adjustable Mortgage
Rates ("ARM Loans"), the index or indices upon which such adjustments are based,
the adjustment dates, the range of gross margins and the weighted average gross
margin, and any limits on Mortgage Rate adjustments at the time of any
adjustment and over the life of the ARM Loan, (viii) information regarding the
payment characteristics of the Mortgage Loans, including, without limitation,
balloon payment and other amortization provisions, Lockout Periods and
Prepayment Premiums, (ix) the Debt Service Coverage Ratios of the Mortgage Loans
(either at origination or as of a more recent date), or the range thereof, and
the weighted average of such Debt Service Coverage Ratios, and (x) the
geographic distribution of the Mortgaged Properties on a state-by-state basis.
In appropriate cases, the related Prospectus Supplement will also contain
certain information available to the Depositor that pertains to the provisions
of leases and the nature of tenants of the Mortgaged Properties. If the
Depositor is unable to provide the specific information described above at the
time Offered Certificates of a series are initially offered, more general
information of the nature described above will be provided in the related
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of those Certificates at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Commission within fifteen days following such issuance.
If any Mortgage Loan, or group of related Mortgage Loans, constitutes a
concentration of credit risk, financial statements or other financial
information with respect to the related Mortgaged Property or Mortgaged
Properties will be included in the related Prospectus Supplement.
If and to the extent available and relevant to an investment decision in
the Offered Certificates of the related series, information regarding the
prepayment experience of a Master Servicer's multifamily and/or commercial
mortgage loan servicing portfolio will be included in the related Prospectus
Supplement. However, many servicers do not maintain records regarding such
matters or, at least, not in a format that can be readily aggregated. In
addition, the relevant characteristics of a Master Servicer's servicing
portfolio may be so materially different from those of the related Mortgage
Asset Pool that such prepayment experience would not be meaningful to an
investor. For example, differences in geographic dispersion, property type
and/or loan terms (e.g., mortgage rates, terms to maturity and/or prepayment
restrictions) between the two pools of loans could render the Master Servicer's
prepayment experience irrelevant. Because of the nature of the assets to be
serviced and administered by a Special Servicer, no comparable prepayment
information will be presented with respect to the Special Servicer's multifamily
and/or commercial mortgage loan servicing portfolio.
Mortgage Loans Secured by Health Care-Related Properties. The Mortgaged
Properties may include Senior Housing, Assisted Living Facilities, Skilled
Nursing Facilities and Acute Care Facilities (any of the foregoing, "Health
Care-Related Facilities"). "Senior Housing" generally consist of facilities with
respect to which the residents are ambulatory, handle their own affairs and
typically are couples whose children have left the home and at which the
accommodations are usually apartment style. "Assisted Living Facilities" are
typically single or double room occupancy, dormitory-style housing facilities
which provide food service, cleaning and some personal care and with respect to
which the tenants are able to medicate themselves but may require assistance
with certain daily routines. "Skilled Nursing Facilities" provide services to
post trauma and frail residents with limited mobility who require extensive
medical treatment. "Acute Care Facilities" generally consist of hospital and
other facilities providing short-term, acute medical care services.
Certain types of Health Care-Related Properties, particularly Acute Care
Facilities, Skilled Nursing Facilities and some Assisted Living Facilities,
typically receive a substantial portion of their revenues from government
reimbursement programs, primarily Medicaid and Medicare. Medicaid and Medicare
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, policy interpretations, delays by fiscal intermediaries
and government funding restrictions. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers, and
there exist various proposals for national health care reform that could further
limit those payments. Accordingly, there can
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be no assurance that payments under government reimbursement programs will, in
the future, be sufficient to fully reimburse the cost of caring for program
beneficiaries. If such payments are insufficient, net operating income of those
Health Care-Related Facilities that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their obligations
under any Mortgage Loans secured thereby, could be adversely affected.
Moreover, Health Care-Related Facilities are generally subject to federal
and state laws that relate to the adequacy of medical care, distribution of
pharmaceuticals, rate setting, equipment, personnel, operating policies and
additions to facilities and services. In addition, facilities where such care or
other medical services are provided are subject to periodic inspection by
governmental authorities to determine compliance with various standards
necessary to continued licensing under state law and continued participation in
the Medicaid and Medicare reimbursement programs. Providers of assisted living
services are also subject to state licensing requirements in certain states. The
failure of an operator to maintain or renew any required license or regulatory
approval could prevent it from continuing operations at a Health Care-Related
Facility or, if applicable, bar it from participation in government
reimbursement programs. Furthermore, under applicable federal and state laws and
regulations, Medicare and Medicaid reimbursements are generally not permitted to
be made to any person other than the provider who actually furnished the related
medical goods and services. Accordingly, in the event of foreclosure, none of
the Trustee, the Master Servicer, the Special Servicer or a subsequent lessee or
operator of any Health Care-Related Facility securing a defaulted Mortgage Loan
(a "Health Care-Related Mortgaged Property") would generally be entitled to
obtain from federal or state governments any outstanding reimbursement payments
relating to services furnished at such property prior to such foreclosure. Any
of the aforementioned events may adversely affect the ability of the related
borrowers to meet their Mortgage Loan obligations.
Government regulation applying specifically to Acute Care Facilities,
Skilled Nursing Facilities and certain types of Assisted Living Facilities
includes health planning legislation, enacted by most states, intended, at least
in part, to regulate the supply of nursing beds. The most common method of
control is the requirement that a state authority first make a determination of
need, evidenced by its issuance of a Certificate of Need ("CON"), before a
long-term care provider can establish a new facility, add beds to an existing
facility or, in some states, take certain other actions (for example, acquire
major medical equipment, make major capital expenditures, add services,
refinance long-term debt, or transfer ownership of a facility). States also
regulate nursing bed supply in other ways. For example, some states have imposed
moratoria on the licensing of new beds, or on the certification of new Medicaid
beds, or have discouraged the construction of new nursing facilities by limiting
Medicaid reimbursements allocable to the cost of new construction and equipment.
In general, a CON is site specific and operator specific; it cannot be
transferred from one site to another, or to another operator, without the
approval of the appropriate state agency. Accordingly, if a Mortgage Loan
secured by a lien on such a Health Care-Related Mortgaged Property were
foreclosed upon, the purchaser at foreclosure might be required to obtain a new
CON or an appropriate exemption. In addition, compliance by a purchaser with
applicable regulations may in any case require the engagement of a new operator
and the issuance of a new operating license. Upon a foreclosure, a state
regulatory agency may be willing to expedite any necessary review and approval
process to avoid interruption of care to a facility's residents, but there can
be no assurance that any will do so or that any necessary licenses or approvals
will be issued.
Further government regulation applicable to Health Care-Related Facilities
is found in the form of federal and state "fraud and abuse" laws that generally
prohibit payment or fee-splitting arrangements between health care providers
that are designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products or services.
Violation of these restrictions can result in license revocation, civil and
criminal penalties, and exclusion from participation in Medicare or Medicaid
programs. The state law restrictions in this area vary considerably from state
to state. Moreover, the federal anti- kickback law includes broad language that
potentially could be applied to a wide range of referral arrangements, and
regulations designed to create "safe harbors" under the law provide only limited
guidance.
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Accordingly, there can be no assurance that such laws will be interpreted in a
manner consistent with the practices of the owners or operators of the Health
Care-Related Mortgaged Properties that are subject to such laws.
The operators of Health Care-Related Facilities are likely to compete on a
local and regional basis with others that operate similar facilities, some of
which competitors may be better capitalized, may offer services not offered by
such operators, or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other sources not available to such operators. The successful operation of a
Health Care- Related Facility will generally depend upon the number of competing
facilities in the local market, as well as upon other factors such as its age,
appearance, reputation and management, the types of services it provides and,
where applicable, the quality of care and the cost of that care. The inability
of a Health Care-Related Mortgaged Property to flourish in a competitive market
may increase the likelihood of foreclosure on the related Mortgage Loan,
possibly affecting the yield on one or more classes of the related series of
Offered Certificates.
MBS
MBS may include (i) private-label (that is, not issued, insured or
guaranteed by the United States or any agency or instrumentality thereof)
mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates issued and/or insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA"), the Governmental National Mortgage
Association ("GNMA") or the Federal Agricultural Mortgage Corporation ("FAMC"),
provided that, unless otherwise specified in the related Prospectus Supplement,
each MBS will evidence an interest in, or will be secured by a pledge of,
mortgage loans that conform to the descriptions of the Mortgage Loans contained
herein.
Except in the case of a pro rata mortgage participation in a single
mortgage loan or a pool of mortgage loans, each MBS included in a Mortgage Asset
Pool: (a) either will (i) have been previously registered under the Securities
Act of 1933, as amended, (ii) be exempt from such registration requirements or
(iii) have been held for at least the holding period specified in Rule 144(k)
under the Securities Act of 1933, as amended; and (b) either (i) will have been
acquired (other than from the Depositor or an affiliate thereof) in bona fide
secondary market transactions or (ii) if so specified in the related Prospectus
Supplement, may be derived from the Depositor's (or an affiliate's) unsold
allotments from the Depositor (or an affiliate's) previous offerings.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). The issuer of the MBS (the "MBS Issuer") and/or the
servicer of the underlying mortgage loans (the "MBS Servicer") will be parties
to the MBS Agreement, generally together with a trustee (the "MBS Trustee") or,
in the alternative, with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Issuer, the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. The MBS
Issuer or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit support, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will
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have been established on the basis of the requirements of any rating agency that
may have assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify: (i) the aggregate approximate initial and
outstanding principal amount(s) and type of the MBS to be included in the Trust
Fund, (ii) the original and remaining term(s) to stated maturity of the MBS, if
applicable, (iii) the pass-through or bond rate(s) of the MBS or the formula for
determining such rate(s), (iv) the payment characteristics of the MBS, (v) the
MBS Issuer, MBS Servicer and MBS Trustee, as applicable, of each of the MBS,
(vi) a description of the related credit support, if any, (vii) the
circumstances under which the related underlying mortgage loans, or the MBS
themselves, may be purchased prior to their maturity, (viii) the terms on which
mortgage loans may be substituted for those originally underlying the MBS, (ix)
the type of mortgage loans underlying the MBS and, to the extent appropriate
under the circumstances, such other information in respect of the underlying
mortgage loans described under "-Mortgage Loans-Mortgage Loan Information in
Prospectus Supplements", and (x) the characteristics of any cash flow agreements
that relate to the MBS.
The Depositor will provide the same information regarding the MBS in any
Trust Fund in its reports filed under the Exchange Act with respect to such
Trust Fund as was provided by the related MBS Issuer in its own such reports if
such MBS was publicly offered or the reports the related MBS Issuer provides the
related MBS Trustee if such MBS was privately issued.
Certificate Accounts
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which all payments and collections received or advanced
with respect to the Mortgage Assets and other assets in the Trust Fund will be
deposited to the extent described herein and in the related Prospectus
Supplement. See "Description of the Pooling Agreements-Certificate Account".
Credit Support
If so provided in the Prospectus Supplement for a series of Certificates,
partial or full protection against certain defaults and losses on the Mortgage
Assets in the related Trust Fund may be provided to one or more classes of
Certificates of such series in the form of subordination of one or more other
classes of Certificates of such series or by one or more other types of Credit
Support, which may include a letter of credit, a surety bond, an insurance
policy, a guarantee, a reserve fund, or any combination thereof. The amount and
types of such Credit Support, the identity of the entity providing it (if
applicable) and related information with respect to each type of Credit Support,
if any, will be set forth in the Prospectus Supplement for a series of
Certificates. See "Risk Factors-Credit Support Limitations" and "Description of
Credit Support".
Cash Flow Agreements
If so provided in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include guaranteed investment contracts pursuant to
which moneys held in the funds and accounts established for such series will be
invested at a specified rate. The Trust Fund may also include interest rate
exchange agreements, interest rate cap or floor agreements, or other agreements
designed to reduce the effects of interest rate fluctuations on the Mortgage
Assets on one or more classes of Certificates. The principal terms of any such
Cash Flow Agreement, including, without limitation, provisions relating to the
timing, manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the related Prospectus Supplement. The
related Prospectus Supplement will also identify the obligor under the Cash Flow
Agreement.
<PAGE>
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YIELD AND MATURITY CONSIDERATIONS
General
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount and
timing of distributions on the Certificate. See "Risk Factors-Effect of
Prepayments on Average Life of Certificates". The following discussion
contemplates a Trust Fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying an MBS can generally
be expected to have the same effect on the yield to maturity and/or weighted
average life of a class of Certificates as will the characteristics and behavior
of comparable Mortgage Loans, the effect may differ due to the payment
characteristics of the MBS. If a Trust Fund includes MBS, the related Prospectus
Supplement will discuss the effect, if any, that the payment characteristics of
the MBS may have on the yield to maturity and weighted average lives of the
Offered Certificates of the related series.
Pass-Through Rate
The Certificates of any class within a series may have a fixed, variable or
adjustable Pass-Through Rate, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related Trust Fund. The Prospectus
Supplement with respect to any series of Certificates will specify the
Pass-Through Rate for each class of Offered Certificates of such series or, in
the case of a class of Offered Certificates with a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the effect,
if any, of the prepayment of any Mortgage Loan on the Pass-Through Rate of one
or more classes of Offered Certificates; and whether the distributions of
interest on the Offered Certificates of any class will be dependent, in whole or
in part, on the performance of any obligor under a Cash Flow Agreement.
Payment Delays
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related Trust
Fund are due and the Distribution Date on which such payments are passed through
to Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on the date they were due.
Certain Shortfalls in Collections of Interest
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest on the amount of such prepayment only
through the date of such prepayment, instead of through the Due Date for the
next succeeding scheduled payment. However, interest accrued on any series of
Certificates and distributable thereon on any Distribution Date will generally
correspond to interest accrued on the Mortgage Loans to their respective Due
Dates during the related Due Period. A "Due Period" will be a specified time
period (generally corresponding in length to the period between Distribution
Dates) and all scheduled payments on the Mortgage Loans in the related Trust
Fund that are due during a given Due Period will, to the extent received by a
specified date (the "Determination Date") or otherwise advanced by the related
Master Servicer, Special Servicer or other specified person, be distributed to
the holders of the Certificates of such series on the next succeeding
Distribution Date. Consequently, if a prepayment on any Mortgage Loan is
distributable to Certificateholders on a particular Distribution Date, but such
prepayment is not accompanied by interest thereon to the Due Date for such
Mortgage Loan in the related Due Period, then the interest charged to the
borrower (net of servicing and administrative fees) may be less (such shortfall,
a "Prepayment Interest Shortfall") than the corresponding amount of interest
accrued and otherwise payable on the Certificates of the related series. If and
to the extent that any such shortfall is allocated
<PAGE>
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to a class of Offered Certificates, the yield thereon will be adversely
affected. The Prospectus Supplement for each series of Certificates will
describe the manner in which any such shortfalls will be allocated among the
classes of such Certificates. The related Prospectus Supplement will also
describe any amounts available to offset such shortfalls.
Yield and Prepayment Considerations
A Certificate's yield to maturity will be affected by the rate of principal
payments on the Mortgage Loans in the related Trust Fund and the allocation
thereof to reduce the principal balance (or notional amount, if applicable) of
such Certificate. The rate of principal payments on the Mortgage Loans in any
Trust Fund will in turn be affected by the amortization schedules thereof
(which, in the case of ARM Loans, may change periodically to accommodate
adjustments to the Mortgage Rates thereon), the dates on which any balloon
payments are due, and the rate of principal prepayments thereon (including for
this purpose, voluntary prepayments by borrowers and also prepayments resulting
from liquidations of Mortgage Loans due to defaults, casualties or condemnations
affecting the related Mortgaged Properties, or purchases of Mortgage Loans out
of the related Trust Fund). Because the rate of principal prepayments on the
Mortgage Loans in any Trust Fund will depend on future events and a variety of
factors (as described below), no assurance can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend upon
the degree to which they are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans in the related Trust
Fund are in turn distributed on such Certificates (or, in the case of a class of
Stripped Interest Certificates, result in the reduction of the Notional Amount
thereof). An investor should consider, in the case of any Offered Certificate
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans in the related Trust Fund could result
in an actual yield to such investor that is lower than the anticipated yield
and, in the case of any Offered Certificate purchased at a premium, the risk
that a faster than anticipated rate of principal payments on such Mortgage Loans
could result in an actual yield to such investor that is lower than the
anticipated yield. In addition, if an investor purchases an Offered Certificate
at a discount (or premium), and principal payments are made in reduction of the
principal balance or notional amount of such investor's Offered Certificates at
a rate slower (or faster) than the rate anticipated by the investor during any
particular period, any consequent adverse effects on such investor's yield would
not be fully offset by a subsequent like increase (or decrease) in the rate of
principal payments.
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related Trust Fund or (ii) equal the Certificate
Balances of one or more of the other classes of Certificates of the same series.
Accordingly, the yield on such Stripped Interest Certificates will be inversely
related to the rate at which payments and other collections of principal are
received on such Mortgage Assets or distributions are made in reduction of the
Certificate Balances of such classes of Certificates, as the case may be.
Consistent with the foregoing, if a class of Certificates of any series
consists of Stripped Interest Certificates or Stripped Principal Certificates, a
lower than anticipated rate of principal prepayments on the Mortgage Loans in
the related Trust Fund will negatively affect the yield to investors in Stripped
Principal Certificates, and a higher than anticipated rate of principal
prepayments on such Mortgage Loans will negatively affect the yield to investors
in Stripped Interest Certificates. If the Offered Certificates of a series
include any such Certificates, the related Prospectus Supplement will include a
table showing the effect of various constant assumed levels of prepayment on
yields on such Certificates. Such tables will be intended to illustrate the
sensitivity of yields to various constant assumed prepayment rates and will not
be intended to predict, or to provide information that will enable investors to
predict, yields or prepayment rates.
The extent of prepayments of principal of the Mortgage Loans in any Trust
Fund may be affected by a number of factors, including, without limitation, the
availability of mortgage credit, the relative economic vitality of the area in
which
<PAGE>
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the Mortgaged Properties are located, the quality of management of the Mortgaged
Properties, the servicing of the Mortgage Loans, possible changes in tax laws
and other opportunities for investment. In general, those factors which increase
the attractiveness of selling a Mortgaged Property or refinancing a Mortgage
Loan or which enhance a borrower's ability to do so, as well as those factors
which increase the likelihood of default under a Mortgage Loan, would be
expected to cause the rate of prepayment in respect of any Mortgage Asset Pool
to accelerate. In contrast, those factors having an opposite effect would be
expected to cause the rate of prepayment of any Mortgage Asset Pool to slow.
The rate of principal payments on the Mortgage Loans in any Trust Fund may
also be affected by the existence of Lock-out Periods and requirements that
principal prepayments be accompanied by Prepayment Premiums, and by the extent
to which such provisions may be practicably enforced. To the extent enforceable,
such provisions could constitute either an absolute prohibition (in the case of
a Lock-out Period) or a disincentive (in the case of a Prepayment Premium) to a
borrower's voluntarily prepaying its Mortgage Loan, thereby slowing the rate of
prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be affected
by prevailing market interest rates for mortgage loans of a comparable type,
term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Even in the case of ARM Loans, as prevailing market interest
rates decline, and without regard to whether the Mortgage Rates on such ARM
Loans decline in a manner consistent therewith, the related borrowers may have
an increased incentive to refinance for purposes of either (i) converting to a
fixed rate loan and thereby "locking in" such rate or (ii) taking advantage of a
different index, margin or rate cap or floor on another adjustable rate mortgage
loan. Therefore, as prevailing market interest rates decline, prepayment speeds
would be expected to accelerate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits. The Depositor
makes no representation as to the particular factors that will affect the
prepayment of the Mortgage Loans in any Trust Fund, as to the relative
importance of such factors, as to the percentage of the principal balance of
such Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment on such Mortgage Loans.
Weighted Average Life and Maturity
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average life
of one or more classes of the Certificates of such series. Unless otherwise
specified in the related Prospectus Supplement, weighted average life refers to
the average amount of time that will elapse from the date of issuance of an
instrument until each dollar allocable as principal of such instrument is repaid
to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related Mortgage
Loans, whether in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes voluntary prepayments by borrowers and
also prepayments resulting from liquidations of Mortgage Loans due to default,
casualties or condemnations affecting the related Mortgaged Properties and
purchases of Mortgage Loans out of the related Trust Fund), is paid to such
class. Prepayment rates on loans are commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents
an assumed constant rate of prepayment each month (expressed as an annual
percentage) relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage)
<PAGE>
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relative to the then outstanding principal balance of a pool of mortgage loans,
with different prepayment assumptions often expressed as percentages of SPA. For
example, a prepayment assumption of 100% of SPA assumes prepayment rates of 0.2%
per annum of the then outstanding principal balance of such loans in the first
month of the life of the loans and an additional 0.2% per annum in each month
thereafter until the thirtieth month. Beginning in the thirtieth month, and in
each month thereafter during the life of the loans, 100% of SPA assumes a
constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. Thus, it is unlikely that the
prepayment experience of the Mortgage Loans included in any Trust Fund will
conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Certificates of such series with a Certificate Balance,
and the percentage of the initial Certificate Balance of each such class that
would be outstanding on specified Distribution Dates, based on the assumptions
stated in such Prospectus Supplement, including assumptions that prepayments on
the related Mortgage Loans are made at rates corresponding to various
percentages of CPR or SPA, or at such other rates specified in such Prospectus
Supplement. Such tables and assumptions will illustrate the sensitivity of the
weighted average lives of the Certificates to various assumed prepayment rates
and will not be intended to predict, or to provide information that will enable
investors to predict, the actual weighted average lives of the Certificates.
Other Factors Affecting Yield, Weighted Average Life and Maturity
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage Loans
included in a particular Trust Fund may require that balloon payments be made at
maturity. Because the ability of a borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a possibility that Mortgage Loans that require
balloon payments may default at maturity, or that the maturity of such a
Mortgage Loan may be extended in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things, bankruptcy
of the borrower or adverse conditions in the market where the property is
located. In order to minimize losses on defaulted Mortgage Loans, the Master
Servicer or the Special Servicer, to the extent and under the circumstances set
forth herein and in the related Prospectus Supplement, may be authorized to
modify Mortgage Loans that are in default or as to which a payment default is
imminent. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan may delay distributions of principal on a class of
Offered Certificates and thereby extend the weighted average life of such
Certificates and, if such Certificates were purchased at a discount, reduce the
yield thereon.
Negative Amortization. The weighted average life of a class of Certificates
can be affected by Mortgage Loans that permit negative amortization to occur
(that is, Mortgage Loans that provide for the current payment of interest
calculated at a rate lower than the rate at which interest accrues thereon, with
the unpaid portion of such interest being added to the related principal
balance). Negative amortization on one or more Mortgage Loans in any Trust Fund
may result in negative amortization on the Offered Certificates of the related
series. The related Prospectus Supplement will describe, if applicable, the
manner in which negative amortization in respect of the Mortgage Loans in any
Trust Fund is allocated among the respective classes of Certificates of the
related series. The portion of any Mortgage Loan negative amortization allocated
to a class of Certificates may result in a deferral of some or all of the
interest payable thereon, which deferred interest may be added to the
Certificate Balance thereof. In addition, an ARM Loan that permits negative
amortization would be expected during a period of increasing interest rates to
amortize at a slower rate (and perhaps not at all) than if interest rates were
declining or were remaining constant. Such slower rate of Mortgage Loan
amortization would correspondingly be reflected
<PAGE>
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in a slower rate of amortization for one or more classes of Certificates of the
related series. Accordingly, the weighted average lives of Mortgage Loans that
permit negative amortization (and that of the classes of Certificates to which
any such negative amortization would be allocated or that would bear the effects
of a slower rate of amortization on such Mortgage Loans) may increase as a
result of such feature.
Negative amortization may occur in respect of an ARM Loan that (i) limits
the amount by which its scheduled payment may adjust in response to a change in
its Mortgage Rate, (ii) provides that its scheduled payment will adjust less
frequently than its Mortgage Rate or (iii) provides for constant scheduled
payments notwithstanding adjustments to its Mortgage Rate. Accordingly, during a
period of declining interest rates, the scheduled payment on such a Mortgage
Loan may exceed the amount necessary to amortize the loan fully over its
remaining amortization schedule and pay interest at the then applicable Mortgage
Rate, thereby resulting in the accelerated amortization of such Mortgage Loan.
Any such acceleration in amortization of its principal balance will shorten the
weighted average life of such Mortgage Loan and, correspondingly, the weighted
average lives of those classes of Certificates entitled to a portion of the
principal payments on such Mortgage Loan.
The extent to which the yield on any Offered Certificate will be affected
by the inclusion in the related Trust Fund of Mortgage Loans that permit
negative amortization, will depend upon (i) whether such Offered Certificate was
purchased at a premium or a discount and (ii) the extent to which the payment
characteristics of such Mortgage Loans delay or accelerate the distributions of
principal on such Certificate (or, in the case of a Stripped Interest
Certificate, delay or accelerate the reduction of the notional amount thereof).
See "-Yield and Prepayment Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance with
their terms will affect the weighted average lives of those Mortgage Loans and,
accordingly, the weighted average lives of and yields on the Certificates of the
related series. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceedings or otherwise, may also
have an effect upon the payment patterns of particular Mortgage Loans and thus
the weighted average lives of and yields on the Certificates of the related
series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
Offered Certificates of any series will directly depend on the extent to which
such holders are required to bear the effects of any losses or shortfalls in
collections arising out of defaults on the Mortgage Loans in the related Trust
Fund and the timing of such losses and shortfalls. In general, the earlier that
any such loss or shortfall occurs, the greater will be the negative effect on
yield for any class of Certificates that is required to bear the effects
thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by (i) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of Certificates and/or (ii)
establishing a priority of payments among such classes of Certificates.
The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
<PAGE>
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Additional Certificate Amortization. In addition to entitling the holders
thereof to a specified portion (which may during specified periods range from
none to all) of the principal payments received on the Mortgage Assets in the
related Trust Fund, one or more classes of Certificates of any series, including
one or more classes of Offered Certificates of such series, may provide for
distributions of principal thereof from (i) amounts attributable to interest
accrued but not currently distributable on one or more classes of Accrual
Certificates, (ii) Excess Funds or (iii) any other amounts described in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, "Excess Funds" will, in general, represent that portion
of the amounts distributable in respect of the Certificates of any series on any
Distribution Date that represent (i) interest received or advanced on the
Mortgage Assets in the related Trust Fund that is in excess of the interest
currently accrued on the Certificates of such series, or (ii) Prepayment
Premiums, payments from Equity Participations or any other amounts received on
the Mortgage Assets in the related Trust Fund that do not constitute interest
thereon or principal thereof.
The amortization of any class of Certificates out of the sources described
in the preceding paragraph would shorten the weighted average life of such
Certificates and, if such Certificates were purchased at a premium, reduce the
yield thereon. The related Prospectus Supplement will discuss the relevant
factors to be considered in determining whether distributions of principal of
any class of Certificates out of such sources is likely to have any material
effect on the rate at which such Certificates are amortized and the consequent
yield with respect thereto.
THE DEPOSITOR
The Depositor is a special purpose corporation incorporated in the State of
Delaware on March 22, 1996, for the purpose of engaging in the business, among
other things, of acquiring and depositing mortgage assets in trust in exchange
for certificates evidencing interest in such trusts and selling or otherwise
distributing such certificates. The Depositor is not an affiliate of Deutsche
Bank AG. The principal executive offices of the Depositor are located at One
International Place, Room 608, Boston, Massachusetts 02110. Its telephone number
is (617) 951-7690. The Depositor's capitalization is nominal. All of the shares
of capital stock of the Depositor are held by The Deutsche Mortgage & Asset
Receiving Trust, a Massachusetts charitable lead trust (the "DMARC Trust")
formed by J H Management Corporation and J H Holdings Corporation, both of which
are Massachusetts corporations. J H Holdings Corporation is the trustee of the
DMARC Trust, which holds no assets other than the stock of the Depositor. All of
the stock of J H Holdings Corporation and of J H Management Corporation is held
by the 1960 Trust, an independent charitable organization qualified under
Section 501(c)(3) of the Code, and operated for the benefit of a Massachusetts
charitable institution.
None of the Depositor, J H Management Corporation, Deutsche Bank A.G. or
any of their respective affiliates will insure or guarantee distributions on the
Certificates of any series.
DEUTSCHE BANK AG
It is anticipated that the assets conveyed to the Trust Fund by the
Depositor will have been acquired by the Depositor from Deutsche Bank AG or an
affiliate thereof. Deutsche Bank AG is the largest banking institution in the
Federal Republic of Germany and one of the largest in the world. It is the
parent company of a group (the "Deutsche Bank Group") consisting of commercial
banks, investment banking and fund management companies, mortgage banks and
property finance companies, installment financing and leasing companies,
insurance companies, research and consultancy companies and other domestic and
foreign companies. The Deutsche Bank Group employs over 74,000 staff members at
more than 2,400 branches and offices around the world.
<PAGE>
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DESCRIPTION OF THE CERTIFICATES
General
Each series of Certificates will represent the entire beneficial ownership
interest in the Trust Fund created pursuant to the related Pooling Agreement. As
described in the related Prospectus Supplement, the Certificates of each series,
including the Offered Certificates of such series, may consist of one or more
classes of Certificates that, among other things: (i) provide for the accrual of
interest on the Certificate Balance or Notional Amount thereof at a fixed,
variable or adjustable rate; (ii) constitute Senior Certificates or Subordinate
Certificates; (iii) constitute Stripped Interest Certificates or Stripped
Principal Certificates; (iv) provide for distributions of interest thereon or
principal thereof that commence only after the occurrence of certain events,
such as the retirement of one or more other classes of Certificates of such
series; (v) provide for distributions of principal thereof to be made, from time
to time or for designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower) than
the rate at which payments or other collections of principal are received on the
Mortgage Assets in the related Trust Fund; (vi) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology; or (vii) provide for
distributions based on collections on the Mortgage Assets in the related Trust
Fund attributable to Prepayment Premiums and Equity Participations.
If so specified in the related Prospectus Supplement, a class of
Certificates may have two or more component parts, each having characteristics
that are otherwise described herein as being attributable to separate and
distinct classes. For example, a class of Certificates may have a Certificate
Balance on which it accrues interest at a fixed, variable or adjustable rate.
Such class of Certificates may also have certain characteristics attributable to
Stripped Interest Certificates insofar as it may also entitle the holders
thereof to distributions of interest accrued on a Notional Amount at a different
fixed, variable or adjustable rate. In addition, a class of Certificates may
accrue interest on one portion of its Certificate Balance at one fixed, variable
or adjustable rate and on another portion of its Certificate Balance at a
different fixed, variable or adjustable rate.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the principal balances or, in case of certain
classes of Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully registered,
definitive form (such Certificates, "Definitive Certificates") or may be offered
in book-entry format (such Certificates, "Book-Entry Certificates") through the
facilities of DTC. The Offered Certificates of each series (if issued as
Definitive Certificates) may be transferred or exchanged, subject to any
restrictions on transfer described in the related Prospectus Supplement, at the
location specified in the related Prospectus Supplement, without the payment of
any service charges, other than any tax or other governmental charge payable in
connection therewith. Interests in a class of Book-Entry Certificates will be
transferred on the book-entry records of DTC and its participating
organizations. If so specified in the related Prospectus Supplement,
arrangements may be made for clearance and settlement through CEDEL, S.A. or the
Euroclear System, if they are participants in DTC.
Distributions
Distributions on the Certificates of each series will be made on each
Distribution Date from the Available Distribution Amount for such series and
such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the "Available Distribution Amount" for any series of Certificates
and any Distribution Date will refer to the total of all payments or other
collections (or advances in lieu thereof) on, under or in respect of the
Mortgage Assets and any other assets included
<PAGE>
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in the related Trust Fund that are available for distribution to the holders of
Certificates of such series on such date. The particular components of the
Available Distribution Amount for any series and Distribution Date will be more
specifically described in the related Prospectus Supplement. In general, the
Distribution Date for a series of Certificates will be the 25th day of each
month (or, if any such 25th day is not a business day, the next succeeding
business day), commencing in the month immediately following the month in which
such series of Certificates is issued.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such class
in proportion to the respective Percentage Interests evidenced thereby unless
otherwise specified in the related Prospectus Supplement. Payments will be made
either by wire transfer in immediately available funds to the account of a
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder has provided the person required to make
such payments with wiring instructions no later than the related Record Date or
such other date specified in the related Prospectus Supplement (and, if so
provided in the related Prospectus Supplement, such Certificateholder holds
Certificates in the requisite amount or denomination specified therein), or by
check mailed to the address of such Certificateholder as it appears on the
Certificate Register; provided, however, that the final distribution in
retirement of any class of Certificates (whether Definitive Certificates or
Book-Entry Certificates) will be made only upon presentation and surrender of
such Certificates at the location specified in the notice to Certificateholders
of such final distribution. The undivided percentage interest (the "Percentage
Interest") represented by an Offered Certificate of a particular class will be
equal to the percentage obtained by dividing the initial principal balance or
notional amount of such Certificate by the initial Certificate Balance or
Notional Amount of such class.
Distributions of Interest on the Certificates
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC Residual
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which in each case may be fixed, variable or adjustable. The related
Prospectus Supplement will specify the Pass-Through Rate or, in the case of a
variable or adjustable Pass-Through Rate, the method for determining the
Pass-Through Rate, for each class of Offered Certificates. Unless otherwise
specified in the related Prospectus Supplement, interest on the Certificates of
each series will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Distributions of interest in respect of any class of Certificates (other
than a class of Accrual Certificates, which will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement, and other than
any class of Stripped Principal Certificates or REMIC Residual Certificates that
is not entitled to any distributions of interest) will be made on each
Distribution Date based on the Accrued Certificate Interest for such class and
such Distribution Date, subject to the sufficiency of that portion, if any, of
the Available Distribution Amount allocable to such class on such Distribution
Date. Prior to the time interest is distributable on any class of Accrual
Certificates, the amount of Accrued Certificate Interest otherwise distributable
on such class will be added to the Certificate Balance thereof on each
Distribution Date or otherwise deferred as described in the related Prospectus
Supplement. With respect to each class of Certificates (other than certain
classes of Stripped Interest Certificates and certain classes of REMIC Residual
Certificates), the "Accrued Certificate Interest" for each Distribution Date
will be equal to interest at the applicable Pass-Through Rate accrued for a
specified period (generally the most recently ended calendar month) on the
outstanding Certificate Balance of such class of Certificates immediately prior
to such Distribution Date. Unless otherwise
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provided in the related Prospectus Supplement, the Accrued Certificate Interest
for each Distribution Date on a class of Stripped Interest Certificates will be
similarly calculated except that it will accrue on a Notional Amount that is
either (i) based on the principal balances of some or all of the Mortgage Assets
in the related Trust Fund or (ii) equal to the Certificate Balances of one or
more other classes of Certificates of the same series. Reference to a Notional
Amount with respect to a class of Stripped Interest Certificates is solely for
convenience in making certain calculations and does not represent the right to
receive any distributions of principal. If so specified in the related
Prospectus Supplement, the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Certificates, that may
otherwise be added to the Certificate Balance of) one or more classes of the
Certificates of a series may be reduced to the extent that any Prepayment
Interest Shortfalls, as described under "Yield and Maturity
Considerations-Certain Shortfalls in Collections of Interest", exceed the amount
of any sums that are applied to offset the amount of such shortfalls. The
particular manner in which such shortfalls will be allocated among some or all
of the classes of Certificates of that series will be specified in the related
Prospectus Supplement. The related Prospectus Supplement will also describe the
extent to which the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise be
added to the Certificate Balance of) a class of Offered Certificates may be
reduced as a result of any other contingencies, including delinquencies, losses
and deferred interest on or in respect of the Mortgage Assets in the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement, any
reduction in the amount of Accrued Certificate Interest otherwise distributable
on a class of Certificates by reason of the allocation to such class of a
portion of any deferred interest on or in respect of the Mortgage Assets in the
related Trust Fund will result in a corresponding increase in the Certificate
Balance of such class. See "Risk Factors-Effect of Prepayments on Average Life
of Certificates" and "-Effect of Prepayments on Yield of Certificates" and
"Yield and Maturity Considerations-Certain Shortfalls in Collections of
Interest".
Distributions of Principal of the Certificates
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of Certificates of such class will be
entitled to receive as principal out of the future cash flow on the Mortgage
Assets and other assets included in the related Trust Fund. The outstanding
Certificate Balance of a class of Certificates will be reduced by distributions
of principal made thereon from time to time and, if and to the extent so
provided in the related Prospectus Supplement, further by any losses incurred in
respect of the related Mortgage Assets allocated thereto from time to time. In
turn, the outstanding Certificate Balance of a class of Certificates may be
increased as a result of any deferred interest on or in respect of the related
Mortgage Assets being allocated thereto from time to time, and will be
increased, in the case of a class of Accrual Certificates prior to the
Distribution Date on which distributions of interest thereon are required to
commence, by the amount of any Accrued Certificate Interest in respect thereof
(reduced as described above). The initial aggregate Certificate Balance of all
classes of a series of Certificates will not be greater than the aggregate
outstanding principal balance of the related Mortgage Assets as of a specified
date (the "Cut-off Date"), after application of scheduled payments due on or
before such date, whether or not received. The initial Certificate Balance of
each class of a series of Certificates will be specified in the related
Prospectus Supplement. As and to the extent described in the related Prospectus
Supplement, distributions of principal with respect to a series of Certificates
will be made on each Distribution Date to the holders of the class or classes of
Certificates of such series entitled thereto until the Certificate Balances of
such Certificates have been reduced to zero. Distributions of principal with
respect to one or more classes of Certificates may be made at a rate that is
faster (and, in some cases, substantially faster) than the rate at which
payments or other collections of principal are received on the Mortgage Assets
in the related Trust Fund. Distributions of principal with respect to one or
more classes of Certificates may not commence until the occurrence of certain
events, such as the retirement of one or more other classes of Certificates of
the same series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund.
Distributions of principal with respect to one or more classes of Certificates
(each such class, a "Controlled Amortization
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Class") may be made, subject to available funds, based on a specified principal
payment schedule. Distributions of principal with respect to one or more other
classes of Certificates (each such class, a "Companion Class") may be contingent
on the specified principal payment schedule for a Controlled Amortization Class
of the same series and the rate at which payments and other collections of
principal on the Mortgage Assets in the related Trust Fund are received. Unless
otherwise specified in the related Prospectus Supplement, distributions of
principal of any class of Offered Certificates will be made on a pro rata basis
among all of the Certificates of such class.
Distributions on the Certificates in Respect of Prepayment Premiums or in
Respect of Equity Participations
If so provided in the related Prospectus Supplement, Prepayment Premiums or
payments in respect of Equity Participations received on or in connection with
the Mortgage Assets in any Trust Fund will be distributed on each Distribution
Date to the holders of the class of Certificates of the related series entitled
thereto in accordance with the provisions described in such Prospectus
Supplement. Alternatively, such items may be retained by the Depositor or any of
its affiliates or by any other specified person and/or may be excluded as Trust
Assets.
Allocation of Losses and Shortfalls
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by (i) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of Certificates and/or (ii)
establishing a priority of payments among such classes of Certificates. See
"Description of Credit Support".
Advances in Respect of Delinquencies
If and to the extent provided in the related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the Master Servicer, the Special Servicer,
the Trustee, any provider of Credit Support and/or any other specified person
may be obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of Certificates for such Distribution Date, an
amount up to the aggregate of any payments of principal (other than the
principal portion of any balloon payments) and interest that were due on or in
respect of such Mortgage Loans during the related Due Period and were delinquent
on the related Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made out of a specific entity's own funds will be reimbursable out of
related recoveries on the Mortgage Loans (including amounts drawn under any fund
or instrument constituting Credit Support) respecting which such advances were
made (as to any Mortgage Loan, "Related Proceeds") and such other specific
sources as may be identified in the related Prospectus Supplement, including, in
the case of a series that includes one or more classes of Subordinate
Certificates, if so identified, collections on other Mortgage Assets in the
related Trust Fund that would otherwise be distributable to the holders of one
or more classes of such Subordinate Certificates. No advance will be required to
be made by a Master Servicer, Special Servicer or Trustee if, in the judgment of
the Master Servicer, Special Servicer or Trustee, as the case may be, such
advance would not be recoverable from Related Proceeds or another specifically
identified source (any such advance, a "Nonrecoverable Advance"); and, if
previously made by a Master Servicer, Special Servicer or Trustee, a
Nonrecoverable Advance will be
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reimbursable thereto from any amounts in the related Certificate Account prior
to any distributions being made to the related series of Certificateholders.
If advances have been made by a Master Servicer, Special Servicer, Trustee
or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will be
required to replace such funds in such Certificate Account on or prior to any
future Distribution Date to the extent that funds in such Certificate Account on
such Distribution Date are less than payments required to be made to the related
series of Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer, Special Servicer,
Trustee or other entity to make advances may be secured by a cash advance
reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest on certain or all of
such advances for a specified period during which such advances are outstanding
at the rate specified in such Prospectus Supplement, and such entity will be
entitled to payment of such interest periodically from general collections on
the Mortgage Loans in the related Trust Fund prior to any payment to the related
series of Certificateholders or as otherwise provided in the related Pooling
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a party
to the related MBS Agreement.
Reports to Certificateholders
On each Distribution Date, together with the distribution to the holders of
each class of the Offered Certificates of a series, a Master Servicer, Manager
or Trustee, as provided in the related Prospectus Supplement, will forward to
each such holder, a statement (a "Distribution Date Statement") that, unless
otherwise provided in the related Prospectus Supplement, will set forth, among
other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of Offered
Certificates that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of such class of Offered
Certificates that was applied to pay Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of such class
of Offered Certificates that was allocable to (A) Prepayment Premiums and (B)
payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of Offered Certificates are entitled;
(v) if the related Trust Fund includes Mortgage Loans, the aggregate amount
of advances included in such distribution;
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(vi) if the related Trust Fund includes Mortgage Loans, the amount of
servicing compensation received by the related Master Servicer (and, if payable
directly out of the related Trust Fund, by any Special Servicer and any
Sub-Servicer) and, if the related Trust Fund includes MBS, the amount of
administrative compensation received by the MBS Administrator;
(vii) information regarding the aggregate principal balance of the related
Mortgage Assets on or about such Distribution Date;
(viii) if the related Trust Fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of such Mortgage Loans that
are delinquent;
(ix) if the related Trust Fund includes Mortgage Loans, information
regarding the aggregate amount of losses incurred and principal prepayments made
with respect to such Mortgage Loans during the related Prepayment Period (that
is, the specified period, generally corresponding in length to the period
between Distribution Dates, during which prepayments and other unscheduled
collections on the Mortgage Loans in the related Trust Fund must be received in
order to be distributed on a particular Distribution Date);
(x) the Certificate Balance or Notional Amount, as the case may be, of such
class of Certificates at the close of business on such Distribution Date,
separately identifying any reduction in such Certificate Balance or Notional
Amount due to the allocation of any losses in respect of the related Mortgage
Assets, any increase in such Certificate Balance or Notional Amount due to the
allocation of any negative amortization in respect of the related Mortgage
Assets and any increase in the Certificate Balance of a class of Accrual
Certificates, if any, in the event that Accrued Certificate Interest has been
added to such balance;
(xi) if such class of Offered Certificates has a variable Pass-Through Rate
or an adjustable Pass-Through Rate, the Pass-Through Rate applicable thereto for
such Distribution Date and, if determinable, for the next succeeding
Distribution Date;
(xii) the amount deposited in or withdrawn from any reserve fund on such
Distribution Date, and the amount remaining on deposit in such reserve fund as
of the close of business on such Distribution Date;
(xiii) if the related Trust Fund includes one or more instruments of Credit
Support, such as a letter of credit, an insurance policy and/or a surety bond,
the amount of coverage under each such instrument as of the close of business on
such Distribution Date; and
(xiv) the amount of Credit Support being afforded by any classes of
Subordinate Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per specified
denomination of the relevant class of Offered Certificates or as a percentage.
The Prospectus Supplement for each series of Certificates may describe
additional information to be included in reports to the holders of the Offered
Certificates of such series.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer, Manager or Trustee for a series of Certificates, as the case
may be, will be required to furnish to each person who at any time during the
calendar year was a holder of an Offered Certificate of such series a statement
containing the information set forth in subclauses (i)-(iii) above, aggregated
for such calendar year or the applicable portion thereof during which such
person was a Certificateholder. Such obligation will be deemed to have been
satisfied to the extent that substantially comparable information is provided
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pursuant to any requirements of the Code as are from time to time in force. See,
however, "-Book-Entry Registration and Definitive Certificates" below.
If the Trust Fund for a series of Certificates includes MBS, the ability of
the related Master Servicer, Manager or Trustee, as the case may be, to include
in any Distribution Date Statement information regarding the mortgage loans
underlying such MBS will depend on the reports received with respect to such
MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the Offered Certificates of that series
in connection with distributions made to them. The Depositor will provide the
same information with respect to any MBSs in its own reports that were publicly
offered and the reports the related MBS Issuer provides to the Trustee if
privately issued.
Voting Rights
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes of
such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except with
respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement. See
"Description of the Pooling Agreements-Amendment". The holders of specified
amounts of Certificates of a particular series will have the right to act as a
group to remove the related Trustee and also upon the occurrence of certain
events which if continuing would constitute an Event of Default on the part of
the related Master Servicer, Special Servicer or REMIC Administrator. See
"Description of the Pooling Agreements-Events of Default", "-Rights Upon Event
of Default" and "-Resignation and Removal of the Trustee".
Termination
The obligations created by the Pooling Agreement for each series of
Certificates will terminate following (i) the final payment or other liquidation
of the last Mortgage Asset subject thereto or the disposition of all property
acquired upon foreclosure of any Mortgage Loan subject thereto and (ii) the
payment (or provision for payment) to the Certificateholders of that series of
all amounts required to be paid to them pursuant to such Pooling Agreement.
Written notice of termination of a Pooling Agreement will be given to each
Certificateholder of the related series, and the final distribution will be made
only upon presentation and surrender of the Certificates of such series at the
location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the repurchase
of the Mortgage Assets in the related Trust Fund by the party or parties
specified therein, under the circumstances and in the manner set forth therein.
In addition, if so provided in the related Prospectus Supplement upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount or upon a specified date, a
party designated therein may be authorized or required to solicit bids for the
purchase of all the Mortgage Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth therein. The solicitation of
bids will be conducted in a commercially reasonable manner and, generally,
assets will be sold at their fair market value. Circumstances may arise in which
such fair market value may be less than the unpaid balance of the Mortgage Loans
sold and therefore, as a result of such a sale, the Certificateholders of one or
more Classes of Certificates may receive an amount less than the Certificate
Balance of, and accrued unpaid interest on, their Certificates.
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Book-Entry Registration and Definitive Certificates
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of the Offered Certificates of such series will be offered
in book-entry format through the facilities of DTC, and each such class will be
represented by one or more global Certificates registered in the name of The
Depository Trust Company ("DTC") or its nominee. If so provided in the
Prospectus Supplement, arrangements may be made for clearance and settlement
through the Euroclear System or CEDEL, S.A., if they are participants in DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking corporation" 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 Exchange Act. DTC
was created to hold securities for its participating organizations ("DTC
Participants") and facilitate the clearance and settlement of securities
transactions between DTC Participants through electronic computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement of
securities certificates. DTC Participants that maintain accounts with DTC
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. DTC is owned by a number of
DTC Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with a DTC Participant that maintains as account with
DTC. The rules applicable to DTC and DTC Participants are on file with the
Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through, and 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 Certificates 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). Therefore, the beneficial owner must rely on the foregoing
procedures to evidence its beneficial ownership of such Certificates. The
beneficial ownership interest of the owner of a Book-Entry Certificate (a
"Certificate Owner") may only be transferred by compliance with the rules,
regulations and procedures of such Financial Intermediaries and DTC
Participants.
DTC has no knowledge of the actual Certificate Owners; DTC's records
reflect only the identity of the DTC Participants to whose accounts such
Certificates are credited, which may or may not be the Certificate Owners. The
DTC Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants
and by DTC Participants to Financial Intermediaries and Certificate Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such date.
Disbursement of such distributions by DTC Participants to Financial
Intermediaries and Certificate Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of each such DTC Participant (and not of DTC, the Depositor or
any Trustee, Master Servicer, Special Servicer
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or Manager), subject to any statutory or regulatory requirements as may be in
effect from time to time. Accordingly, under a book-entry system, Certificate
Owners may receive payments after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the only
"Certificateholder" (as such term is used in the related Pooling Agreement) of
Book-Entry Certificates will be the nominee of DTC, and the Certificate Owners
will not be recognized as Certificateholders under the Pooling Agreement.
Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly through
the DTC Participants who in turn will exercise their rights through DTC. The
Depositor has been informed that DTC will take action permitted to be taken by a
Certificateholder under a Pooling Agreement only at the direction of one or more
DTC Participants to whose account with DTC interests in the Book-Entry
Certificates are credited. DTC may take conflicting actions with respect to the
Book-Entry Certificates to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Certificates.
Because DTC can act only on behalf of DTC Participants, who in turn act on
behalf of Financial Intermediaries and certain Certificate Owners, the ability
of a Certificate Owner to pledge its interest in Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of its interest in Book-Entry Certificates, may be limited
due to the lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, 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 such Certificates and the Depositor is unable to locate a
qualified successor or (ii) the Depositor, at its option, elects to terminate
the book-entry system through DTC with respect to such Certificates. Upon the
occurrence of either of the events described in the preceding sentence, DTC will
be required to notify all DTC Participants of the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the certificate or
certificates representing a class of Book-Entry Certificates, together with
instructions for registration, the Trustee for the related series or other
designated party will be required to issue to the Certificate Owners identified
in such instructions the Definitive Certificates to which they are entitled, and
thereafter the holders of such Definitive Certificates will be recognized as
"Certificateholders" under and within the meaning of the related Pooling
Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
General
The Certificates of each series will be issued pursuant to a Pooling
Agreement. In general, the parties to a Pooling Agreement will include the
Depositor, the Trustee, the Master Servicer, the Special Servicer and, if one or
more REMIC elections have been made with respect to the Trust Fund, the REMIC
Administrator. However, a Pooling Agreement that relates to a Trust Fund that
includes MBS may include a Manager as a party, but may not include a Master
Servicer, Special Servicer or other servicer as a party. All parties to each
Pooling Agreement under which Certificates of a series are issued will be
identified in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Mortgage Asset Seller or an affiliate thereof may
perform the functions of Master Servicer, Special Servicer, Manager or REMIC
Administrator. If so specified in the related Prospectus Supplement, the Master
Servicer may also perform the duties of Special Servicer, and the Master
Servicer, the Special Servicer or the Trustee may also perform the duties of
REMIC Administrator. Any party to a Pooling Agreement or any affiliate thereof
may own Certificates issued thereunder; however, except in limited circumstances
(including with respect to required consents to certain amendments to a Pooling
Agreement),
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Certificates issued thereunder that are held by the Master Servicer or Special
Servicer for the related Series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. However, the
provisions of each Pooling Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions that may appear in a Pooling
Agreement under which Certificates that evidence interests in Mortgage Loans
will be issued. The Prospectus Supplement for a series of Certificates will
describe any provision of the related Pooling Agreement that materially differs
from the description thereof contained in this Prospectus and, if the related
Trust Fund includes MBS, will summarize all of the material provisions of the
related Pooling Agreement. The summaries herein do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all of
the provisions of the Pooling Agreement for each series of Certificates and the
description of such provisions in the related Prospectus Supplement. The
Depositor will provide a copy of the Pooling Agreement (without exhibits) that
relates to any series of Certificates without charge upon written request of a
holder of a Certificate of such series addressed to it at its principal
executive offices specified herein under "The Depositor".
Assignment of Mortgage Loans; Repurchases
At the time of issuance of any series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Mortgage Loans to
be included in the related Trust Fund, together with, unless otherwise specified
in the related Prospectus Supplement, all principal and interest to be received
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. The Trustee will,
concurrently with such assignment, deliver the Certificates to or at the
direction of the Depositor in exchange for the Mortgage Loans and the other
assets to be included in the Trust Fund for such series. Each Mortgage Loan will
be identified in a schedule appearing as an exhibit to the related Pooling
Agreement. Such schedule generally will include detailed information that
pertains to each Mortgage Loan included in the related Trust Fund, which
information will typically include the address of the related Mortgaged Property
and type of such property; the Mortgage Rate and, if applicable, the applicable
index, gross margin, adjustment date and any rate cap information; the original
and remaining term to maturity; the amortization term; and the original and
outstanding principal balance.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Mortgage Loan to be included in a
Trust Fund, deliver, or cause to be delivered, to the related Trustee (or to a
custodian appointed by the Trustee as described below) the Mortgage Note
endorsed, without recourse, either in blank or to the order of such Trustee (or
its nominee), the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office), an assignment
of the Mortgage in blank or to the Trustee (or its nominee) in recordable form,
together with any intervening assignments of the Mortgage with evidence of
recording thereon (except for any such assignment not returned from the public
recording office), and, if applicable, any riders or modifications to such
Mortgage Note and Mortgage, together with certain other documents at such times
as set forth in the related Pooling Agreement. Such assignments may be blanket
assignments covering Mortgages on Mortgaged Properties located in the same
county, if permitted by law. Notwithstanding the foregoing, a Trust Fund may
include Mortgage Loans where the original Mortgage Note is not delivered to the
Trustee if the Depositor delivers, or causes to be delivered, to the related
Trustee (or such custodian) a copy or a duplicate original of the Mortgage Note,
together with an affidavit certifying that the original thereof has been lost or
destroyed. In addition, if the Depositor cannot deliver, with respect to any
Mortgage Loan, the Mortgage or any intervening assignment with evidence of
recording thereon concurrently with the execution and delivery of the related
Pooling Agreement because of a delay caused by the public recording office, the
Depositor will deliver, or cause to be delivered, to the related Trustee (or
such custodian) a true and correct photocopy of such Mortgage or assignment as
submitted for recording. The
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Depositor will deliver, or cause to be delivered, to the related Trustee (or
such custodian) such Mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office. If the Depositor
cannot deliver, with respect to any Mortgage Loan, the Mortgage or any
intervening assignment with evidence of recording thereon concurrently with the
execution and delivery of the related Pooling Agreement because such Mortgage or
assignment has been lost, the Depositor will deliver, or cause to be delivered,
to the related Trustee (or such custodian) a true and correct photocopy of such
Mortgage or assignment with evidence of recording thereon. Unless otherwise
specified in the related Prospectus Supplement, assignments of Mortgage to the
Trustee (or its nominee) will be recorded in the appropriate public recording
office, except in states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interests in
the Mortgage Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor or the originator of such Mortgage
Loan.
The Trustee (or a custodian appointed by the Trustee) for a series of
Certificates will be required to review the Mortgage Loan documents delivered to
it within a specified period of days after receipt thereof, and the Trustee (or
such custodian) will hold such documents in trust for the benefit of the
Certificateholders of such series. Unless otherwise specified in the related
Prospectus Supplement, if any such document is found to be missing or defective,
and such omission or defect, as the case may be, materially and adversely
affects the interests of the Certificateholders of the related series, the
Trustee (or such custodian) will be required to notify the Master Servicer, the
Special Servicer and the Depositor, and one of such persons will be required to
notify the relevant Mortgage Asset Seller. In that case, and if the Mortgage
Asset Seller cannot deliver the document or cure the defect within a specified
number of days after receipt of such notice, then, except as otherwise specified
below or in the related Prospectus Supplement, the Mortgage Asset Seller will be
obligated to repurchase the related Mortgage Loan from the Trustee at a price
generally equal to the unpaid principal balance thereof, together with accrued
but unpaid interest through a date on or about the date of purchase, or at such
other price as will be specified in the related Prospectus Supplement (in any
event, the "Purchase Price"). If so provided in the Prospectus Supplement for a
series of Certificates, a Mortgage Asset Seller, in lieu of repurchasing a
Mortgage Loan as to which there is missing or defective loan documentation, will
have the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of Certificates, to replace such
Mortgage Loan with one or more other mortgage loans, in accordance with
standards that will be described in the Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation will constitute the sole remedy to holders of the Certificates of any
series or to the related Trustee on their behalf for missing or defective
Mortgage Loan documentation, and neither the Depositor nor, unless it is the
Mortgage Asset Seller, the Master Servicer or the Special Servicer will be
obligated to purchase or replace a Mortgage Loan if a Mortgage Asset Seller
defaults on its obligation to do so.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage Loans
in any Trust Fund and to maintain possession of and, if applicable, to review
the documents relating to such Mortgage Loans, in any case as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Certificates will be set forth in the related Prospectus
Supplement.
Representations and Warranties; Repurchases
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example: (i) the
accuracy of the information set forth for such Mortgage Loan on the schedule of
Mortgage Loans appearing as an exhibit to the related Pooling Agreement; (ii)
the enforceability of the related Mortgage Note and Mortgage and the existence
of title insurance insuring the lien priority of the related Mortgage; (iii) the
Warranting Party's title to the Mortgage Loan and the authority of the
Warranting Party to sell the Mortgage Loan; and (iv) the payment status of the
Mortgage Loan. It
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is expected that in most cases the Warranting Party will be the Mortgage Asset
Seller; however, the Warranting Party may also be an affiliate of the Mortgage
Asset Seller, the Depositor or an affiliate of the Depositor, the Master
Servicer, the Special Servicer or another person acceptable to the Depositor.
The Warranting Party, if other than the Mortgage Asset Seller, will be
identified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Certificateholders of the
related series. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will be
obligated to repurchase such Mortgage Loan from the Trustee at the applicable
Purchase Price. If so provided in the Prospectus Supplement for a series of
Certificates, a Warranting Party, in lieu of repurchasing a Mortgage Loan as to
which a breach has occurred, will have the option, exercisable upon certain
conditions and/or within a specified period after initial issuance of such
series of Certificates, to replace such Mortgage Loan with one or more other
mortgage loans, in accordance with standards that will be described in the
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, this repurchase or substitution obligation will constitute the sole
remedy available to holders of the Certificates of any series or to the related
Trustee on their behalf for a breach of representation and warranty by a
Warranting Party, and neither the Depositor nor the Master Servicer, in either
case unless it is the Warranting Party, will be obligated to purchase or replace
a Mortgage Loan if a Warranting Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan as of a date prior to the date upon which the related
series of Certificates is issued, and thus may not address events that may occur
following the date as of which they were made. However, the Depositor will not
include any Mortgage Loan in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties made in respect of such Mortgage Loan
will not be accurate in all material respects as of the date of issuance. The
date as of which the representations and warranties regarding the Mortgage Loans
in any Trust Fund were made will be specified in the related Prospectus
Supplement.
Collection and Other Servicing Procedures
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer and the Special Servicer for any Mortgage Pool, directly or through
Sub-Servicers, will each be obligated under the related Pooling Agreement to
service and administer the Mortgage Loans in such Mortgage Pool for the benefit
of the related Certificateholders, in accordance with applicable law and further
in accordance with the terms of such Pooling Agreement, such Mortgage Loans and
any instrument of Credit Support included in the related Trust Fund. Subject to
the foregoing, the Master Servicer and the Special Servicer will each have full
power and authority to do any and all things in connection with such servicing
and administration that it may deem necessary and desirable.
As part of its servicing duties, each of the Master Servicer and the
Special Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans that it
services and will be obligated to follow such collection procedures as it would
follow with respect to mortgage loans that are comparable to such Mortgage Loans
and held for its own account, provided (i) such procedures are consistent with
the terms of the related Pooling Agreement and (ii) do not impair recovery under
any instrument of Credit Support included in the related Trust Fund. Consistent
with the foregoing, the Master Servicer and the Special Servicer will each be
permitted, in its discretion, unless otherwise specified in the related
Prospectus Supplement, to waive any Prepayment Premium, late payment charge or
other charge in connection with any Mortgage Loan.
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The Master Servicer and the Special Servicer for any Trust Fund, either
separately or jointly, directly or through Sub-Servicers, will also be required
to perform as to the Mortgage Loans in such Trust Fund various other customary
functions of a servicer of comparable loans, including maintaining escrow or
impound accounts, if required under the related Pooling Agreement, for payment
of taxes, insurance premiums, ground rents and similar items, or otherwise
monitoring the timely payment of those items; attempting to collect delinquent
payments; supervising foreclosures; negotiating modifications; conducting
property inspections on a periodic or other basis; managing (or overseeing the
management of) Mortgaged Properties acquired on behalf of such Trust Fund
through foreclosure, deed-in-lieu of foreclosure or otherwise (each, an "REO
Property"); and maintaining servicing records relating to such Mortgage Loans.
The related Prospectus Supplement will specify when and the extent to which
servicing of a Mortgage Loan is to be transferred from the Master Servicer to
the Special Servicer. In general, and subject to the discussion in the related
Prospectus Supplement, a Special Servicer will be responsible for the servicing
and administration of: (i) Mortgage Loans that are delinquent in respect of a
specified number of scheduled payments; (ii) Mortgage Loans as to which the
related borrower has entered into or consented to bankruptcy, appointment of a
receiver or conservator or similar insolvency proceeding, or the related
borrower has become the subject of a decree or order for such a proceeding which
shall have remained in force undischarged or unstayed for a specified number of
days; and (iii) REO Properties. If so specified in the related Prospectus
Supplement, a Pooling Agreement also may provide that if a default on a Mortgage
Loan has occurred or, in the judgment of the related Master Servicer, a payment
default is reasonably foreseeable, the related Master Servicer may elect to
transfer the servicing thereof, in whole or in part, to the related Special
Servicer. Unless otherwise provided in the related Prospectus Supplement, when
the circumstances no longer warrant a Special Servicer's continuing to service a
particular Mortgage Loan (e.g., the related borrower is paying in accordance
with the forbearance arrangement entered into between the Special Servicer and
such borrower), the Master Servicer will resume the servicing duties with
respect thereto. If and to the extent provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Special Servicer may
perform certain limited duties in respect of Mortgage Loans for which the Master
Servicer is primarily responsible (including, if so specified, performing
property inspections and evaluating financial statements); and a Master Servicer
may perform certain limited duties in respect of any Mortgage Loan for which the
Special Servicer is primarily responsible (including, if so specified,
continuing to receive payments on such Mortgage Loan (including amounts
collected by the Special Servicer), making certain calculations with respect to
such Mortgage Loan and making remittances and preparing certain reports to the
Trustee and/or Certificateholders with respect to such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be responsible for filing and settling claims in respect of particular
Mortgage Loans under any applicable instrument of Credit Support. See
"Description of Credit Support".
A mortgagor's failure to make required Mortgage Loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a mortgagor that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and otherwise to maintain and insure the
related Mortgaged Property. In general, the related Special Servicer will be
required to monitor any Mortgage Loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related Mortgaged Property and take such other actions as it deems necessary
and appropriate. A significant period of time may elapse before the Special
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Special Servicer can make
the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Certificateholders of the related series
may vary considerably depending on the particular Mortgage Loan, the Mortgaged
Property, the mortgagor, the presence of an acceptable party to assume the
Mortgage Loan and the laws of the jurisdiction in which the Mortgaged Property
is located. If a mortgagor files a bankruptcy petition, the Special Servicer may
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not be permitted to accelerate the maturity of the Mortgage Loan or to foreclose
on the related Mortgaged Property for a considerable period of time. See
"Certain Legal Aspects of Mortgage Loans-Bankruptcy Laws."
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. In general, the Master Servicer may approve such a request if
it has determined, exercising its business judgment in accordance with the
applicable servicing standard, that such approval will not adversely affect the
security for, or the timely and full collectability of, the related Mortgage
Loan. Any fee collected by the Master Servicer for processing such request will
be retained by the Master Servicer as additional servicing compensation.
In the case of Mortgage Loans secured by junior liens on the related
Mortgaged Properties, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be required to file (or cause to be filed)
of record a request for notice of any action by a superior lienholder under the
Senior Lien for the protection of the related Trustee's interest, where
permitted by local law and whenever applicable state law does not require that a
junior lienholder be named as a party defendant in foreclosure proceedings in
order to foreclose such junior lienholder's equity of redemption. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
also will be required to notify any superior lienholder in writing of the
existence of the Mortgage Loan and request notification of any action (as
described below) to be taken against the mortgagor or the Mortgaged Property by
the superior lienholder. If the Master Servicer is notified that any superior
lienholder has accelerated or intends to accelerate the obligations secured by
the related Senior Lien, or has declared or intends to declare a default under
the mortgage or the promissory note secured thereby, or has filed or intends to
file an election to have the related Mortgaged Property sold or foreclosed,
then, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and the Special Servicer will each be required to take, on
behalf of the related Trust Fund, whatever actions are necessary to protect the
interests of the related Certificateholders and/or to preserve the security of
the related Mortgage Loan, subject to the application of the REMIC Provisions.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or Special Servicer, as applicable, will be required to advance the
necessary funds to cure the default or reinstate the Senior Lien, if such
advance is in the best interests of the related Certificateholders and the
Master Servicer or Special Servicer, as applicable, determines such advances are
recoverable out of payments on or proceeds of the related Mortgage Loan.
Sub-Servicers
A Master Servicer or Special Servicer may delegate its servicing
obligations in respect of the Mortgage Loans serviced thereby to one or more
third-party servicers (each, a "Sub-Servicer"); provided that, unless otherwise
specified in the related Prospectus Supplement, such Master Servicer or Special
Servicer will remain obligated under the related Pooling Agreement. Unless
otherwise provided in the related Prospectus Supplement, each sub-servicing
agreement between a Master Servicer and a Sub-Servicer (a "Sub-Servicing
Agreement") must provide for servicing of the applicable Mortgage Loans
consistent with the related Pooling Agreement. The Master Servicer and Special
Servicer in respect of any Mortgage Asset Pool will each be required to monitor
the performance of Sub-Servicers retained by it and will have the right to
remove a Sub-Servicer retained by it at any time it considers such removal to be
in the best interests of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, a Master
Servicer or Special Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, irrespective of whether the Master Servicer's or Special
Servicer's compensation pursuant to the related Pooling Agreement is sufficient
to pay such fees. Each Sub-Servicer will be reimbursed by the Master Servicer or
Special Servicer, as the case may be, that retained it for certain expenditures
which it makes, generally to the same extent such Master Servicer or Special
Servicer would be reimbursed under a Pooling Agreement. See "-Certificate
Account" and "-Servicing Compensation and Payment of Expenses".
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Certificate Account
General. The Master Servicer, the Trustee and/or the Special Servicer will,
as to each Trust Fund that includes Mortgage Loans, establish and maintain or
cause to be established and maintained the corresponding Certificate Account,
which will be established so as to comply with the standards of each Rating
Agency that has rated any one or more classes of Certificates of the related
series. A Certificate Account may be maintained as an interest-bearing or a
noninterest-bearing account and the funds held therein may be invested pending
each succeeding Distribution Date in United States government securities and
other obligations that are acceptable to each Rating Agency that has rated any
one or more classes of Certificates of the related series ("Permitted
Investments"). Unless otherwise provided in the related Prospectus Supplement,
any interest or other income earned on funds in a Certificate Account will be
paid to the related Master Servicer, Trustee or Special Servicer as additional
compensation. A Certificate Account may be maintained with the related Master
Servicer, Special Servicer, Trustee or Mortgage Asset Seller or with a
depository institution that is an affiliate of any of the foregoing or of the
Depositor, provided that it complies with applicable Rating Agency standards. If
permitted by the applicable Rating Agency or Agencies, a Certificate Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds representing payments on mortgage loans
owned by the related Master Servicer or Special Servicer or serviced by either
on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the following payments and
collections received or made by the Master Servicer, the Trustee or the Special
Servicer subsequent to the Cut-off Date (other than payments due on or before
the Cut-off Date) are to be deposited in the Certificate Account for each Trust
Fund that includes Mortgage Loans, within a certain period following receipt (in
the case of collections on or in respect of the Mortgage Loans) or otherwise as
provided in the related Pooling Agreement:
(i) all payments on account of principal, including principal prepayments,
on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion thereof retained
by the Master Servicer or the Special Servicer as its servicing compensation or
as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial condemnation of
a Mortgaged Property (other than proceeds applied to the restoration of the
property or released to the related borrower) ("Insurance Proceeds" and
"Condemnation Proceeds", respectively) and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans or
property acquired in respect thereof, by foreclosure or otherwise (such amounts,
together with those amounts listed in clause (vii) below, "Liquidation
Proceeds"), together with the net operating income (less reasonable reserves for
future expenses) derived from the operation of any Mortgaged Properties acquired
by the Trust Fund through foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates;
(v) any advances made with respect to delinquent scheduled payments of
principal and interest on the Mortgage Loans;
(vi) any amounts paid under any Cash Flow Agreement;
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(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller or any
other specified person as described under "-Assignment of Mortgage Loans;
Repurchases" and "-Representations and Warranties; Repurchases", all proceeds of
the purchase of any defaulted Mortgage Loan as described under "-Realization
Upon Defaulted Mortgage Loans", and all proceeds of any Mortgage Asset purchased
as described under "Description of the Certificates-Termination; Retirement of
Certificates";
(viii) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or the Special Servicer and is not
otherwise retained by the Depositor or another specified person, any payments on
account of modification or assumption fees, late payment charges, Prepayment
Premiums or Equity Participations with respect to the Mortgage Loans;
(ix) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy as described
under "-Hazard Insurance Policies";
(x) any amount required to be deposited by the Master Servicer, the Special
Servicer or the Trustee in connection with losses realized on investments for
the benefit of the Master Servicer, the Special Servicer or the Trustee, as the
case may be, of funds held in the Certificate Account; and
(xi) any other amounts received on or in respect of the Mortgage Loans
required to be deposited in the Certificate Account as provided in the related
Pooling Agreement and described in the related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, a Master Servicer, Trustee or
Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund that includes Mortgage Loans for any of the following purposes:
(i) to make distributions to the Certificateholders on each Distribution
Date;
(ii) to pay the Master Servicer or the Special Servicer any servicing fees
not previously retained thereby, such payment to be made out of payments and
other collections of interest on the particular Mortgage Loans as to which such
fees were earned;
(iii) to reimburse the Master Servicer, the Special Servicer or any other
specified person for unreimbursed advances of delinquent scheduled payments of
principal and interest made by it, and certain unreimbursed servicing expenses
incurred by it, with respect to Mortgage Loans in the Trust Fund and properties
acquired in respect thereof, such reimbursement to be made out of amounts that
represent late payments collected on the particular Mortgage Loans, Liquidation
Proceeds, Insurance Proceeds and Condemnation Proceeds collected on the
particular Mortgage Loans and properties, and net income collected on the
particular properties, with respect to which such advances were made or such
expenses were incurred or out of amounts drawn under any form of Credit Support
with respect to such Mortgage Loans and properties, or if in the judgment of the
Master Servicer, the Special Servicer or such other person, as applicable, such
advances and/or expenses will not be recoverable from such amounts, such
reimbursement to be made from amounts collected on other Mortgage Loans in the
same Trust Fund or, if and to the extent so provided by the related Pooling
Agreement and described in the related Prospectus Supplement, only from that
portion of amounts collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of Subordinate Certificates of the related
series;
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(iv) if and to the extent described in the related Prospectus Supplement,
to pay the Master Servicer, the Special Servicer or any other specified person
interest accrued on the advances and servicing expenses described in clause
(iii) above incurred by it while such remain outstanding and unreimbursed;
(v) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged Properties
that constitute security for defaulted Mortgage Loans, and for any containment,
clean-up or remediation of hazardous wastes and materials present on such
Mortgaged Properties, as described under "-Realization Upon Defaulted Mortgage
Loans";
(vi) to reimburse the Master Servicer, the Special Servicer, the REMIC
Administrator, the Depositor, the Trustee, or any of their respective directors,
officers, employees and agents, as the case may be, for certain expenses, costs
and liabilities incurred thereby, as and to the extent described under "-Certain
Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor" and "-Certain Matters Regarding the Trustee";
(vii) if and to the extent described in the related Prospectus Supplement,
to pay the fees of the Trustee, the REMIC Administrator and any provider of
Credit Support;
(viii) if and to the extent described in the related Prospectus Supplement,
to reimburse prior draws on any form of Credit Support;
(ix) to pay the Master Servicer, the Special Servicer or the Trustee, as
appropriate, interest and investment income earned in respect of amounts held in
the Certificate Account as additional compensation;
(x) to pay any servicing expenses not otherwise required to be advanced by
the Master Servicer, the Special Servicer or any other specified person;
(xi) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local taxes
imposed on the Trust Fund or its assets or transactions, as and to the extent
described under "Certain Federal Income Tax Consequences-REMICs-Prohibited
Transactions Tax and Other Taxes";
(xii) to pay for the cost of various opinions of counsel obtained pursuant
to the related Pooling Agreement for the benefit of Certificateholders;
(xiii) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xiv) to clear and terminate the Certificate Account upon the termination
of the Trust Fund.
Modifications, Waivers and Amendments of Mortgage Loans
The Master Servicer and the Special Servicer may each agree to modify,
waive or amend any term of any Mortgage Loan serviced by it in a manner
consistent with the applicable Servicing Standard; provided that, unless
otherwise set forth in the related Prospectus Supplement, the modification,
waiver or amendment (i) will not affect the amount or timing of any scheduled
payments of principal or interest on the Mortgage Loan, (ii) will not, in the
judgment of the Master Servicer or the Special Servicer, as the case may be,
materially impair the security for the Mortgage Loan or reduce the likelihood of
timely payment of amounts due thereon and (iii) will not adversely affect the
coverage under any applicable instrument of
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Credit Support. Unless otherwise provided in the related Prospectus Supplement,
the Special Servicer also may agree to any other modification, waiver or
amendment if, in its judgment, (i) a material default on the Mortgage Loan has
occurred or a payment default is imminent, (ii) such modification, waiver or
amendment is reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation and (iii) such modification, waiver or amendment will not adversely
affect the coverage under any applicable instrument of Credit Support.
Realization Upon Defaulted Mortgage Loans
If a default on a Mortgage Loan has occurred or, in the Special Servicer's
judgment, a payment default is imminent, the Special Servicer, on behalf of the
Trustee, may at any time institute foreclosure proceedings, exercise any power
of sale contained in the related Mortgage, obtain a deed in lieu of foreclosure,
or otherwise acquire title to the related Mortgaged Property, by operation of
law or otherwise. Unless otherwise specified in the related Prospectus
Supplement, the Special Servicer may not, however, acquire title to any
Mortgaged Property, have a receiver of rents appointed with respect to any
Mortgaged Property or take any other action with respect to any Mortgaged
Property that would cause the Trustee, for the benefit of the related series of
Certificateholders, or any other specified person to be considered to hold title
to, to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator"
of such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Special Servicer has previously received a report prepared by a
person who regularly conducts environmental audits (which report will be an
expense of the Trust Fund) and either:
(i) such report indicates that (a) the Mortgaged Property is in
compliance with applicable environmental laws and regulations and (b) there
are no circumstances or conditions present at the Mortgaged Property that
have resulted in any contamination for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under
any applicable environmental laws and regulations; or
(ii) the Special Servicer, based solely (as to environmental matters
and related costs) on the information set forth in such report, determines
that taking such actions as are necessary to bring the Mortgaged Property
into compliance with applicable environmental laws and regulations and/or
taking the actions contemplated by clause (i)(b) above, is reasonably
likely to produce a greater recovery, taking into account the time value of
money, than not taking such actions. See "Certain Legal Aspects of Mortgage
Loans-Environmental Considerations".
A Pooling Agreement may grant to the Master Servicer, the Special Servicer,
a provider of Credit Support and/or the holder or holders of certain classes of
the related series of Certificates a right of first refusal to purchase from the
Trust Fund, at a predetermined price (which, if less than the Purchase Price,
will be specified in the related Prospectus Supplement), any Mortgage Loan as to
which a specified number of scheduled payments are delinquent. In addition,
unless otherwise specified in the related Prospectus Supplement, the Special
Servicer may offer to sell any defaulted Mortgage Loan if and when the Special
Servicer determines, consistent with its normal servicing procedures, that such
a sale would produce a greater recovery, taking into account the time value of
money, than would liquidation of the related Mortgaged Property. In the absence
of any such sale, the Special Servicer will generally be required to proceed
against the related Mortgaged Property, subject to the discussion above.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Special Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within two years of acquisition, unless
(i) the Internal Revenue Service (the "IRS") grants an extension of time to sell
such property or (ii) the Trustee receives an opinion of independent counsel to
the effect that the holding of the property by the Trust Fund for more than two
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund (or any designated portion thereof) to fail
to qualify as a REMIC under
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the Code at any time that any Certificate is outstanding. Subject to the
foregoing and any other tax-related limitations, the Special Servicer will
generally be required to attempt to sell any Mortgaged Property so acquired on
the same terms and conditions it would if it were the owner. Unless otherwise
provided in the related Prospectus Supplement, if title to any Mortgaged
Property is acquired by a Trust Fund as to which a REMIC election has been made,
the Special Servicer will also be required to ensure that the Mortgaged Property
is administered so that it constitutes "foreclosure property" within the meaning
of Code Section 860G(a)(8) at all times, that the sale of such property does not
result in the receipt by the Trust Fund of any income from nonpermitted assets
as described in Code Section 860F(a)(2)(B), and that the Trust Fund does not
derive any "net income from foreclosure property" within the meaning of Code
Section 860G(c)(2), with respect to such property. If the Trust Fund acquires
title to any Mortgaged Property, the Special Servicer, on behalf of the Trust
Fund, may retain an independent contractor to manage and operate such property.
The retention of an independent contractor, however, will not relieve the
Special Servicer of its obligation to manage such Mortgaged Property as required
under the related Pooling Agreement.
If Liquidation Proceeds collected with respect to a defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon plus the aggregate amount of reimbursable expenses
incurred by the Special Servicer and/or the Master Servicer in connection with
such Mortgage Loan, then, to the extent that such shortfall is not covered by
any instrument or fund constituting Credit Support, the Trust Fund will realize
a loss in the amount of such shortfall. The Special Servicer and/or the Master
Servicer will be entitled to reimbursement out of the Liquidation Proceeds
recovered on any defaulted Mortgage Loan, prior to the distribution of such
Liquidation Proceeds to Certificateholders, any and all amounts that represent
unpaid servicing compensation in respect of the Mortgage Loan, unreimbursed
servicing expenses incurred with respect to the Mortgage Loan and any
unreimbursed advances of delinquent payments made with respect to the Mortgage
Loan. In addition, if and to the extent set forth in the related Prospectus
Supplement, amounts otherwise distributable on the Certificates may be further
reduced by interest payable to the Master Servicer and/or Special Servicer on
such servicing expenses and advances.
If any Mortgaged Property suffers damage such that the proceeds, if any, of
the related hazard insurance policy are insufficient to restore fully the
damaged property, neither the Special Servicer nor the Master Servicer will be
required to expend its own funds to effect such restoration unless (and to the
extent not otherwise provided in the related Prospectus Supplement) it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Special Servicer or the Master Servicer, as the case may be, for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds and/or amounts
drawn on any instrument or fund constituting Credit Support.
Hazard Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer (or the Special Servicer with
respect to Mortgage Loans serviced thereby) to use reasonable efforts to cause
each Mortgage Loan borrower to maintain a hazard insurance policy that provides
for such coverage as is required under the related Mortgage or, if the Mortgage
permits the holder thereof to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, such coverage as is consistent
with the Master Servicer's (or Special Servicer's) normal servicing procedures.
Unless otherwise specified in the related Prospectus Supplement, such coverage
generally will be in an amount equal to the lesser of the principal balance
owing on such Mortgage Loan and the replacement cost of the related Mortgaged
Property. The ability of a Master Servicer (or Special Servicer) to assure that
hazard insurance proceeds are appropriately applied may be dependent upon its
being named as an additional insured under any hazard insurance policy and under
any other insurance policy referred to below, or upon the extent to which
information concerning covered losses is furnished by borrowers. All amounts
collected by a Master Servicer (or Special Servicer) under any such policy
(except for
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amounts to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with the Master Servicer's (or Special
Servicer's) normal servicing procedures and/or to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the related
Certificate Account. The Pooling Agreement may provide that the Master Servicer
(or Special Servicer) may satisfy its obligation to cause each borrower to
maintain such a hazard insurance policy by maintaining a blanket policy insuring
against hazard losses on the Mortgage Loans in a Trust Fund. If such blanket
policy contains a deductible clause, the Master Servicer (or Special Servicer)
will be required, in the event of a casualty covered by such blanket policy, to
deposit in the related Certificate Account all additional sums that would have
been deposited therein under an individual policy but were not because of such
deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin and domestic animals. Accordingly, a Mortgaged
Property may not be insured for losses arising from any such cause unless the
related Mortgage specifically requires, or permits the holder thereof to
require, such coverage.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the improvements on the property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clauses generally provide that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (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.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale or
other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage Loan
upon the creation of any other lien or encumbrance upon the Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer (or Special Servicer) will determine whether to exercise any right the
Trustee may have under any such provision in a manner consistent with the Master
Servicer's (or Special Servicer's) normal servicing procedures. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or Special
Servicer, as applicable, will be entitled to retain as additional servicing
compensation any fee collected in connection with the permitted transfer of a
Mortgaged Property. See "Certain Legal Aspects of Mortgage Loans-Due-on-Sale and
Due-on-Encumbrance".
Servicing Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion of
the interest payments on each Mortgage Loan in the related Trust Fund, including
Mortgage Loans serviced by the related Special Servicer. If and to the extent
described in the related Prospectus Supplement, a Special Servicer's primary
compensation with respect to a
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series of Certificates may consist of any or all of the following components:
(i) a specified portion of the interest payments on each Mortgage Loan in the
related Trust Fund, whether or not serviced by it; (ii) an additional specified
portion of the interest payments on each Mortgage Loan then currently serviced
by it; and (iii) subject to any specified limitations, a fixed percentage of
some or all of the collections and proceeds received with respect to each
Mortgage Loan which was at any time serviced by it, including Mortgage Loans for
which servicing was returned to the Master Servicer. Insofar as any portion of
the Master Servicer's or Special Servicer's compensation consists of a specified
portion of the interest payments on a Mortgage Loan, such compensation will
generally be based on a percentage of the principal balance of such Mortgage
Loan outstanding from time to time and, accordingly, will decrease with the
amortization of the Mortgage Loan. As additional compensation, a Master Servicer
or Special Servicer may be entitled to retain all or a portion of late payment
charges, Prepayment Premiums, modification fees and other fees collected from
borrowers and any interest or other income that may be earned on funds held in
the related Certificate Account. A more detailed description of each Master
Servicer's and Special Servicer's compensation will be provided in the related
Prospectus Supplement. Any Sub-Servicer will receive as its sub-servicing
compensation a portion of the servicing compensation to be paid to the Master
Servicer or Special Servicer that retained such Sub-Servicer.
In addition to amounts payable to any Sub-Servicer, a Master Servicer or
Special Servicer may be required, to the extent provided in the related
Prospectus Supplement, to pay from amounts that represent its servicing
compensation certain expenses incurred in connection with the administration of
the related Trust Fund, including, without limitation, payment of the fees and
disbursements of independent accountants, payment of fees and disbursements of
the Trustee and any custodians appointed thereby and payment of expenses
incurred in connection with distributions and reports to Certificateholders.
Certain other expenses, including certain expenses related to Mortgage Loan
defaults and liquidations and, to the extent so provided in the related
Prospectus Supplement, interest on such expenses at the rate specified therein,
may be required to be borne by the Trust Fund.
Evidence as to Compliance
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will provide that on or before a specified date in each year,
beginning the first such date that is at least a specified number of months
after the Cut-off Date, there will be furnished to the related Trustee a report
of a firm of independent certified public accountants stating that (i) it has
obtained a letter of representation regarding certain matters from the
management of the Master Servicer which includes an assertion that the Master
Servicer has complied with certain minimum mortgage loan servicing standards (to
the extent applicable to commercial and multifamily mortgage loans), identified
in the Uniform Single Attestation Program for Mortgage Bankers established by
the Mortgage Bankers Association of America, with respect to the Master
Servicer's servicing of commercial and multifamily mortgage loans during the
most recently completed calendar year and (ii) on the basis of an examination
conducted by such firm in accordance with standards established by the American
Institute of Certified Public Accountants, such representation is fairly stated
in all material respects, subject to such exceptions and other qualifications
that, in the opinion of such firm, such standards require it to report. In
rendering its report such firm may rely, as to the matters relating to the
direct servicing of commercial and multifamily mortgage loans by Sub-Servicers,
upon comparable reports of firms of independent public accountants rendered on
the basis of examinations conducted in accordance the same standards (rendered
within one year of such report) with respect to those Sub-Servicers. The
Prospectus Supplement may provide that additional reports of independent
certified public accountants relating to the servicing of mortgage loans may be
required to be delivered to the Trustee.
Each Pooling Agreement will also provide that, on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, the Master Servicer and Special
Servicer shall each deliver to the related Trustee an annual statement signed by
one or more officers of the Master Servicer or the Special
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Servicer, as the case may be, to the effect that, to the best knowledge of each
such officer, the Master Servicer or the Special Servicer, as the case may be,
has fulfilled in all material respects its obligations under the Pooling
Agreement throughout the preceding year or, if there has been a material default
in the fulfillment of any such obligation, such statement shall specify each
such known default and the nature and status thereof. Such statement may be
provided as a single form making the required statements as to more than one
Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer or Special Servicer may be obtained by Certificateholders upon
written request to the Trustee.
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor
Unless otherwise specified in the Prospectus Supplement for a series of
Certificates, the related Pooling Agreement will permit the Master Servicer, the
Special Servicer and any REMIC Administrator to resign from its obligations
thereunder only upon (a) the appointment of, and the acceptance of such
appointment by, a successor thereto and receipt by the Trustee of written
confirmation from each applicable Rating Agency that such resignation and
appointment will not have an adverse effect on the rating assigned by such
Rating Agency to any class of Certificates of such series or (b) a determination
that such obligations are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it. No such resignation will become effective until the Trustee or other
successor has assumed the obligations and duties of the resigning Master
Servicer, Special Servicer or REMIC Administrator, as the case may be, under the
Pooling Agreement. The Master Servicer and Special Servicer for each Trust Fund
will be required to maintain a fidelity bond and errors and omissions policy or
their equivalent that provides coverage against losses that may be sustained as
a result of an officer's or employee's misappropriation of funds or errors and
omissions, subject to certain limitations as to amount of coverage, deductible
amounts, conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Special Servicer, the REMIC Administrator, the Depositor or any director,
officer, employee or agent of any of them will be under any liability to the
related Trust Fund or Certificateholders for any action taken, or not taken, in
good faith pursuant to the Pooling Agreement or for errors in judgment;
provided, however, that none of the Master Servicer, the Special Servicer, the
REMIC Administrator, the Depositor or any such person will be protected against
any liability that would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of obligations or duties
thereunder or by reason of reckless disregard of such obligations and duties.
Unless otherwise specified in the related Prospectus Supplement, each Pooling
Agreement will further provide that the Master Servicer, the Special Servicer,
the REMIC Administrator, the Depositor and any director, officer, employee or
agent of any of them will be entitled to indemnification by the related Trust
Fund against any loss, liability or expense incurred in connection with any
legal action that relates to such Pooling Agreement or the related series of
Certificates; provided, however, that such indemnification will not extend to
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or duties under such
Pooling Agreement, or by reason of reckless disregard of such obligations or
duties. In addition, each Pooling Agreement will provide that none of the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor will be
under any obligation to appear in, prosecute or defend any legal action that is
not incidental to its respective responsibilities under the Pooling Agreement
and that in its opinion may involve it in any expense or liability. However,
each of the Master Servicer, the Special Servicer, the REMIC Administrator and
the Depositor will be permitted, in the exercise of its discretion, to undertake
any such action that it may deem necessary or desirable with respect to the
enforcement and/or protection of the rights and duties of the parties to the
Pooling Agreement and the interests of the related series of 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
related series of Certificateholders,
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and the Master Servicer, the Special Servicer, the REMIC Administrator or the
Depositor, as the case may be, will be entitled to charge the related
Certificate Account therefor.
Any person into which the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Master Servicer, the
Special Servicer, the REMIC Administrator or the Depositor is a party, or any
person succeeding to the business of the Master Servicer, the Special Servicer,
the REMIC Administrator or the Depositor, will be the successor of the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor, as the
case may be, under the related Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, a REMIC
Administrator will be entitled to perform any of its duties under the related
Pooling Agreement either directly or by or through agents or attorneys, and the
REMIC Administrator will not be responsible for any willful misconduct or gross
negligence on the part of any such agent or attorney appointed by it with due
care.
Events of Default
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include, without limitation, (i) any failure by the Master Servicer to
distribute or cause to be distributed to the Certificateholders of such series,
or to remit to the Trustee for distribution to such Certificateholders, any
amount required to be so distributed or remitted, which failure continues
unremedied for five days after written notice thereof has been given to the
Master Servicer by any other party to the related Pooling Agreement, or to the
Master Servicer, with a copy to each other party to the related Pooling
Agreement, by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series; (ii) any failure by the Special Servicer to remit to the Master
Servicer or the Trustee, as applicable, any amount required to be so remitted,
which failure continues unremedied for five days after written notice thereof
has been given to the Special Servicer by any other party to the related Pooling
Agreement, or to the Special Servicer, with a copy to each other party to the
related Pooling Agreement, by the Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights of such series; (iii) any failure by the Master Servicer or
the Special Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after written notice thereof has
been given to the Master Servicer or the Special Servicer, as the case may be,
by any other party to the related Pooling Agreement, or to the Master Servicer
or the Special Servicer, as the case may be, with a copy to each other party to
the related Pooling Agreement, by Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights for such series; (iv) any failure by a REMIC Administrator (if
other than the Trustee) duly to observe or perform in any material respect any
of its covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after written notice thereof has
been given to the REMIC Administrator by any other party to the related Pooling
Agreement, or to the REMIC Administrator, with a copy to each other party to the
related Pooling Agreement, by Certificateholders entitled to not less than 25%
(or such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series; and (v) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings in respect of or relating to the Master Servicer, the Special
Servicer or the REMIC Administrator (if other than the Trustee), and certain
actions by or on behalf of the Master Servicer, the Special Servicer or the
REMIC Administrator (if other than the Trustee) indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events of
Default (other than to add thereto or shorten cure periods or eliminate notice
requirements) will be specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, when a single entity
acts as Master Servicer, Special Servicer and REMIC Administrator, or in any two
of the
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foregoing capacities, for any Trust Fund, an Event of Default in one capacity
will constitute an Event of Default in each capacity.
Rights Upon Event of Default
If an Event of Default occurs with respect to the Master Servicer, the
Special Servicer or a REMIC Administrator under a Pooling Agreement, then, in
each and every such case, so long as the Event of Default remains unremedied,
the Depositor or the Trustee will be authorized, and at the direction of
Certificateholders of the related series entitled to not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series, the Trustee will be required, to terminate all of the
rights and obligations of the defaulting party as Master Servicer, Special
Servicer or REMIC Administrator, as applicable, under the Pooling Agreement,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the defaulting party as Master Servicer, Special Servicer or
REMIC Administrator, as applicable, under the Pooling Agreement (except that if
the defaulting party is required to make advances thereunder regarding
delinquent Mortgage Loans, but the Trustee is prohibited by law from obligating
itself to make such advances, or if the related Prospectus Supplement so
specifies, the Trustee will not be obligated to make such advances) and will be
entitled to similar compensation arrangements. Unless otherwise specified in the
related Prospectus Supplement, if the Trustee is unwilling or unable so to act,
it may (or, at the written request of Certificateholders of the related series
entitled to not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series, it will be required
to) appoint, or petition a court of competent jurisdiction to appoint, a loan
servicing institution or other entity that (unless otherwise provided in the
related Prospectus Supplement) is acceptable to each applicable Rating Agency to
act as successor to the Master Servicer, Special Servicer or REMIC
Administrator, as the case may be, under the Pooling Agreement. Pending such
appointment, the Trustee will be obligated to act in such capacity.
If the same entity is acting as both Trustee and REMIC Administrator, it
may be removed in both such capacities as described under "-Resignation and
Removal of the Trustee" below.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class 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 sixty days after receipt of such
request and indemnity has neglected or refused to institute any such proceeding.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Pooling Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates covered by such Pooling
Agreement, unless such Certificateholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement, each
Pooling Agreement may be amended by the parties thereto, without the consent of
any of the holders of Certificates covered by such Pooling Agreement, (i) to
cure any ambiguity, (ii) to correct or supplement any provision therein which
may be inconsistent with any other provision therein or to correct any error,
(iii) to change the timing and/or nature of deposits in the Certificate Account,
provided that (A) such change would not adversely affect in any material respect
the interests of any Certificateholder, as evidenced by an opinion of counsel,
and (B) such change would not adversely affect the then-current rating of any
rated classes of Certificates, as evidenced by a letter from each applicable
Rating Agency, (iv) if a REMIC election has been made with respect to the
related
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Trust Fund, to modify, eliminate or add to any of its provisions (A) to such
extent as shall be necessary to maintain the qualification of the Trust Fund (or
any designated portion thereof) as a REMIC or to avoid or minimize the risk of
imposition of any tax on the related Trust Fund, provided that the Trustee has
received an opinion of counsel to the effect that (1) such action is necessary
or desirable to maintain such qualification or to avoid or minimize such risk,
and (2) such action will not adversely affect in any material respect the
interests of any holder of Certificates covered by the Pooling Agreement, or (B)
to restrict the transfer of the REMIC Residual Certificates, provided that the
Depositor has determined that the then-current ratings of the classes of the
Certificates that have been rated will not be adversely affected, as evidenced
by a letter from each applicable Rating Agency, and that any such amendment will
not give rise to any tax with respect to the transfer of the REMIC Residual
Certificates to a non-permitted transferee (See "Certain Federal Income Tax
Consequences-REMICs-Tax and Restrictions on Transfers of REMIC Residual
Certificates to Certain Organizations" herein), (v) to make any other provisions
with respect to matters or questions arising under such Pooling Agreement or any
other change, provided that such action will not adversely affect in any
material respect the interests of any Certificateholder, or (vi) to amend
specified provisions that are not material to holders of any class of
Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with the
consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66-2/3% (or such other percentage
specified in the related Prospectus Supplement) of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Pooling
Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that 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 a Certificate
of any class without the consent of the holder of such Certificate or (ii)
reduce the aforesaid percentage of Certificates of any class the holders of
which are required to consent to any such amendment without the consent of the
holders of all Certificates of such class covered by such Pooling Agreement then
outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be required to consent
to any amendment to a Pooling Agreement without having first received an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Master Servicer, the Special Servicer, the Depositor, the Trustee
or any other specified person in accordance with such amendment will not result
in the imposition of a tax on the related Trust Fund or cause such Trust Fund
(or any designated portion thereof) to fail to qualify as a REMIC.
List of Certificateholders
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders of record made for purposes
of communicating with other holders of Certificates of the same series with
respect to their rights under the related Pooling Agreement, the Trustee or
other specified person will afford such Certificateholders access during normal
business hours to the most recent list of Certificateholders of that series held
by such person. If such list is as of a date more than 90 days prior to the date
of receipt of such Certificateholders' request, then such person, if not the
registrar for such series of Certificates, will be required to request from such
registrar a current list and to afford such requesting Certificateholders access
thereto promptly upon receipt.
The Trustee
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any Master
Servicer, Special Servicer or REMIC Administrator and its affiliates.
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Duties of the Trustee
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, such
Certificates or any underlying Mortgage Asset or related document and will not
be accountable for the use or application by or on behalf of any Master Servicer
or Special Servicer of any funds paid to the Master Servicer or Special Servicer
in respect of the Certificates or the underlying Mortgage Assets. If no Event of
Default has occurred and is continuing, the Trustee for each series of
Certificates will be required to perform only those duties specifically required
under the related Pooling Agreement. However, upon receipt of any of the various
certificates, reports or other instruments required to be furnished to it
pursuant to the related Pooling Agreement, a Trustee will be required to examine
such documents and to determine whether they conform to the requirements of such
agreement.
Certain Matters Regarding the Trustee
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the related
Master Servicer or other specified person or may be required to be borne by the
related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling Agreement;
provided, however, that such indemnification will not extend to any loss
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of this
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
Resignation and Removal of the Trustee
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates of the applicable series evidencing not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee. Notwithstanding anything herein to the
contrary, if any entity is acting as both Trustee and REMIC Administrator, then
any resignation or removal of such entity as the Trustee will also constitute
the resignation or removal of such entity as REMIC Administrator, and the
successor trustee will serve as successor to the REMIC Administrator as well.
DESCRIPTION OF CREDIT SUPPORT
General
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Credit Support may be provided with respect to one or more classes of the
Certificates of any series or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a surety bond, an insurance
policy or a guarantee, the establishment of one or more reserve funds, or any
combination of the foregoing. If and to the extent so provided in the related
Prospectus Supplement, any of the foregoing forms of Credit Support may provide
credit enhancement for more than one series of Certificates.
The Credit Support may not provide protection against all risks of loss and
will not guarantee payment to Certificateholders of all amounts to which they
are entitled under the related Pooling Agreement. If losses or shortfalls occur
that exceed the amount covered by the related Credit Support or that are of a
type not covered by such Credit Support, Certificateholders will bear their
allocable share of deficiencies. Moreover, if a form of Credit Support covers
the Offered Certificates of more than one series and losses on the related
Mortgage Assets exceed the amount of such Credit Support, it is possible that
the holders of Offered Certificates of one (or more) such series will be
disproportionately benefited by such Credit Support to the detriment of the
holders of Offered Certificates of one (or more) other such series.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature and
amount of coverage under such Credit Support, (ii) any conditions to payment
thereunder not otherwise described herein, (iii) the conditions (if any) under
which the amount of coverage under such Credit Support may be reduced and under
which such Credit Support may be terminated or replaced and (iv) the material
provisions relating to such Credit Support. Additionally, the related Prospectus
Supplement will set forth certain information with respect to the obligor, if
any, under any instrument of Credit Support. See "Risk Factors-Credit Support
Limitations".
Subordinate Certificates
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate Account
on any Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Certificates. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of certain
types of losses or shortfalls. The related Prospectus Supplement will set forth
information concerning the method and amount of subordination provided by a
class or classes of Subordinate Certificates in a series and the circumstances
under which such subordination will be available.
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of the related
series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
Insurance or Guarantees with Respect to Mortgage Loans
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. The related Prospectus
Supplement will describe the nature of such default risks and the extent of such
coverage.
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Letter of Credit
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or other financial institution specified in such Prospectus Supplement (the
"Letter of Credit Bank"). Under a letter of credit, the Letter of Credit Bank
will be obligated to honor draws thereunder in an aggregate fixed dollar amount,
net of unreimbursed payments thereunder, generally equal to a percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of some or all of the related Mortgage Assets on the related Cut-off
Date or of the initial aggregate Certificate Balance of one or more classes of
Certificates. If so specified in the related Prospectus Supplement, the letter
of credit may permit draws only in the event of certain types of losses and
shortfalls. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments thereunder and may
otherwise be reduced as described in the related Prospectus Supplement. The
obligations of the Letter of Credit Bank under the letter of credit for each
series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund.
Certificate Insurance and Surety Bonds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies or surety bonds provided
by one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Certificates of the related series, timely
distributions of interest or distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. The related Prospectus
Supplement will describe any limitations on the draws that may be made under any
such instrument.
Reserve Funds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments, a
demand note or a combination thereof will be deposited, in the amounts specified
in such Prospectus Supplement. If so specified in the related Prospectus
Supplement, the reserve fund for a series may also be funded over time by a
specified amount of certain collections received on the related Mortgage Assets.
Amounts on deposit in any reserve fund for a series will be applied for the
purposes, in the manner, and to the extent specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, reserve funds
may be established to provide protection only against certain types of losses
and shortfalls. Following each Distribution Date, amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from the
reserve fund under the conditions and to the extent specified in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, any reinvestment income or other
gain from such investments will be credited to the related reserve fund for such
series, and any loss resulting from such investments will be charged to such
reserve fund. However, such income may be payable to any related Master Servicer
or another service provider as additional compensation for its services. The
reserve fund, if any, for a series will not be a part of the Trust Fund unless
otherwise specified in the related Prospectus Supplement.
Credit Support with respect to MBS
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If so provided in the Prospectus Supplement for a series of Certificates,
any MBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify, as to each
such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by commercial and multifamily residential
properties. Because such legal aspects are governed by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular state, or to encompass the laws
of all states in which the security for the Mortgage Loans (or mortgage loans
underlying any MBS) is situated. Accordingly, the summaries are qualified in
their entirety by reference to the applicable laws of those states. See
"Description of the Trust Funds-Mortgage Loans". If a significant percentage of
Mortgage Loans (or mortgage loans underlying MBS), by balance, are secured by
properties in a particular state, relevant state laws, to the extent they vary
materially from this discussion, will be discussed in the Prospectus Supplement.
For purposes of the following discussion, "Mortgage Loan" includes a mortgage
loan underlying an MBS.
General
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages". A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property, irrevocably until the debt is paid, in trust
and generally with a power of sale, to the trustee to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties, pursuant to which the borrower, or grantor, conveys title to the
real property to the grantee, or lender, generally with a power of sale, until
such time as the debt is repaid. In a case where the borrower is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the borrower.
At origination of a mortgage loan involving a land trust, the borrower may
execute a separate undertaking to make payments on the mortgage note. In no
event is the land trustee personally liable for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed by
the express provisions of the related instrument, the law of the state
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in which the real property is located, certain federal laws and, in some deed of
trust transactions, the directions of the beneficiary.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the borrower
as additional security for the loan. In general, the lender must file financing
statements in order to perfect its security interest in the room rates and must
file continuation statements, generally every five years, to maintain perfection
of such security interest. In certain cases, Mortgage Loans secured by hotels or
motels may be included in a Trust Fund even if the security interest in the room
rates was not perfected or the requisite UCC filings were allowed to lapse. Even
if the lender's security interest in room rates is perfected under applicable
nonbankruptcy law, it will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default. In the bankruptcy setting,
however, the lender will be stayed from enforcing its rights to collect room
rates, but those room rates (in light of certain revisions to the Bankruptcy
Code which are effective for all bankruptcy cases commenced on or after October
22, 1994) constitute "cash collateral" and therefore cannot be used by the
bankruptcy debtor without a hearing or lender's consent and unless the lender's
interest in the room rates is given adequate protection (e.g., cash payment for
otherwise encumbered funds or a replacement lien on unencumbered property, in
either case equal in value to the amount of room rates that the debtor proposes
to use, or other similar relief). See "-Bankruptcy Laws".
Personalty
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the borrower
and not previously pledged) may constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the UCC. Accordingly, if a borrower pledges personal
property as security for a mortgage loan, the lender generally must file UCC
financing statements in order to perfect its security interest therein, and must
file continuation statements, generally every five years, to maintain that
perfection. In certain cases, Mortgage Loans secured in part by personal
property may be included in a Trust Fund even if the security interest in such
personal property was not perfected or the requisite UCC filings were allowed to
lapse.
Foreclosure
General. Foreclosure is a legal procedure that allows the lender to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the lender has the right to institute foreclosure
proceedings to sell the real property at public auction to satisfy the
indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and nonjudicial foreclosure pursuant to a power of sale granted in the mortgage
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instrument. Other foreclosure procedures are available in some states, but they
are either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses are raised or counterclaims are interposed, and sometimes
requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
Upon successful completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
officer to conduct a public sale of the mortgaged property, the proceeds of
which are used to satisfy the judgment. Such sales are made in accordance with
procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain Provisions.
United States courts have traditionally imposed general equitable principles to
limit the remedies available to lenders in foreclosure actions. These principles
are generally designed to relieve borrowers from the effects of mortgage
defaults perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative actions to determine the cause of 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 and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a nonmonetary default, such as a failure to
adequately maintain the mortgaged property or an impermissible further
encumbrance of the mortgaged property. Finally, some courts have addressed the
issue of whether federal or state constitutional provisions reflecting due
process concerns for adequate notice require that a borrower receive notice in
addition to statutorily-prescribed minimum notice. For the most part, these
cases have upheld the reasonableness of the notice provisions or have found that
a public sale under a mortgage providing for a power of sale does not involve
sufficient state action to trigger constitutional protections.
In addition, some states may have statutory protection such as the right of
the borrower to reinstate mortgage loans after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained in
any other type of mortgage instrument if applicable law so permits. A power of
sale under a deed of trust allows a nonjudicial public sale to be conducted
generally following a request from the beneficiary/lender to the trustee to sell
the property upon default by the borrower and after notice of sale is given in
accordance with the terms of the mortgage and applicable state law. In some
states, prior to such sale, the trustee under the deed of trust must record a
notice of default and notice of sale and send a copy to the borrower and to any
other party who has recorded a request for a copy of a notice of default and
notice of sale. In addition, in some states the trustee must provide notice to
any other party having an interest of record in the real property, including
junior lienholders. A notice of sale must be posted in a public place and, in
most states, published for a specified period of time in one or more newspapers.
The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without regard to the acceleration of the
indebtedness), plus the lender's expenses incurred in enforcing the obligation.
In other states, the borrower or the junior lienholder is not provided a period
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to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, state law governs the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time periods.
Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other things, redemption rights
that may exist) and because of the possibility that physical deterioration of
the property may have occurred during the foreclosure proceedings. Therefore, it
is common for the lender to purchase the mortgaged property for an amount equal
to the secured indebtedness and accrued and unpaid interest plus the expenses of
foreclosure, in which event the borrower's debt will be extinguished, or for a
lesser amount in order to preserve its right to seek a deficiency judgment if
such is available under state law and under the terms of the Mortgage Loan
documents. (The Mortgage Loans, however, may be nonrecourse. See "Risk
Factors-Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans-Limited Recourse Nature of the Mortgage Loans".) Thereafter,
subject to the borrower's right in some states to remain in possession during a
redemption period, the lender will become the owner of the property and have
both the benefits and burdens of ownership, including the obligation to pay debt
service on any senior mortgages, to pay taxes, to obtain casualty insurance and
to make such repairs as are necessary to render the property suitable for sale.
The costs of operating and maintaining a commercial or multifamily residential
property may be significant and may be greater than the income derived from that
property. The lender also will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale or lease 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.
Moreover, because of the expenses associated with acquiring, owning and selling
a mortgaged property, a lender could realize an overall loss on a mortgage loan
even if the mortgaged property is sold at foreclosure, or resold after it is
acquired through foreclosure, for an amount equal to the full outstanding
principal amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all persons
who have interests in the property that are subordinate to that of the
foreclosing lender, from exercise of their "equity of redemption". The doctrine
of equity of redemption provides that, until the property encumbered by a
mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) right which should
be distinguished from post-sale statutory 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. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted 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 because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property
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and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a mortgage loan by its terms provides
for recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of trust. A deficiency judgment is a personal judgment
against the former borrower equal to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes may require the lender to exhaust the security afforded
under a mortgage 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 those states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists will usually proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
Leasehold Considerations. Mortgage Loans may be secured by a mortgage on
the borrower's leasehold interest in a ground lease. Leasehold mortgage loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of the borrower. The most significant of these risks is
that if the borrower's leasehold were to be terminated upon a lease default, the
leasehold mortgagee would lose its security. This risk may be lessened if the
ground lease requires the lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them, permits the leasehold estate to
be assigned to and by the leasehold mortgagee or the purchaser at a foreclosure
sale, and contains certain other protective provisions typically included in a
"mortgageable" ground lease. Certain Mortgage Loans, however, may be secured by
ground leases which do not contain these provisions.
Cooperative Shares. Mortgage Loans may be secured by a security interest on
the borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto, allocable to cooperative dwelling units that may be vacant
or occupied by nonowner tenants. Such loans are subject to certain risks not
associated with mortgage loans secured by a lien on the fee estate of a borrower
in real property. Such a loan typically is subordinate to the mortgage, if any,
on the Cooperative's building which, if foreclosed, could extinguish the equity
in the building and the proprietary leases of the dwelling units derived from
ownership of the shares of the Cooperative. Further, transfer of shares in a
Cooperative are subject to various regulations as well as to restrictions under
the governing documents of the Cooperative, and the shares may be cancelled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the Cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on Cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given the debtor and
the method, manner, time, place and terms of the sale. 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. A 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 leases.
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Bankruptcy Laws
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
Some bankruptcy courts have approved plans, based on the particular facts of the
reorganization case, that effected the cure of a mortgage loan default by paying
arrearages over a number of years. Also, a bankruptcy court may permit a debtor,
through its rehabilitative plan, to reinstate a loan mortgage payment schedule
even if the lender has obtained a final judgment of foreclosure prior to the
filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under the Bankruptcy
Code, a lender may be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents. Recent amendments to the
Bankruptcy code, however, may minimize the impairment of the lender's ability to
enforce the borrower's assignment of rents and leases. In addition to the
inclusion of hotel revenues within the definition of "cash collateral" as noted
previously in the section entitled "-Leases and Rents", the amendments provide
that a pre-petition security interest in rents or hotel revenues is designed to
overcome those cases holding that a security interest in rents is unperfected
under the laws of certain states until the lender has taken some further action,
such as commencing foreclosure or obtaining a receiver prior to activation of
the assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that ability
may be impaired by the commencement of a bankruptcy case relating to a lessee
under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition. In addition, the Bankruptcy Code generally provides that a
trustee or debtor-in-possession may, subject to approval of the court, (i)
assume the lease and retain it or assign it to a third party or (ii) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must cure any defaults under the lease, compensate the
lessor for its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also
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limits a lessor's damages for lease rejection to the rent reserved by the lease
(without regard to acceleration) for the greater of one year, or 15%, not to
exceed three years, of the remaining term of the lease.
Environmental Considerations
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Such environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In certain circumstances, a lender
may decide to abandon a contaminated mortgaged property as collateral for its
loan rather than foreclose and risk liability for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
participated in the management of such mortgaged property or the operations of
the borrower. Such liability may exist even if the lender did not cause or
contribute to the contamination and regardless of whether the lender has
actually taken possession of a mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, such liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator", however, is a person "who without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest". This is the so called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Act") amended, among other things, the provisions of CERCLA with respect
to lender liability and the secured creditor exemption. The Act offers
substantial protection to lenders by defining the activities in which a lender
can engage and still have the benefit of the secured creditor exemption. In
order for a lender to be deemed to have participated in the management of a
mortgaged property, the lender must actually participate in the operational
affairs of the property of the borrower. The Act provides that "merely having
the capacity to influence, or unexercised right to control" operations does not
constitute participation in management. A lender will lose the protection of the
secured creditor exemption only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property. The Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Certain Other Federal and State Laws. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption. In
addition, under federal law, there is potential liability relating to hazardous
wastes and underground storage tanks under the federal Resource Conservation and
Recovery Act.
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In a few states, transfers of some types of properties are conditioned upon
cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury or damage to property) related to hazardous environmental
conditions on a property. While it may be more difficult to hold a lender liable
in such cases, unanticipated or uninsured liabilities of the borrower may
jeopardize the borrower's ability to meet its loan obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. Such costs may jeopardize the
borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard, but that individual or entity may be without
substantial assets. Accordingly, it is possible that such costs could become a
liability of the Trust Fund and occasion a loss to the Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related Prospectus Supplement, the Pooling Agreement will provide that neither
the Master Servicer nor the Special Servicer, acting on behalf of the Trustee,
may acquire title to a Mortgaged Property or take over its operation unless the
Special Servicer, based solely (as to environmental matters) on a report
prepared by a person who regularly conducts environmental audits, has made the
determination that it is appropriate to do so, as described under "Description
of the Pooling Agreements-Realization Upon Defaulted Mortgage Loans".
If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will be
required to operate the property in accordance with those laws and regulations.
Such compliance may entail substantial expense, especially in the case of
industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental conditions
on a property to government entities and/or to prospective buyers (including
prospective buyers at a foreclosure sale or following foreclosure). Such
disclosure may decrease the amount that prospective buyers are willing to pay
for the affected property, sometimes substantially, and thereby decrease the
ability of the lender to recoup its investment in a loan upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to the
issuance of the related Certificates. Environmental site assessments, however,
vary considerably in their content, quality and cost. Even when adhering to good
professional practices, environmental consultants will sometimes not detect
significant environmental problems because to do an exhaustive environmental
assessment would be far too costly and time-consuming to be practical.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such
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clauses in many states. However, the Garn-St Germain Depository Institutions Act
of 1982 (the "Garn Act") generally preempts state laws that prohibit the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limitations as set forth in
the Garn Act and the regulations promulgated thereunder. Accordingly, a Master
Servicer may nevertheless have the right to accelerate the maturity of a
Mortgage Loan that contains a "due-on-sale" provision upon transfer of an
interest in the property, without regard to the Master Servicer's ability to
demonstrate that a sale threatens its legitimate security interest.
Junior Liens; Rights of Holders of Senior Liens
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens, and
the loans secured by the related Senior Liens may not be included in the
Mortgage Pool. The primary risk to holders of Mortgage Loans secured by junior
liens is the possibility that adequate funds will not be received in connection
with a foreclosure of the related Senior Liens to satisfy fully both the Senior
Liens and the Mortgage Loan. In the event that a holder of a Senior Lien
forecloses on a Mortgaged Property, the proceeds of the foreclosure or similar
sale will be applied first to the payment of court costs and fees in connection
with the foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Liens. The claims of the holders
of the Senior Liens will be satisfied in full out of proceeds of the liquidation
of the related Mortgage Property, if such proceeds are sufficient, before the
Trust Fund as holder of the junior lien receives any payments in respect of the
Mortgage Loan. In the event that such proceeds from a foreclosure or similar
sale of the related Mortgaged Property are insufficient to satisfy all Senior
Liens and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of
the junior lien, and, accordingly, holders of one or more classes of the
Certificates of the related series bear (i) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (ii) the risk
of loss if the deficiency judgment is not realized upon. Moreover, deficiency
judgments may not be available in certain jurisdictions or the Mortgage Loan may
be nonrecourse.
Subordinate Financing
The terms of certain of the Mortgage Loans may not restrict the ability of
the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be unenforceable. Where a borrower
encumbers a mortgaged property with one or more junior liens, the senior lender
is subjected to additional risk. First, the borrower may have difficulty
servicing and repaying multiple loans. Moreover, if the subordinate financing
permits recourse to the borrower (as is frequently the case) and the senior loan
does not, a borrower may have more incentive to repay sums due on the
subordinate loan. Second, acts of the senior lender that prejudice the junior
lender or impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate payable on
the senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments.
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Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid. In addition, the enforceability
of provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that 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.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or adoption)
be eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof are to be
construed in accordance with the laws of another state under which such interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that such choice of law provision would be given
effect.
Certain Laws and Regulations
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply (together
with an inability to remedy any such failure) could result in material
diminution in the value of a Mortgaged Property which could, together with the
possibility of limited alternative uses for a particular Mortgaged Property
(i.e., a nursing or convalescent home or hospital), result in a failure to
realize the full principal amount of the related Mortgage Loan.
Americans with Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
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Soldiers' and Sailors' Civil Relief Act of 1940
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 was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) 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. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of a Master Servicer or
Special Servicer to collect full amounts of interest on certain of the Mortgage
Loans. Any shortfalls in interest collections resulting from the application of
the Relief Act would result in a reduction of the amounts distributable to the
holders of the related series of Certificates, and would not be covered by
advances or, unless otherwise specified in the related Prospectus Supplement,
any form of Credit Support provided in connection with such Certificates. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer or Special Servicer to foreclose on an affected Mortgage
Loan during the borrower's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following general discussion of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of Offered
Certificates of any series thereof, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of counsel to
the Depositor with respect to that series on the material matters associated
with such consequences, subject to any qualifications set forth herein. Unless
otherwise specified in the related Prospectus Supplement, counsel to the
Depositor for each series will be Thacher Proffitt & Wood. This discussion is
directed primarily to Certificateholders that hold the Certificates as "capital
assets" within the meaning of Section 1221 of the Code (although portions
thereof may also apply to Certificateholders who do not hold Certificates as
"capital assets") and it does not purport to discuss all federal income tax
consequences that may be applicable to the individual circumstances of
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particular investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special treatment under the Code. Further,
the authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. Prospective investors should note that no rulings have been or
will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given the IRS will not
take contrary positions. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their tax advisors and tax return preparers regarding
the preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein. In addition to the federal income tax
consequences described herein, potential investors are advised to consider the
state and local tax consequences, if any, of the purchase, ownership and
disposition of Offered Certificates. See "State and Other Tax Consequences".
Certificateholders are advised to consult their tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of Offered Certificates.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the REMIC Administrator will elect to have treated as a
real estate mortgage investment conduit ("REMIC") under Sections 860A through
860G (the "REMIC Provisions") of the Code, and (ii) Grantor Trust Certificates
representing interests in a Trust Fund ("Grantor Trust Fund") as to which no
such election will be made. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election (or elections) will be made
for the related Trust Fund and, if such an election is to be made, will identify
all "regular interests" and "residual interests" in the REMIC. For purposes of
this tax discussion, references to a "Certificateholder" or a "holder" are to
the beneficial owner of a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that Mortgage
Assets held by a Trust Fund consist solely of Mortgage Loans. To the extent that
other Mortgage Assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a Trust Fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related Prospectus
Supplement. In addition, if Cash Flow Agreements other than guaranteed
investment contracts are included in a Trust Fund, the anticipated material tax
consequences associated with such Cash Flow Agreements also will be discussed in
the related Prospectus Supplement. See "Description of the Trust Funds-Cash Flow
Agreements".
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICs
Classification of REMICs. With respect to each series of REMIC
Certificates, counsel to the Depositor will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Trust Fund (or each applicable portion thereof) will
qualify as a REMIC and the REMIC Certificates offered with respect thereto will
be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in that REMIC within the meaning of the REMIC Provisions.
The following general discussion of the anticipated federal income
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tax consequences of the purchase, ownership and disposition of REMIC
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of counsel to the Depositor for the
applicable series as specified in the related Prospectus Supplement, subject to
any qualifications set forth herein. In addition, counsel to the Depositor have
prepared or reviewed the statements in this Prospectus under the heading
"Certain Federal Income Tax Consequences--REMICs," and are of the opinion that
such statements are correct in all material respects. Such statements are
intended as an explanatory discussion of the possible effects of the
classification of any Trust Fund (or applicable portion thereof) as a REMIC for
federal income tax purposes on investors generally and of related tax matters
affecting investors generally, but do not purport to furnish information in the
level of detail or with the attention to an investor's specific tax
circumstances that would be provided by an investor's own tax advisor.
Accordingly, each investor is advised to consult its own tax advisors with
regard to the tax consequences to it of investing in REMIC Certificates.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling Agreement with respect to each REMIC will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be inadvertently terminated.
Characterization of Investments in REMIC Certificates. In general, unless
otherwise provided in the related Prospectus Supplement, the REMIC Certificates
will be "qualifying real property loans" within the meaning of Section 593(d) of
the Code, "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC underlying such Certificates would be so
treated. However, to the extent that the REMIC assets constitute mortgages on
property not used for residential or certain other prescribed purposes, the
REMIC Certificates will not be treated as assets qualifying under Section
7701(a)(19)(C). Moreover, if 95% or more of the assets of the REMIC qualify for
any of the foregoing characterizations at all times during a calendar year, the
REMIC Certificates will qualify for the corresponding status in their entirety
for that calendar year. Interest (including original issue discount) on the
REMIC Regular Certificates and income allocated to the REMIC Residual
Certificates will be interest described in Section 856(c)(3)(B) of the Code to
the extent that such Certificates are treated as "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code. In addition, the REMIC Regular
Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. The determination as to the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during such calendar
quarter. The REMIC Administrator will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale, and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections of the Code)
otherwise would receive the same treatment as the Mortgage Loans for purposes of
all of the foregoing sections of the Code. In addition, in some instances
Mortgage Loans may not be treated entirely as assets described in the foregoing
sections of the Code. If so, the related Prospectus Supplement will describe the
Mortgage Loans
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that may not be so treated. The REMIC Regulations do provide, however, that cash
received from payments on Mortgage Loans held pending distribution is considered
part of the Mortgage Loans for purposes of Sections 593(d) and 856(c)(5)(A) of
the Code, and Treasury regulations provide that real property acquired by
foreclosure constitutes "qualifying real property loans" for purposes of section
593(d) of the Code.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. As to
each such series of REMIC Certificates, in the opinion of counsel to the
Depositor, assuming compliance with all provisions of the related Pooling
Agreement, the Tiered REMICs will each qualify as a REMIC and the REMIC
Certificates issued by the Tiered REMICs, will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates.
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the "constant yield" method described below,
in advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to Mortgage Loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor nor any other person will
make any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers
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and underwriters). If less than a substantial amount of a particular class of
REMIC Regular Certificates is sold for cash on or prior to the date of their
initial issuance (the "Closing Date"), the issue price for such class will be
the fair market value of such class on the Closing Date. Under the OID
Regulations, the stated redemption price of a REMIC Regular Certificate is equal
to the total of all payments to be made on such Certificate other than
"qualified stated interest". "Qualified stated interest" is interest that is
unconditionally payable at least annually (during the entire term of the
instrument) at a single fixed rate, or at a "qualified floating rate", an
"objective rate", a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate", or a
combination of "qualified floating rates" that does not operate in a manner that
accelerates or defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the IRS.
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on a
Distribution Date, in some cases, as a consequence of this "long first accrual
period", some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns provided to
the Certificateholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total
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amount of such de minimis original issue discount and a fraction, the numerator
of which is the amount of such principal payment and the denominator of which is
the outstanding stated principal amount of the REMIC Regular Certificate. The
OID Regulations also would permit a Certificateholder to elect to accrue de
minimis original issue discount into income currently based on a constant yield
method. See "-Taxation of Owners of REMIC Regular Certificates-Market Discount"
below for a description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated in the
related Prospectus Supplement, each period that begins on a date that
corresponds to a Distribution Date (or in the case of the first such period,
begins on the Closing Date) and ends on the day preceding the immediately
following Distribution Date, a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (a) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (b) the distributions made on
such REMIC Regular Certificate during the accrual period of amounts included in
the stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate will
be received in future periods based on the Mortgage Loans being prepaid at a
rate equal to the Prepayment Assumption, (ii) using a discount rate equal to the
original yield to maturity of the Certificate and (iii) taking into account
events (including actual prepayments) that have occurred before the close of the
accrual period. For these purposes, the original yield to maturity of the
Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price", in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price.
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In particular, under Section 1276 of the Code such a Certificateholder generally
will be required to allocate the portion of each such distribution representing
stated redemption price first to accrued market discount not previously included
in income, and to recognize ordinary income to that extent. A Certificateholder
may elect to include market discount in income currently as it accrues rather
than including it on a deferred basis in accordance with the foregoing. If made,
such election will apply to all market discount bonds acquired by such
Certificateholder on or after the first day of the first taxable year to which
such election applies. In addition, the OID Regulations permit a
Certificateholder to elect to accrue all interest and discount (including de
minimis market or original issue discount) in income as interest, and to
amortize premium, based on a constant yield method. If such an election were
made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "-Taxation of Owners of REMIC
Regular Certificates-Premium" below. Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable except with the approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder
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of a REMIC Regular Certificate generally will be required to treat a portion of
any gain on the sale or exchange of such Certificate as ordinary income to the
extent of the market discount accrued to the date of disposition under one of
the foregoing methods, less any accrued market discount previously reported as
ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount" above. The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171 of
the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its Certificate Balance has been reduced
to zero) and that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
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Taxation of Owners of REMIC Residual Certificates.
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"-Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "-Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC until the
REMIC's termination. Ordinary income derived from REMIC Residual Certificates
will be "portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses".
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate from the
seller of such Certificate in connection with the acquisition of such REMIC
Residual Certificate will be taken into account in determining the income of
such holder for federal income tax purposes. Although it appears likely that any
such payment would be includible in income immediately upon its receipt, the IRS
might assert that such payment should be included in income over time according
to an amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of such
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions",
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual
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Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt losses with respect
to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under "-Taxation
of Owners of REMIC Regular Certificates-Original Issue Discount". The issue
price of a REMIC Certificate received in exchange for an interest in the
Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the REMIC
Administrator may be required to estimate the fair market value of such
interests in order to determine the basis of the REMIC in the Mortgage Loans and
other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "-Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC
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Certificates constituting "regular interests" in the REMIC not offered hereby)
were indebtedness of the REMIC. Original issue discount will be considered to
accrue for this purpose as described above under "-Taxation of Owners of REMIC
Regular Certificates-Original Issue Discount", except that the de minimis rule
and the adjustments for subsequent holders of REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "-Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other noninterest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "-Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To
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the extent such REMIC Residual Certificateholders' initial bases are less than
the distributions to such REMIC Residual Certificateholders, and increases in
such initial bases either occur after such distributions or (together with their
initial bases) are less than the amount of such distributions, gain will be
recognized to such REMIC Residual Certificateholders on such distributions and
will be treated as gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "-Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder see "-Taxation of Owners of REMIC
Residual Certificates-General" above.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will, with an exception discussed below for certain REMIC Residual
Certificates held by thrift institutions, be subject to federal income tax in
all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "-Foreign Investors
in REMIC Certificates" below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value". The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Although it
has not done so, the Treasury also has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
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excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value". The related Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered to have "significant
value" under the REMIC Regulations; provided, however, that any disclosure that
a REMIC Residual Certificate will have "significant value" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will have "significant value" for purposes of the
above-described rules. The above-described exception for thrift institutions
applies only to those residual interests held directly by, and deductions,
losses and loss carryovers incurred by, such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income tax
return with such thrift institution) or by certain wholly-owned direct
subsidiaries of such institutions formed or operated exclusively in connection
with the organization and operation of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax". If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "-Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
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Mark-to-Market Rules. On December 28, 1993, the IRS released temporary
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a "negative value" REMIC Residual Certificate is not
treated as a security and thus generally may not be marked to market. This
exclusion from the mark-to-market requirement is expanded to include all REMIC
Residual Certificates under proposed Treasury regulations published January 4,
1995 which provide that any REMIC Residual Certificate issued after January 4,
1995 will not be treated as a security and therefore generally may not be marked
to market. Prospective purchasers of a REMIC Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate 2% of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over such amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of such a holder of a REMIC Certificate that is an individual, estate or trust,
or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should consult with
their tax advisors prior to making an investment in such Certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described above
under "-Taxation of Owners of REMIC Residual Certificates-Basis Rules, Net
Losses and Distributions". Except as provided in the following four paragraphs,
any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for
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investment) within the meaning of Section 1221 of the Code. The Code as of the
date of this Prospectus provides for a top marginal tax rate of 39.6% for
individuals and a maximum marginal rate for long-term capital gains of
individuals of 28%. No such rate differential exists for corporations. In
addition, the distinction between a capital gain or loss and ordinary income or
loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be a
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate), determined as of
the date of purchase of such REMIC Regular Certificate, over (ii) the amount of
ordinary income actually includible in the seller's income prior to such sale.
In addition, gain recognized on the sale of a REMIC Regular Certificate by a
seller who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "-Taxation of Owners of REMIC Regular Certificates-Market
Discount" and "-Premium".
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
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Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions" (a
"Prohibited Transactions Tax"). In general, subject to certain specified
exceptions a prohibited transaction means the disposition of a Mortgage Loan,
the receipt of income from a source other than a Mortgage Loan or certain other
permitted investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the Mortgage Loans
for temporary investment pending distribution on the REMIC Certificates. It is
not anticipated that any REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property", determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related REMIC Administrator, Master Servicer, Special Servicer, Manager or
Trustee, in any case out of its own funds, provided that such person has
sufficient assets to do so, and provided further that such tax arises out of a
breach of such person's obligations under the related Pooling Agreement and in
respect of compliance with applicable laws and regulations. Any such tax not
borne by a REMIC Administrator, a Master Servicer, Special Servicer, Manager or
Trustee will be charged against the related Trust Fund resulting in a reduction
in amounts payable to holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations. If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate) of the total anticipated
excess inclusions with respect to such REMIC Residual Certificate for periods
after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The anticipated excess inclusions must be determined
as of the date that the REMIC Residual Certificate is transferred and must be
based on events that have occurred up to the time of such transfer, the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable
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arrangements designed to ensure that (i) residual interests in such entity are
not held by disqualified organizations and (ii) information necessary for the
application of the tax described herein will be made available. Restrictions on
the transfer of REMIC Residual Certificates and certain other provisions that
are intended to meet this requirement will be included in each Pooling
Agreement, and will be discussed in any Prospectus Supplement relating to the
offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination. A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Mortgage
Loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder should
(but may not) be treated as realizing a loss equal to the amount of such
difference, and such loss may be treated as a capital loss.
Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, the REMIC
Administrator, which generally will hold at least a nominal amount of REMIC
Residual Certificates, will file REMIC federal income tax returns on behalf of
the related REMIC, and will be designated as and will act as the "tax matters
person" with respect to the REMIC in all respects.
As the tax matters person, the REMIC Administrator, subject to certain
notice requirements and various restrictions and limitations, generally will
have the authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders generally will be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the REMIC Administrator, as tax matters person, and the IRS concerning
any such REMIC item. Adjustments made to the REMIC tax return may require a
REMIC Residual Certificateholder to make corresponding
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adjustments on its return, and an audit of the REMIC's tax return, or the
adjustments resulting from such an audit, could result in an audit of a REMIC
Residual Certificateholder's return. No REMIC will be registered as a tax
shelter pursuant to Section 6111 of the Code because it is not anticipated that
any REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a REMIC Residual Certificate as a nominee for
another person may be required to furnish to the related REMIC, in a manner to
be provided in Treasury regulations, the name and address of such person and
other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other nonindividuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the IRS. Reporting with respect
to REMIC Residual Certificates, including income, excess inclusions, investment
expenses and relevant information regarding qualification of the REMIC's assets
will be made as required under the Treasury regulations, generally on a
quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount".
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the REMIC Administrator.
Backup Withholding with Respect to REMIC Certificates. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax. Furthermore, certain penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular Certificateholder
that is not a "United States Person" (as defined below) and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate will
not, unless otherwise disclosed in the related Prospectus Supplement, be subject
to United States federal income or withholding tax in respect of a distribution
on a REMIC Regular Certificate, provided that the holder complies to the extent
necessary with certain identification requirements (including delivery of a
statement, signed by the Certificateholder under penalties of perjury,
certifying that such Certificateholder is not a United States Person and
providing the name and address of such Certificateholder). For these purposes,
"United States Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof, or an estate or
trust whose income from sources
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without the United States is includible in gross income for United States
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States. It is possible that the IRS may
assert that the foregoing tax exemption should not apply with respect to a REMIC
Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a nonresident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are nonresident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling Agreement.
Grantor Trust Funds
Classification of Grantor Trust Funds. With respect to each series of
Grantor Trust Certificates, counsel to the Depositor will deliver its opinion to
the effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. The following general discussion of the
anticipated federal income tax consequences of the purchase, ownership and
disposition of Grantor Trust Certificates, to the extent it relates to matters
of law or legal conclusions with respect thereto, represents the opinion of
counsel to the Depositor for the applicable series as specified in the related
Prospectus Supplement, subject to any qualifications set forth herein. In
addition, counsel to the Depositor have prepared or reviewed the statements in
this Prospectus under the heading "Certain Federal Income Tax
Consequences--Grantor Trust Funds," and are of the opinion that such statements
are correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Grantor Trust Fund as a grantor trust for federal income tax purposes on
investors generally and of related tax matters affecting investors generally,
but do not purport to furnish information in the level of detail or with the
attention to an investor's specific tax circumstances that would be provided by
an investor's own tax advisor. Accordingly, each investor is advised to consult
its own tax advisors with regard to the tax consequences to it of investing in
Grantor Trust Certificates.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate". A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees) and interest paid to the holders of Grantor Trust
Fractional Interest Certificates issued with respect to such Grantor Trust Fund
will be referred to as a "Grantor Trust Strip Certificate". A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
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Characterization of Investments in Grantor Trust Certificates.
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Depositor will deliver an opinion
that, in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "qualifying real property loans" within the meaning of Section
593(d) of the Code; (ii) "loans . . . secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; (iii)
"obligation[s] (including any participation or Certificate of beneficial
ownership therein) which . . .[are] principally secured by an interest in real
property" within the meaning of Section 860G(a)(3) of the Code; and (iv) "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code. In
addition, counsel to the Depositor will deliver an opinion that interest on
Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of Mortgage Loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, "qualifying real property loans" within
the meaning of Section 593(d) of the Code, and "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code, and the interest on which is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(A) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying such sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that such characterization is appropriate. Counsel to the
Depositor will not deliver any opinion on these questions. Prospective
purchasers to which such characterization of an investment in Grantor Trust
Strip Certificates is material should consult their tax advisors regarding
whether the Grantor Trust Strip Certificates, and the income therefrom, will be
so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates.
General. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses) and
will be entitled to deduct their shares of any such reasonable servicing fees
and other expenses. Because of stripped interests, market or original issue
discount, or premium, the amount includible in income on account of a Grantor
Trust Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
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holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a Mortgage Asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. The
related Prospectus Supplement will include information regarding servicing fees
paid to a Master Servicer, a Special Servicer, any Sub-Servicer or their
respective affiliates.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-Market Discount" below. Under the stripped bond rules, the
holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser of the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest", if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest". In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "-Sales of Grantor Trust Certificates" below) and the yield of such Grantor
Trust Fractional Interest Certificate to such holder. Such yield would be
computed as the rate (compounded based on the regular interval between payment
dates) that, if used to discount the holder's share of future payments on the
Mortgage Loans, would cause the present value of those future payments to equal
the price at which the holder purchased such Certificate. In computing yield
under the stripped bond rules, a Certificateholder's share of future payments on
the Mortgage Loans will not include any payments made in respect of any
ownership interest in the Mortgage Loans retained by the Depositor, the Master
Servicer, the Special Servicer, any Sub-Servicer or their respective affiliates,
but will include such Certificateholder's share of any reasonable servicing fees
and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions
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to the Grantor Trust Fractional Interest Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Fractional Interest
Certificates or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "-REMICs-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount" above. It is
unclear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor any other person will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average
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maturity of the Mortgage Loans, then such original issue discount or market
discount will be considered to be de minimis. Original issue discount or market
discount of only a de minimis amount will be included in income in the same
manner as de minimis original issue and market discount described in "-Taxation
of Owners of Grantor Trust Fractional Interest Certificates-If Stripped Bond
Rules Do Not Apply" and "-Market Discount" below.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply, even if the stripped bond rules do not apply, to a
Grantor Trust Fractional Interest Certificate to the extent it evidences an
interest in Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. For a definition of "stated redemption price," see "-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount" above. In general,
the issue price of a Mortgage Loan will be the amount received by the borrower
from the lender under the terms of the Mortgage Loan, less any "points" paid by
the borrower, and the stated redemption price of a Mortgage Loan will equal its
principal amount, unless the Mortgage Loan provides for an initial "teaser," or
below-market interest rate. The determination as to whether original issue
discount will be considered to be de minimis will be calculated using the same
test as in the REMIC discussion. See "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee or
Master Servicer, as applicable, in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during
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such accrual period prior to such day. The adjusted issue price of a Mortgage
Loan at the beginning of any accrual period will equal the issue price of such
Mortgage Loan, increased by the aggregate amount of original issue discount with
respect to such Mortgage Loan that accrued in prior accrual periods, and reduced
by the amount of any payments made on such Mortgage Loan in prior accrual
periods of amounts included in its stated redemption price.
Unless otherwise provided in the related Prospectus Supplement, the Trustee
or Master Servicer, as applicable, will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may reasonably
request from time to time with respect to original issue discount accruing on
Grantor Trust Fractional Interest Certificates. See "-Grantor Trust Reporting"
below.
Market Discount. If the stripped bond rules do not apply to a Grantor Trust
Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount", that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in "-Taxation of Owners of REMIC Regular
Interests-Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
holder's option: (i) on the basis of a constant yield method, (ii) in the case
of a Mortgage Loan issued without original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "-REMICs-Taxation of Owners of REMIC Regular
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Certificates-Original Issue Discount" above within the exception that it is less
likely that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
Further, under the rules described above in "-REMICs-Taxation of Owners of
REMIC Regular Certificates-Market Discount", any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "-Taxation of Owners of Grantor Trust
Fractional Interest Certificates-If Stripped Bond Rules Apply", no regulations
or published rulings under Section 1286 of the Code have been issued and some
uncertainty exists as to how it will be applied to securities such as the
Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their tax advisors concerning the method to be used
in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons", although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "-Possible Application of Proposed Contingent Payment Rules"
below and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate
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to such holder. Such yield would be calculated based on the price paid for that
Grantor Trust Strip Certificate by its holder and the payments remaining to be
made thereon at the time of the purchase, plus an allocable portion of the
servicing fees and expenses to be paid with respect to the Mortgage Loans. See
"-Taxation of Owners of Grantor Trust Fractional Interest Certificates-If
Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
Possible Application of Proposed Contingent Payment Rules. The coupon
stripping rules' general treatment of stripped coupons is to regard them as
newly issued debt instruments in the hands of each purchaser. To the extent that
payments on the Grantor Trust Strip Certificates would cease if the Mortgage
Loans were prepaid in full, the Grantor Trust Strip Certificates could be
considered to be debt instruments providing for contingent payments. Under the
OID Regulations, debt instruments providing for contingent payments are not
subject to the same rules as debt instruments providing for noncontingent
payments, but no final regulations have been promulgated with respect to
contingent payment debt instruments. Proposed regulations were promulgated on
December 16, 1994 regarding contingent payment debt instruments. As in the case
of the OID Regulations, such proposed regulations do not specifically address
securities, such as the Grantor Trust Strip Certificates, that are subject to
the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply a "noncontingent bond method." Under that method, the issuer of a Grantor
Trust Strip
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Certificate would determine a projected payment schedule with respect to such
Grantor Trust Strip Certificate. Holders of Grantor Trust Strip Certificates
would be bound by the issuer's projected payment schedule, which would consist
of all noncontingent payments and a projected amount for each contingent payment
based on the projected yield (as described below) of the Grantor Trust Strip
Certificate. The projected amount of each payment would be determined so that
the projected payment schedule reflected the projected yield reasonably expected
to be received by the holder of a Grantor Trust Strip Certificate. The projected
yield referred to above would be a reasonable rate, not less than the
"applicable Federal rate" that, as of the issue date, reflected general market
conditions, the credit quality of the issuer, and the terms and conditions of
the Mortgage Loans. The holder of a Grantor Trust Strip Certificate would be
required to include as interest income in each month the adjusted issue price of
the Grantor Trust Strip Certificate at the beginning of the period multiplied by
the projected yield, and would add to, or subtract from, such income any
variation between the payment actually received in such month and the payment
originally projected to be made in such month.
In the absence of final Treasury regulations relating to debt instruments
providing for contingent payments, a projected payment schedule under the
"noncontingent bond method" is not intended to be provided to holders.
Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.
Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this Prospectus provides a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for that taxable year, for purposes
of the rule that limits
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the deduction of interest on indebtedness incurred to purchase or carry property
held for investment to a taxpayer's net investment income.
Grantor Trust Reporting. Unless otherwise provided in the related
Prospectus Supplement, the Trustee or Master Servicer, as applicable, will
furnish to each holder of a Grantor Trust Certificate with each distribution a
statement setting forth the amount of such distribution allocable to principal
on the underlying Mortgage Loans and to interest thereon at the related
Pass-Through Rate. In addition, the Trustee or Master Servicer, as applicable,
will furnish, within a reasonable time after the end of each calendar year, to
each holder of a Grantor Trust Certificate who was such a holder at any time
during such year, information regarding the amount of servicing compensation
received by the Master Servicer, the Special Servicer or any Sub-Servicer, and
such other customary factual information as the Depositor or the reporting party
deems necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are uncertain
in various respects, there is no assurance the IRS will agree with the Trustee's
or Master Servicer's, as the case may be, information reports of such items of
income and expense. Moreover, such information reports, even if otherwise
accepted as accurate by the IRS, will in any event be accurate only as to the
initial Certificateholders that bought their Certificates at the representative
initial offering price used in preparing such reports.
Backup Withholding. In general, the rules described above in
"-REMICs-Backup Withholding with Respect to REMIC Certificates" will also apply
to Grantor Trust Certificates.
Foreign Investors. In general, the discussion with respect to REMIC Regular
Certificates in "-REMICs-Foreign Investors in REMIC Certificates" above applies
to Grantor Trust Certificates except that Grantor Trust Certificates will,
unless otherwise disclosed in the related Prospectus Supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
nonresident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Offered Certificates. State tax law may differ substantially from the
corresponding federal law, and the discussion above does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their tax advisors with respect to the
various tax consequences of investments in the Offered Certificates.
<PAGE>
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ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans, and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts (and as applicable, insurance company general accounts) in which such
plans, accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code ("Plans"), and
on persons who are fiduciaries with respect to such Plans, in connection with
the investment of Plan assets. 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 Section
3(33) of ERISA) are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Offered Certificates without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal and state law. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons ("parties in interest" within the meaning of ERISA and "disqualified
persons" within the meaning of the Code; collectively, "Parties in Interest")
who have certain specified relationships to the Plan, unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code or a penalty imposed pursuant to Section
502(i) of ERISA, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
Plan Asset Regulations
A Plan's investment in Offered Certificates may cause the underlying
Mortgage Assets and other assets included in a related Trust Fund to be deemed
assets of such Plan. Section 2510.3-101 of the regulations (the "Plan Asset
Regulations") of the United States Department of Labor (the "DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets include
both such equity interest and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions not applicable here apply, or
unless the equity participation in the entity by "benefit plan investors" (i.e.,
Plans and certain employee benefit plans not subject to ERISA) is not
"significant", both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. Equity participation in a Trust Fund will be significant
on any date if immediately after the most recent acquisition of any Certificate,
25% or more of any class of Certificates is held by benefit plan investors.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Depositor, the Master
Servicer, any Special Servicer, any Sub-Servicer, any Manager, the Trustee, the
obligor under any credit enhancement mechanism or certain affiliates thereof to
be considered or become Parties in Interest with respect to an investing Plan
(or of a Plan holding an interest in an investing entity). If so, the
acquisition or holding of Certificates by or on behalf of the investing Plan
could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Certificates
acquired by a Plan may be assets of that Plan. Under the Plan Asset Regulations,
the Trust Fund, including the Mortgage Asset Loans and the other assets held in
the Trust
<PAGE>
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Fund, may also be deemed to be assets of each Plan that acquires Certificates.
Special caution should be exercised before Plan Assets are used to acquire a
Certificate in such circumstances, especially if, with respect to such assets,
the Depositor, the Master Servicer, any Special Servicer, any Sub-Servicer, any
Manager, the Trustee, the obligor under any credit enhancement mechanism or an
affiliate thereof either (i) has investment discretion with respect to the
investment of Plan Assets; or (ii) has authority or responsibility to give (or
regularly gives) investment advice with respect to Plan Assets for a fee
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such Plan assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Assets and other assets included in a Trust Fund
constitute Plan assets, then any party exercising management or discretionary
control regarding those assets, such as the Master Servicer, any Special
Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism, or certain affiliates thereof may be deemed to be a Plan
"fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code with respect to the
investing Plan. In addition, if the Mortgage Assets and other assets included in
a Trust Fund constitute Plan assets, the purchase of Certificates by a Plan, as
well as the operation of the Trust Fund, may constitute or involve a prohibited
transaction under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a "guaranteed
governmental mortgage pool certificate", the Plan's assets include such
certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Plan
Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" FHLMC Certificates, GNMA Certificates and FNMA
Certificates, but do not include FAMC Certificates. Accordingly, even if such
MBS (other than FAMC Certificates) included in a Trust Fund were deemed to be
assets of Plan investors, the mortgages underlying such MBS (other than FAMC
Certificates) would not be treated as assets of such Plans. Private label
mortgage participations, mortgage pass-through certificates, FAMC Certificates
or other mortgage-backed securities are not "guaranteed governmental mortgage
pool certificates" within the meaning of the Plan Asset Regulations. Potential
Plan investors should consult their counsel and review the ERISA discussion in
the related Prospectus Supplement before purchasing any such Certificates.
Prohibited Transaction Exemptions
In considering an investment in the Offered Certificates, a Plan fiduciary
should consider the availability of prohibited transaction exemptions
promulgated by the DOL including, among others, Prohibited Transaction Class
Exemption ("PTCE") 75-1, which exempts certain transactions involving Plans and
certain broker-dealers, reporting dealers and banks; PTCE 90-1, which exempts
certain transactions between insurance company separate accounts and Parties in
Interest; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; PTCE 95-60, which exempts certain transactions between insurance
company general accounts and Parties in Interest; and PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by an "in-house asset
manager". There can be no assurance that any of these class exemptions will
apply with respect to any particular Plan investment in the Certificates or,
even if it were deemed to apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such investment. The
Prospectus Supplement with respect to a series of Certificates may contain
additional information regarding the availability of other exemptions with
respect to the Certificates offered thereby.
<PAGE>
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Insurance Company General Accounts
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Notes should consult with their legal counsel with
respect to the applicability of Section 401(c) of ERISA, including the general
account's ability to continue to hold the Certificates after the date which is
18 months after the date the 401(c) Regulations become final.
Consultation With Counsel
Any Plan fiduciary which proposes to purchase Offered Certificates on
behalf of or with assets of a Plan should consider its general fiduciary
obligations under ERISA and should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investment and the
availability of any prohibited transaction exemption in connection therewith.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences-REMICs-Taxation of
Owners of REMIC Residual Certificates-Excess Inclusions".
LEGAL INVESTMENT
If so specified in the related Prospectus Supplement, the Offered
Certificates will constitute "mortgage related securities" for purposes of
SMMEA. Generally, only classes of Offered Certificates that (i) are rated in one
of the two highest rating categories by one or more Rating Agencies and (ii) are
part of a series evidencing interests in a Trust Fund consisting of loans
secured by a single parcel of real estate upon which is located a dwelling or
mixed residential and commercial
<PAGE>
-99-
structure, such as certain Multifamily Loans, and originated by types of
Originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA. "Mortgage related securities" are legal investments to the
same extent that, under applicable law, obligations issued by or guaranteed as
to principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, insurance companies and pension funds created pursuant
to or existing under the laws of the United States or of any state, the
authorized investments of which are subject to state regulation). Under SMMEA,
if a state enacted legislation prior to October 3, 1991 that specifically limits
the legal investment authority of any such entities with respect to "mortgage
related securities", Offered Certificates would constitute legal investments for
entities subject to such legislation only to the extent provided in such
legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
Upon the issuance of final implementing regulations under the Riegle
Community Development and Regulatory Improvement Act of 1994 and subject to any
limitations such regulations may impose, a modification of the definition of
"mortgage related securities" will become effective to expand the types of loans
to which such securities may relate to include loans secured by "one or more
parcels of real estate upon which is located one or more commercial structures".
In addition, the related legislative history states that this expanded
definition includes multifamily residential loans secured by more than one
parcel of real estate upon which is located more than one structure. Until
September 23, 2001 any state may enact legislation limiting the extent to which
"mortgage related securities" under this expanded definition would constitute
legal investments under that state's laws.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities". The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS (as defined herein). The
Policy Statement generally indicates that a mortgage derivative product will be
deemed to be high risk if it exhibits greater price volatility than a standard
fixed rate thirty-year mortgage security. According to the Policy Statement,
prior to purchase, a depository institution will be required to determine
whether a mortgage derivative product that it is considering acquiring is
high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance as
to which classes of Certificates, including Offered Certificates, will be
treated as high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision (the "OTS") issued a
bulletin, entitled "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Offered Certificates. In addition, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes
<PAGE>
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of Offered Certificates. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Offered Certificates or to purchase any class of
Offered Certificates representing more than a specified percentage of the
investor's assets. The Depositor will make no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all investors whose investment activities are subject
to legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Certificates of any class
constitute legal investments or are subject to investment, capital or other
restrictions.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or will
be used by the Depositor to cover expenses related thereto. The Depositor
expects to sell the Certificates from time to time, but the timing and amount of
offerings of Certificates will depend on a number of factors, including the
volume of Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus
Supplements will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the Depositor from such sale.
The Depositor intends that Offered Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the Offered
Certificates of a particular series may be made through a combination of two or
more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
offering by one or more underwriters specified in the related
Prospectus Supplement;
2. By placements by the Depositor with institutional investors through
dealers; and
3. By direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, the Offered
Certificates of a series may be offered in whole or in part to the seller of the
related Mortgage Assets that would comprise the Trust Fund for such
Certificates.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to
<PAGE>
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time in one or more transactions, including negotiated transactions, at fixed
public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. The managing underwriter or underwriters
with respect to the offer and sale of Offered Certificates of a particular
series will be set forth on the cover of the Prospectus Supplement relating to
such series and the members of the underwriting syndicate, if any, will be named
in such Prospectus Supplement.
In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Offered Certificates may be
deemed to be underwriters in connection with such Certificates, and any
discounts or commissions received by them from the Depositor and any profit on
the resale of Offered Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
the Offered Certificates of any series will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Depositor will indemnify the
several underwriters and the underwriters will indemnify the Depositor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Depositor and purchasers of
Offered Certificates of such series.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended, in connection with reoffers and sales by them of
Offered Certificates. Holders of Offered Certificates should consult with their
legal advisors in this regard prior to any such reoffer or sale.
As to any series of Certificates, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any unrated
class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or institutional investors.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the Depositor
by Thacher Proffitt & Wood.
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
<PAGE>
-102-
Supplement. The Depositor has determined that its financial statements will not
be material to the offering of any Offered Certificates.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by borrowers 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 Interest Certificates might, in extreme
cases fail to recoup their initial investments. Furthermore, ratings on mortgage
pass-through certificates do not address the price of such certificates or the
suitability of such certificates to the investor.
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.
<PAGE>
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INDEX OF PRINCIPAL DEFINITIONS
401(c) Regulations............................................................98
Accrual Certificates...........................................................4
Accrual Period ............................................................73
Accrued Certificate Interest..................................................31
Act ............................................................64
ADA ............................................................67
ARM Loans ............................................................20
Assisted Living Facilities....................................................20
Available Distribution Amount.................................................30
Book-Entry Certificates.......................................................30
Call Risk ............................................................10
Cash Flow Agreement............................................................6
CERCLA ............................................................64
Certificate Account...........................................................23
Certificate Balance............................................................4
Certificate Owner ............................................................37
Certificates .............................................................i
Closing Date ............................................................72
Code .............................................................7
Commercial Properties...................................................i, 2, 16
Commission ............................................................iv
Committee Report ............................................................71
Companion Class ............................................................33
Condemnation Proceeds.........................................................44
Contributions Tax ............................................................83
Controlled Amortization Class.................................................32
Controlled Amortization Classes................................................3
Cooperatives ............................................................17
CPR ............................................................26
Credit Support .............................................................6
Crime Control Act ............................................................68
Cut-off Date .........................................................5, 32
Debt Service Coverage Ratio...................................................18
Definitive Certificates.......................................................30
Depositor .............................................................i
Determination Date........................................................24, 31
Deutsche Bank Group...........................................................29
Distribution Date .............................................................4
Distribution Date Statement...................................................34
DMARC Trust ............................................................29
DOL ............................................................96
DTC .........................................................v, 37
DTC Participants ............................................................37
Due Dates ............................................................19
Due Period ............................................................24
Equity Participation..........................................................19
ERISA .........................................................7, 96
Exchange Act .............................................................v
Extension Risk ............................................................10
FAMC ............................................................22
FHLMC ............................................................22
Financial Intermediary........................................................37
FNMA ............................................................22
Garn Act ............................................................66
GNMA ............................................................22
Grantor Trust Certificates.....................................................7
Grantor Trust Fractional Interest Certificate.................................86
Grantor Trust Fund............................................................69
Health Care-Related Facilities................................................20
Insurance Proceeds............................................................44
IRS ........................................................47, 69
Issue Premium ............................................................78
Letter of Credit Bank.........................................................57
Liquidation Proceeds..........................................................44
Loan-to-Value Ratio...........................................................18
Lock-out Date ............................................................19
Lock-out Period ............................................................19
Manager .............................................................1
Mark-to-Market Regulations....................................................81
Master Servicer .............................................................1
MBS ......................................................i, 3, 16
MBS Administrator .............................................................1
MBS Agreement ............................................................22
MBS Issuer ............................................................22
MBS Servicer ............................................................22
MBS Trustee ............................................................22
Mortgage ............................................................16
Mortgage Asset Pool............................................................i
Mortgage Asset Seller.........................................................16
Mortgage Assets .........................................................i, 16
Mortgage Loans ......................................................i, 1, 16
Mortgage Notes ............................................................16
Mortgage Rate .............................................................2
Mortgaged Properties..........................................................16
Mortgages ............................................................58
Multifamily Properties...............................................i, 1, 2, 16
Net Leases ............................................................18
Net Operating Income..........................................................18
Nonrecoverable Advance........................................................33
Notional Amount .............................................................4
Offered Certificates...........................................................i
OID Regulations ............................................................69
Originator ............................................................17
OTS ............................................................99
Parties in Interest...........................................................96
Pass-Through Rate .............................................................4
<PAGE>
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Percentage Interest...........................................................31
Permitted Investments.........................................................44
Plan Asset Regulations........................................................96
Plans ............................................................96
Policy Statement ............................................................99
Pooling and Servicing Agreement................................................3
Prepayment Assumption.....................................................71, 89
Prepayment Interest Shortfall.................................................24
Prepayment Period ............................................................35
Prepayment Premium............................................................19
Prohibited Transactions Tax...................................................83
Prospectus Supplement..........................................................i
PTCE ............................................................97
Purchase Price ............................................................40
Rating Agency .............................................................7
Record Date ............................................................31
Related Proceeds ............................................................33
Relief Act ............................................................68
REMIC .......................................................iii, 69
REMIC Administrator........................................................iv, 1
REMIC Certificates............................................................69
REMIC Provisions ............................................................69
REMIC Regular Certificates.....................................................7
REMIC Regulations ............................................................69
REMIC Residual Certificates....................................................7
REO Property ............................................................42
Residual Owner ............................................................76
RICO ............................................................68
Senior Certificates............................................................3
Senior Housing Facilities.....................................................20
Senior Liens ............................................................17
Skilled Nursing Facilities....................................................20
SMMEA .............................................................7
SPA ............................................................26
Special Servicer .............................................................1
Stripped Interest Certificates.................................................3
Stripped Principal Certificates................................................3
Sub-Servicer ............................................................43
Sub-Servicing Agreement.......................................................43
Subordinate Certificates.......................................................3
Superlien ............................................................64
Tax Exempt Investor...........................................................98
Tiered REMICs ............................................................71
Title V ............................................................67
Trust Assets ............................................................iv
Trust Fund .............................................................i
Trustee .............................................................1
UBTI ............................................................98
UCC ............................................................59
Value ............................................................18
Voting Rights ............................................................36
Warranting Party ............................................................40
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ________, 199_
[Version 3 - Restaurant Concentration]
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
Mortgage Pass-Through Certificates
The mortgage pass-through certificates offered hereby (the "Offered
Certificates") and by the supplements hereto (each, a "Prospectus Supplement")
will be offered from time to time in series. The Offered Certificates of any
series, together with any other mortgage pass-through certificates of such
series, are collectively referred to herein as the "Certificates".
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") to be formed by Deutsche Mortgage & Asset Receiving Corporation
(the "Depositor") and including a segregated pool (a "Mortgage Asset Pool") of
various types of multifamily and commercial mortgage loans ("Mortgage Loans"),
mortgage-backed securities ("MBS") that evidence interests in, or that are
secured by pledges of, one or more of various types of multifamily or commercial
mortgage loans, or a combination of Mortgage Loans and MBS (collectively,
"Mortgage Assets"). The Mortgage Loans in (and the mortgage loans underlying the
MBS in) any Trust Fund will be secured by first or junior liens on, or security
interests in, one or more of the following types of real property: (i)
residential properties consisting of five or more rental or cooperatively-owned
dwelling units and mobile home parks; and (ii) commercial properties consisting
of office buildings, retail shopping facilities, hotels and motels, health
care-related facilities (such as hospitals, skilled nursing facilities, nursing
homes, congregate care facilities and senior housing), recreational vehicle
parks, warehouse facilities, mini-warehouse facilities, self-storage facilities,
industrial facilities, parking lots, individual restaurants and other
establishments that are part of the food service industry (collectively,
"Restaurants"), mixed use properties (that is, any combination of the
foregoing), and unimproved land. However, health care- related facilities will
not represent security for a material concentration of the Mortgage Loans in (or
the mortgage loans underlying the MBS in) any Trust Fund, based on principal
balance at the time such Trust Fund is formed. If so specified in the related
Prospectus Supplement, the Trust Fund for a series of Certificates may also
include letters of credit, surety bonds, insurance policies, guarantees, reserve
funds, guaranteed investment contracts, interest rate exchange agreements,
interest rate cap or floor agreements, or other agreements designed to reduce
the effects of interest rate fluctuations on the Mortgage Assets. See
"Description of the Trust Funds", "Description of the Certificates" and
"Description of Credit Support".
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. See
"Yield and Maturity Considerations". A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination;
Retirement of the Certificates".
(cover continued on next page)
--------
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR ANY
OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE ASSETS
WILL BE GUARANTEED OR INSURED BY THE DEPOSITOR OR ANY OF ITS AFFILIATES OR,
UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------
Prospective investors should review the information appearing on page 8
herein under the caption "Risk Factors" and such information as may be set forth
under the caption "Risk Factors" in the related Prospectus Supplement before
purchasing any Offered Certificate.
The Offered Certificates of any series may be offered through one or more
different methods, including offerings through underwriters, as described under
"Method of Distribution" and in the related Prospectus Supplement.
<PAGE>
(ii)
There will be no secondary market for the Offered Certificates of any
series prior to the offering thereof. There can be no assurance that a secondary
market for any Offered Certificates will develop or, if it does develop, that it
will continue. Unless otherwise provided in the related Prospectus Supplement,
the Certificates will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Offered Certificates of any series unless
accompanied by the Prospectus Supplement for such series.
--------
The date of this Prospectus is ______, 199_
<PAGE>
(iii)
(cover continued)
As described in the related Prospectus Supplement, the Certificates of each
series, including the Offered Certificates of such series, may consist of one or
more classes of Certificates that: (i) provide for the accrual of interest
thereon based on a fixed, variable or adjustable interest rate; (ii) are senior
or subordinate to one or more other classes of Certificates in entitlement to
certain distributions on the Certificates; (iii) are entitled to distributions
of principal, with disproportionate, nominal or no distributions of interest;
(iv) are entitled to distributions of interest, with disproportionate, nominal
or no distributions of principal; (v) provide for distributions of interest
thereon or principal thereof that commence only following the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of such series; (vi) provide for distributions of principal thereof
to be made, from time to time or for designated periods, at a rate that is
faster (and, in some cases, substantially faster) or slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund; or
(vii) provide for distributions of principal thereof to be made, subject to
available funds, based on a specified principal payment schedule or other
methodology. Distributions in respect of the Certificates of each series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. See "Description of the
Certificates".
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" (each, a "REMIC") for federal income
tax purposes. If applicable, the Prospectus Supplement for a series of
Certificates will specify which class or classes of such series of Certificates
will be considered to be regular interests in the related REMIC and which class
of Certificates or other interests will be designated as the residual interest
in the related REMIC. See "Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this Prospectus
specifying the location of definitions of important or frequently used defined
terms.
<PAGE>
(iv)
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to each series of Offered Certificates will, among other things, set forth, as
and to the extent appropriate: (i) a description of the class or classes of such
Offered Certificates, including the payment provisions with respect to each such
class, the aggregate principal amount, if any, of each such class, the rate at
which interest accrues from time to time, if at all, with respect to each such
class or the method of determining such rate, and whether interest with respect
to each such class will accrue from time to time on its aggregate principal
amount, if any, or on a specified notional amount, if at all; (ii) information
with respect to any other classes of Certificates of the same series; (iii) the
respective dates on which distributions are to be made; (iv) information as to
the assets, including the Mortgage Assets, constituting the related Trust Fund
(all such assets, with respect to the Certificates of any series, the "Trust
Assets"); (v) the circumstances, if any, under which the related Trust Fund may
be subject to early termination; (vi) additional information with respect to the
method of distribution of such Offered Certificates; (vii) whether one or more
REMIC elections will be made and the designation of the "regular interests" and
"residual interests" in each REMIC to be created and the identity of the person
(the "REMIC Administrator") responsible for the various tax-related duties in
respect of each REMIC to be created; (viii) the initial percentage ownership
interest in the related Trust Fund to be evidenced by each class of Certificates
of such series; (ix) information concerning the Trustee (as defined herein) of
the related Trust Fund; (x) if the related Trust Fund includes Mortgage Loans,
information concerning the Master Servicer and any Special Servicer (each as
defined herein) of such Mortgage Loans and the circumstances under which all or
a portion, as specified, of the servicing of a Mortgage Loan would transfer from
the Master Servicer to the Special Servicer; (xi) information as to the nature
and extent of subordination of any class of Certificates of such series,
including a class of Offered Certificates; and (xii) whether such Offered
Certificates will be initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to each
series of Offered Certificates contain 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, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http://www.sec.gov).
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or any related Prospectus Supplement, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Depositor or any other person. Neither the delivery of this Prospectus or
any related Prospectus Supplement nor any sale made hereunder or thereunder
shall under any circumstances create an implication that there has been no
change in the information herein since the date hereof or therein since the date
thereof. This Prospectus and any related Prospectus Supplement are not an offer
to sell or a solicitation of an offer to buy any security in any jurisdiction in
which it is unlawful to make such offer or solicitation.
<PAGE>
(v)
The Master Servicer, the Trustee or another specified person will cause to
be provided to registered holders of the Offered Certificates of each series
periodic unaudited reports concerning the related Trust Fund. If beneficial
interests in a class or series of Offered Certificates are being held and
transferred in book-entry format through the facilities of The Depository Trust
Company ("DTC") as described herein, then unless otherwise provided in the
related Prospectus Supplement, such reports will be sent on behalf of the
related Trust Fund to a nominee of DTC as the registered holder of the Offered
Certificates. Conveyance of notices and other communications by DTC to its
participating organizations, and directly or indirectly through such
participating organizations to the beneficial owners of the applicable Offered
Certificates, will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time. See
"Description of the Certificates--Reports to Certificateholders" and
"--Book-Entry Registration and Definitive Certificates".
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder. The Depositor intends to make a
written request to the staff of the Commission that the staff either (i) issue
an order pursuant to Section 12(h) of the Exchange Act exempting the Depositor
from certain reporting requirements under the Exchange Act with respect to each
Trust Fund or (ii) state that the staff will not recommend that the Commission
take enforcement action if the Depositor fulfills its reporting obligations as
described in its written request. If such request is granted, the Depositor will
file or cause to be filed with the Commission as to each Trust Fund the periodic
unaudited reports to holders of the Offered Certificates referenced in the
preceding paragraph; however, because of the nature of the Trust Funds, it is
unlikely that any significant additional information will be filed. In addition,
because of the limited number of Certificateholders expected for each series,
the Depositor anticipates that a significant portion of such reporting
requirements will be permanently suspended following the first fiscal year for
the related Trust Fund.
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 of 1934, as amended, prior
to the termination of an offering of Offered Certificates evidencing interests
therein. 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 Offered Certificates, upon written or oral request of
such person, 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 Offered Certificates, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by reference
in such documents). Such requests to the Depositor should be directed in writing
to the Depositor at One International Place, Room 608, Boston, Massachusetts
02110, Attention: Secretary, or by telephone at (617) 951-7690.
<PAGE>
(vi)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT .................................................................... iv
AVAILABLE INFORMATION .................................................................... iv
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ........................................ v
SUMMARY OF PROSPECTUS .................................................................... 1
RISK FACTORS ............................................................................. 8
Limited Liquidity of Offered Certificates ....................................... 8
Credit Support Limitations ...................................................... 9
Effect of Prepayments on Average Life of Certificates ........................... 9
Effect of Prepayments on Yield of Certificates .................................. 11
Limited Nature of Ratings ....................................................... 11
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans 11
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset Pool 15
Termination ..................................................................... 15
Risks Associated with Restaurants ............................................... 15
DESCRIPTION OF THE TRUST FUNDS ........................................................... 16
General ......................................................................... 16
Mortgage Loans .................................................................. 16
MBS ............................................................................. 21
Certificate Accounts ............................................................ 22
Credit Support .................................................................. 22
Cash Flow Agreements ............................................................ 22
YIELD AND MATURITY CONSIDERATIONS ........................................................ 23
General ......................................................................... 23
Pass-Through Rate ............................................................... 23
Payment Delays .................................................................. 23
Certain Shortfalls in Collections of Interest ................................... 23
Yield and Prepayment Considerations ............................................. 24
Weighted Average Life and Maturity .............................................. 25
Other Factors Affecting Yield, Weighted Average Life and Maturity ............... 26
THE DEPOSITOR ............................................................................ 28
DEUTSCHE BANK AG ......................................................................... 28
DESCRIPTION OF THE CERTIFICATES .......................................................... 29
General ......................................................................... 29
</TABLE>
<PAGE>
(vii)
<TABLE>
<S> <C>
Distributions of Interest on the Certificates ...................................................... 30
Distributions of Principal of the Certificates ..................................................... 31
Distributions on the Certificates in Respect of Prepayment Premiums or in Respect of Equity
Participations ..................................................................................... 32
Allocation of Losses and Shortfalls ................................................................ 32
Advances in Respect of Delinquencies ............................................................... 32
Reports to Certificateholders ...................................................................... 33
Voting Rights ...................................................................................... 35
Termination ........................................................................................ 35
Book-Entry Registration and Definitive Certificates ................................................ 36
DESCRIPTION OF THE POOLING AGREEMENTS ....................................................................... 37
General ............................................................................................ 37
Assignment of Mortgage Loans; Repurchases .......................................................... 38
Representations and Warranties; Repurchases ........................................................ 39
Collection and Other Servicing Procedures .......................................................... 40
Sub-Servicers ...................................................................................... 42
Certificate Account ................................................................................ 43
Modifications, Waivers and Amendments of Mortgage Loans ............................................ 45
Realization Upon Defaulted Mortgage Loans .......................................................... 46
Hazard Insurance Policies .......................................................................... 47
Due-on-Sale and Due-on-Encumbrance Provisions ...................................................... 48
Servicing Compensation and Payment of Expenses ..................................................... 48
Evidence as to Compliance .......................................................................... 49
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor .......................................................................................... 50
Events of Default .................................................................................. 51
Rights Upon Event of Default ....................................................................... 52
Amendment .......................................................................................... 52
List of Certificateholders ......................................................................... 53
The Trustee ........................................................................................ 53
Duties of the Trustee .............................................................................. 54
Certain Matters Regarding the Trustee .............................................................. 54
Resignation and Removal of the Trustee ............................................................. 54
DESCRIPTION OF CREDIT SUPPORT ............................................................................... 54
General ............................................................................................ 54
Subordinate Certificates ........................................................................... 55
Insurance or Guarantees with Respect to Mortgage Loans ............................................. 55
Letter of Credit ................................................................................... 56
Certificate Insurance and Surety Bonds ............................................................. 56
Reserve Funds ...................................................................................... 56
Credit Support with respect to MBS ................................................................. 56
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS ..................................................................... 57
General ............................................................................................ 57
</TABLE>
<PAGE>
(viii)
Types of Mortgage Instruments ................. 57
Leases and Rents .............................. 58
Personalty .................................... 58
Foreclosure ................................... 58
Bankruptcy Laws ............................... 62
Environmental Considerations .................. 63
Due-on-Sale and Due-on-Encumbrance Provisions . 64
Junior Liens; Rights of Holders of Senior Liens 65
Subordinate Financing ......................... 65
Default Interest and Limitations on Prepayments 65
Applicability of Usury Laws ................... 66
Certain Laws and Regulations .................. 66
Americans with Disabilities Act ............... 66
Soldiers' and Sailors' Civil Relief Act of 1940 67
Forfeitures in Drug and RICO Proceedings ...... 67
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ................ 67
General ....................................... 67
REMICs ........................................ 68
Grantor Trust Funds ........................... 85
STATE AND OTHER TAX CONSEQUENCES ....................... 94
ERISA CONSIDERATIONS ................................... 95
General ....................................... 95
Plan Asset Regulations ........................ 95
Consultation With Counsel ..................... 97
Tax Exempt Investors .......................... 97
LEGAL INVESTMENT ....................................... 97
USE OF PROCEEDS ........................................ 99
METHOD OF DISTRIBUTION ................................. 99
LEGAL MATTERS........................................... 100
FINANCIAL INFORMATION................................... 100
RATING.................................................. 101
INDEX OF PRINCIPAL DEFINITIONS.......................... 102
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
Securities Offered.................. Mortgage pass-through certificates.
Depositor........................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation. See
"The Depositor".
Trustee............................. The trustee (the "Trustee") for each
series of Certificates will be named in
the related Prospectus Supplement. See
"Description of the Pooling
Agreements-The Trustee".
Master Servicer..................... If a Trust Fund includes Mortgage Loans,
then the master servicer (the "Master
Servicer") for the corresponding series
of Certificates will be named in the
related Prospectus Supplement. See
"Description of the Pooling
Agreements-Certain Matters Regarding the
Master Servicer, the Special Servicer,
the REMIC Administrator and the
Depositor".
Special Servicer.................... If a Trust Fund includes Mortgage Loans,
then the special servicer (the "Special
Servicer") for the corresponding series
of Certificates will be named, or the
circumstances under which a Special
Servicer may be appointed will be
described, in the related Prospectus
Supplement. See "Description of the
Pooling Agreements-Collection and Other
Servicing Procedures".
MBS Administrator................... If a Trust Fund includes MBS, then the
entity responsible for administering
such MBS (the "MBS Administrator") will
be named in the related Prospectus
Supplement. If an entity other than the
Trustee and the Master Servicer is the
MBS Administrator, such entity will be
herein referred to as the "Manager".
REMIC Administrator................. The person (the "REMIC Administrator")
responsible for the various tax- related
administration duties for a series of
Certificates as to which one or more
REMIC elections have been made, will be
named in the related Prospectus
Supplement. See "Certain Federal Income
Tax Consequences-REMIC's-Reporting and
Other Administrative Matters."
The Mortgage Assets................. The Mortgage Assets will be the primary
assets of any Trust Fund. The Mortgage
Assets with respect to each series of
Certificates will, in general, consist
of a pool of mortgage loans ("Mortgage
Loans") secured by first or junior liens
on, or security interests in, one or
more of the following types of real
property: (i) residential properties
("Multifamily Properties") consisting of
five or more rental or
cooperatively-owned dwelling units in
high-rise, mid-rise or garden apartment
buildings or other residential
<PAGE>
-2-
structures, and mobile home parks; and
(ii) commercial properties ("Commercial
Properties") consisting of office
buildings, retail shopping facilities
(such as shopping centers, malls and
individual stores), hotels and motels,
health care-related facilities (such as
hospitals, skilled nursing facilities,
nursing homes, congregate care
facilities and senior housing),
recreational vehicle parks, warehouse
facilities, mini-warehouse facilities,
self-storage facilities, industrial
facilities, parking lots, individual
restaurants and other establishments
that are part of the food service
industry (collectively, "Restaurants"),
mixed use properties (that is, any
combination of the foregoing), and
unimproved land. However, health
care-related facilities will not
represent security for a material
concentration of the Mortgage Loans in
any Trust Fund, based on principal
balance at the time such Trust Fund is
formed. The Mortgage Loans will not be
guaranteed or insured by the Depositor
or any of its affiliates or, unless
otherwise provided in the related
Prospectus Supplement, by any
governmental agency or instrumentality
or by any other person. If so specified
in the related Prospectus Supplement,
some Mortgage Loans may be delinquent or
nonperforming as of the date the related
Trust Fund is formed.
As and to the extent described in the
related Prospectus Supplement, a
Mortgage Loan (i) may provide for no
accrual of interest or for accrual of
interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its
term or that adjusts from time to time,
or that may be converted at the
borrower's election from an adjustable
to a fixed Mortgage Rate, or from a
fixed to an adjustable Mortgage Rate,
(ii) may provide for level payments to
maturity or for payments that adjust
from time to time to accommodate changes
in the Mortgage Rate or to reflect the
occurrence of certain events, and may
permit negative amortization, (iii) may
be fully amortizing or may be partially
amortizing or nonamortizing, with a
balloon payment due on its stated
maturity date, (iv) may prohibit over
its term or for a certain period
prepayments and/or require payment of a
premium or a yield maintenance payment
in connection with certain prepayments
and (v) may provide for payments of
principal, interest or both, on due
dates that occur monthly, quarterly,
semi-annually or at such other interval
as is specified in the related
Prospectus Supplement. Each Mortgage
Loan will have had an original term to
maturity of not more than 40 years. No
Mortgage Loan will have been originated
by the Depositor. See "Description of
the Trust Funds-Mortgage Loans".
If any Mortgage Loan, or group of
related Mortgage Loans, constitutes a
concentration of credit risk, financial
statements or other financial
information with respect to the related
Mortgaged Property or Mortgaged
Properties will be included in the
related Prospectus Supplement. See
"Description of the Trust Funds-Mortgage
Loans-Mortgage Loan Information in
Prospectus Supplements".
<PAGE>
-3-
If and to the extent specified in the
related Prospectus Supplement, the
Mortgage Assets with respect to a series
of Certificates may also include, or
consist of, mortgage participations,
mortgage pass-through certificates
and/or other mortgage-backed securities
(collectively, "MBS"), that evidence an
interest in, or are secured by a pledge
of, one or more mortgage loans that
conform to the descriptions of the
Mortgage Loans contained herein and
which may or may not be issued, insured
or guaranteed by the United States or an
agency or instrumentality thereof. See
"Description of the Trust Funds-MBS".
The Certificates.................... Each series of Certificates will be
issued in one or more classes pursuant
to a pooling and servicing agreement or
other agreement specified in the related
Prospectus Supplement (in any case, a
"Pooling Agreement") and will represent
in the aggregate the entire beneficial
ownership interest in the related Trust
Fund.
As described in the related Prospectus
Supplement, the Certificates of each
series, including the Offered
Certificates of such series, may consist
of one or more classes of Certificates
that, among other things: (i) are senior
(collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate
Certificates") to one or more other
classes of Certificates in entitlement
to certain distributions on the
Certificates; (ii) are entitled to
distributions of principal, with
disproportionate, nominal or no
distributions of interest (collectively,
"Stripped Principal Certificates");
(iii) are entitled to distributions of
interest, with disproportionate, nominal
or no distributions of principal
(collectively, "Stripped Interest
Certificates"); (iv) provide for
distributions of interest thereon or
principal thereof that commence only
after the occurrence of certain events,
such as the retirement of one or more
other classes of Certificates of such
series; (v) provide for distributions of
principal thereof to be made, from time
to time or for designated periods, at a
rate that is faster (and, in some cases,
substantially faster) or slower (and, in
some cases, substantially slower) than
the rate at which payments or other
collections of principal are received on
the Mortgage Assets in the related Trust
Fund; (vi) provide for distributions of
principal thereof to be made, subject to
available funds, based on a specified
principal payment schedule or other
methodology; or (vii) provide for
distribution based on collections on the
Mortgage Assets in the related Trust
Fund attributable to prepayment
premiums, yield maintenance payments or
equity participations.
If so specified in the related
Prospectus Supplement, a series of
Certificates may include one or more
"Controlled Amortization Classes", which
will entitle the holders thereof to
receive principal distributions
according to a specified principal
payment schedule. Although prepayment
risk cannot be eliminated entirely for
any class of Certificates, a Controlled
Amortization Class will generally
provide a relatively stable cash flow so
long as the actual rate of prepayment on
the Mortgage Loans in the related Trust
Fund remains
<PAGE>
-4-
relatively constant at the rate, or
within the range of rates, of prepayment
used to establish the specific principal
payment schedule for such Certificates.
Prepayment risk with respect to a given
Mortgage Asset Pool does not disappear,
however, and the stability afforded to a
Controlled Amortization Class comes at
the expense of one or more other classes
of the same series, any of which other
classes may also be a class of Offered
Certificates. See "Risk Factors-Effect
of Prepayments on Average Life of
Certificates" and "-Effect of
Prepayments on Yield of Certificates".
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain classes of
REMIC Residual Certificates (as defined
herein), will have an initial stated
principal amount (a "Certificate
Balance"); and each class of
Certificates, other than certain classes
of Stripped Principal Certificates and
certain classes of REMIC Residual
Certificates, will accrue interest on
its Certificate Balance or, in the case
of certain classes of Stripped Interest
Certificates, on a notional amount (a
"Notional Amount"), based on a fixed,
variable or adjustable interest rate (a
"Pass-Through Rate"). The related
Prospectus Supplement will specify the
Certificate Balance, Notional Amount
and/or Pass-Through Rate (or, in the
case of a variable or adjustable
Pass-Through Rate, the method for
determining such rate), as applicable,
for each class of Offered Certificates.
If so specified in the related
Prospectus Supplement, a class of
Certificates may have two or more
component parts, each having
characteristics that are otherwise
described herein as being attributable
to separate and distinct classes.
The Certificates will not be guaranteed
or insured by the Depositor or any of
its affiliates, by any governmental
agency or instrumentality or by any
other person or entity, unless otherwise
provided in the related Prospectus
Supplement. See "Risk Factors-Limited
Assets".
Distributions of Interest on the
Certificates...................... Interest on each class of Offered
Certificates (other than certain classes
of Stripped Principal Certificates and
certain classes of REMIC Residual
Certificates) of each series will accrue
at the applicable Pass-Through Rate on
the Certificate Balance or, in the case
of certain classes of Stripped Interest
Certificates, the Notional Amount
thereof outstanding from time to time
and will be distributed to
Certificateholders as provided in the
related Prospectus Supplement (each of
the specified dates on which
distributions are to be made, a
"Distribution Date"). Distributions of
interest with respect to one or more
classes of Certificates (collectively,
"Accrual Certificates") may not commence
until the occurrence of certain events,
such as the retirement of one or more
other classes of Certificates, and
interest accrued with respect to a class
of Accrual Certificates prior to the
occurrence of such an event will either
be added to the Certificate Balance
thereof or otherwise deferred as
<PAGE>
-5-
described in the related Prospectus
Supplement. Distributions of interest
with respect to one or more classes of
Certificates may be reduced to the
extent of certain delinquencies, losses
and other contingencies described herein
and in the related Prospectus
Supplement. See "Risk Factors-Effect of
Prepayments on Average Life of
Certificates" and "-Effect of
Prepayments on Yield of Certificates",
"Yield and Maturity
Considerations--Certain Shortfalls in
Collections of Interest" and
"Description of the
Certificates-Distributions of Interest
on the Certificates".
Distributions of Principal of
the Certificates.................. Each class of Certificates of each
series (other than certain classes of
Stripped Interest Certificates and
certain classes of REMIC Residual
Certificates) will have a Certificate
Balance. The Certificate Balance of a
class of Certificates outstanding from
time to time will represent the maximum
amount that the holders thereof are then
entitled to receive in respect of
principal from future cash flow on the
assets in the related Trust Fund. The
initial aggregate Certificate Balance of
all classes of a series of Certificates
will not be greater than the outstanding
principal balance of the related
Mortgage Assets as of a specified date
(the "Cut-off Date"), after application
of scheduled payments due on or before
such date, whether or not received. As
and to the extent described in each
Prospectus Supplement, distributions of
principal with respect to the related
series of Certificates will be made on
each Distribution Date to the holders of
the class or classes of Certificates of
such series then entitled thereto until
the Certificate Balances of such
Certificates have been reduced to zero.
Distributions of principal with respect
to one or more classes of Certificates:
(i) may be made at a rate that is faster
(and, in some cases, substantially
faster) or slower (and, in some cases,
substantially slower) than the rate at
which payments or other collections of
principal are received on the Mortgage
Assets in the related Trust Fund; (ii)
may not commence until the occurrence of
certain events, such as the retirement
of one or more other classes of
Certificates of the same series; (iii)
may be made, subject to certain
limitations, based on a specified
principal payment schedule; or (iv) may
be contingent on the specified principal
payment schedule for another class of
the same series and the rate at which
payments and other collections of
principal on the Mortgage Assets in the
related Trust Fund are received. Unless
otherwise specified in the related
Prospectus Supplement, distributions of
principal of any class of Offered
Certificates will be made on a pro rata
basis among all of the Certificates of
such class. See "Description of the
Certificates-Distributions of Principal
of the Certificates".
Credit Support and
Cash Flow Agreements................ If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on
the Mortgage Assets in the related Trust
Fund may be provided to one or more
classes of Certificates of the related
series in the form of subordination of
one or more other classes of
<PAGE>
-6-
Certificates of such series, which other
classes may include one or more classes
of Offered Certificates, or by one or
more other types of credit support,
which may include a letter of credit, a
surety bond, an insurance policy, a
guarantee, a reserve fund, or a
combination thereof (any such coverage
with respect to the Certificates of any
series, "Credit Support"). If so
provided in the related Prospectus
Supplement, a Trust Fund may include:
(i) guaranteed investment contracts
pursuant to which moneys held in the
funds and accounts established for the
related series will be invested at a
specified rate; or (ii) interest rate
exchange agreements, interest rate cap
or floor agreements, or other agreements
designed to reduce the effects of
interest rate fluctuations on the
Mortgage Assets or on one or more
classes of Certificates (any such
agreement, in the case of clause (i) or
(ii), a "Cash Flow Agreement"). Certain
relevant information regarding any
applicable Credit Support or Cash Flow
Agreement will be set forth in the
Prospectus Supplement for a series of
Offered Certificates. See "Risk
Factors-Credit Support Limitations",
"Description of the Trust Funds-Credit
Support" and "-Cash Flow Agreements" and
"Description of Credit Support".
Advances............................ If and to the extent provided in the
related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the
Master Servicer, the Special Servicer,
the Trustee, any provider of Credit
Support and/or any other specified
person may be obligated to make, or have
the option of making, certain advances
with respect to delinquent scheduled
payments of principal and/or interest on
such Mortgage Loans. Any such advances
made with respect to a particular
Mortgage Loan will be reimbursable from
subsequent recoveries in respect of such
Mortgage Loan and otherwise to the
extent described herein and in the
related Prospectus Supplement. See
"Description of the Certificates
-Advances in Respect of Delinquencies".
If and to the extent provided in the
Prospectus Supplement for a series of
Certificates, any entity making such
advances may be entitled to receive
interest thereon for a specified period
during which certain or all of such
advances are outstanding, payable from
amounts in the related Trust Fund. See
"Description of the Certificates-
Advances in Respect of Delinquencies".
If a Trust Fund includes MBS, any
comparable advancing obligation of a
party to the related Pooling Agreement,
or of a party to the related MBS
Agreement, will be described in the
related Prospectus Supplement.
Optional Termination................ If so specified in the related
Prospectus Supplement, a series of
Certificates may be subject to optional
early termination through the repurchase
of the Mortgage Assets in the related
Trust Fund by the party or parties
specified therein, under the
circumstances and in the manner set
forth therein. If so provided in the
related Prospectus Supplement, upon the
reduction of the Certificate Balance of
a specified class or classes of
Certificates by a specified percentage
or amount or upon a specified date, a
party specified therein may be
authorized or required to solicit bids
for the purchase of all of the Mortgage
Assets of the related Trust Fund, or of
a sufficient portion
<PAGE>
-7-
of such Mortgage Assets to retire such
class or classes, under the
circumstances and in the manner set
forth therein. See "Description of the
Certificates-Termination".
Certain Federal Income Tax
Consequences...................... The Certificates of each series will
constitute or evidence ownership of
either (i) "regular interests" ("REMIC
Regular Certificates") and "residual
interests" ("REMIC Residual
Certificates") in a Trust Fund, or a
designated portion thereof, treated as a
REMIC under Sections 860A through 860G
of the Internal Revenue Code of 1986
(the "Code"), or (ii) interests
("Grantor Trust Certificates") in a
Trust Fund treated as a grantor trust
(or a partnership) under applicable
provisions of the Code.
Investors are advised to consult their
tax advisors concerning the specific tax
consequences to them of the purchase,
ownership and disposition of the Offered
Certificates and to review "Certain
Federal Income Tax Consequences" herein
and in the related Prospectus
Supplement.
ERISA Considerations................ Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh
plans, and collective investment funds
and separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that are
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of
Offered Certificates could give rise to
a transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Legal Investment.................... The Offered Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
amended ("SMMEA"), only if so specified
in the related Prospectus Supplement.
Investors whose investment authority is
subject to legal restrictions should
consult their legal advisors to
determine whether and to what extent the
Offered Certificates constitute legal
investments for them. See "Legal
Investment" herein and in the related
Prospectus Supplement.
Rating.............................. At their respective dates of issuance,
each class of Offered Certificates will
be rated not lower than investment grade
by one or more nationally recognized
statistical rating agencies (each, a
"Rating Agency"). See "Rating" herein
and in the related Prospectus
Supplement.
<PAGE>
-8-
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly pertain
to and be influenced by the characteristics or behavior of the mortgage loans
underlying any MBS included in such Trust Fund.
Limited Liquidity of Offered Certificates
General. The Offered Certificates of any series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related Prospectus
Supplement, Certificateholders will have no redemption rights, and the Offered
Certificates of each series are subject to early retirement only under certain
specified circumstances described herein and in the related Prospectus
Supplement. See "Description of the Certificates-Termination".
Lack of a Secondary Market. There can be no assurance that a secondary
market for the Offered Certificates of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any series of Offered Certificates may indicate that
an underwriter specified therein intends to establish a secondary market in such
Offered Certificates; however, no underwriter will be obligated to do so. Any
such secondary market may provide less liquidity to investors than any
comparable market for securities that evidence interests in single-family
mortgage loans. Unless otherwise provided in the related Prospectus Supplement,
the Certificates will not be listed on any securities exchange.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Certificates of any series, including
information regarding the status of the related Mortgage Assets and any Credit
Support for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling Agreement as
described herein under the heading "Description of the Certificates-Reports to
Certificateholders". There can be no assurance that any additional ongoing
information regarding the Offered Certificates of any series will be available
through any other source. The limited nature of such information in respect of a
series of Offered Certificates may adversely affect the liquidity thereof, even
if a secondary market for such Certificates does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any series of Offered Certificates
or class thereof, the market value of such Certificates will be affected by
several factors, including the perceived liquidity thereof, the anticipated cash
flow thereon (which may vary widely depending upon the prepayment and default
assumptions applied in respect of the underlying Mortgage Loans) and prevailing
interest rates. The price payable at any given time in respect of certain
classes of Offered Certificates (in particular, a class with a relatively long
average life, a Companion Class (as defined herein) or a class of Stripped
Interest Certificates or Stripped Principal Certificates) may be extremely
sensitive to small fluctuations in prevailing interest rates; and the relative
change in price for an Offered Certificate in response to an upward or downward
movement in prevailing interest rates may not necessarily equal the relative
change in price for such Offered Certificate in response to an equal but
opposite movement in such rates. Accordingly, the sale of Offered Certificates
by a holder in any secondary market that may develop may be at a discount from
the price paid by such holder. The Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis.
Limited Assets
<PAGE>
-9-
Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other person
or entity; and no Offered Certificate of any series will represent a claim
against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make payments
on a series of Offered Certificates, no other assets will be available for
payment of the deficiency, and the holders of one or more classes of such
Offered Certificates will be required to bear the consequent loss. Furthermore,
certain amounts on deposit from time to time in certain funds or accounts
constituting part of a Trust Fund, including the Certificate Account and any
accounts maintained as Credit Support, may be withdrawn under certain
conditions, if and to the extent described in the related Prospectus Supplement,
for purposes other than the payment of principal of or interest on the related
series of Certificates. If and to the extent so provided in the Prospectus
Supplement for a series of Certificates consisting of one or more classes of
Subordinate Certificates, on any Distribution Date in respect of which losses or
shortfalls in collections on the Mortgage Assets have been incurred, all or a
portion of the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Certificates, and, thereafter, by the remaining
classes of Certificates in the priority and manner and subject to the
limitations specified in such Prospectus Supplement.
Credit Support Limitations
Limitations Regarding Types of Losses Covered. The Prospectus Supplement
for a series of Certificates will describe any Credit Support provided with
respect thereto. Use of Credit Support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement. Moreover,
such Credit Support may not cover all potential losses; for example, Credit
Support may or may not cover loss by reason of fraud or negligence by a mortgage
loan originator or other parties. Any such losses not covered by Credit Support
may, at least in part, be allocated to one or more classes of Offered
Certificates.
Disproportionate Benefits to Certain Classes and Series. A series of
Certificates may include one or more classes of Subordinate Certificates (which
may include Offered Certificates), if so provided in the related Prospectus
Supplement. Although subordination is intended to reduce the likelihood of
temporary shortfalls and ultimate losses to holders of Senior Certificates, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Offered Certificates of a series are made in a specified order of priority, any
related Credit Support may be exhausted before the principal of the later paid
classes of Offered Certificates of such series has been repaid in full. As a
result, the impact of losses and shortfalls experienced with respect to the
Mortgage Assets may fall primarily upon those classes of Offered Certificates
having a later right of payment. Moreover, if a form of Credit Support covers
the Offered Certificates of more than one series and losses on the related
Mortgage Assets exceed the amount of such Credit Support, it is possible that
the holders of Offered Certificates of one (or more) such series will be
disproportionately benefited by such Credit Support to the detriment of the
holders of Offered Certificates of one (or more) other such series.
Limitations Regarding the Amount of Credit Support. The amount of any
applicable Credit Support supporting one or more classes of Offered
Certificates, including the subordination of one or more other classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level of
defaults, delinquencies and losses on the underlying Mortgage Assets and certain
other factors. There can, however, be no assurance that the loss experience on
the related Mortgage Assets will not exceed such assumed levels. See
"Description of the Certificates--Allocation of Losses and Shortfalls" and
"Description of Credit Support". If the losses on the related Mortgage Assets do
exceed such assumed levels, the holders of one or more classes of Offered
Certificates will be required to bear such additional losses.
Effect of Prepayments on Average Life of Certificates
<PAGE>
-10-
As a result of prepayments on the Mortgage Loans in any Trust Fund, the
amount and timing of distributions of principal and/or interest on the Offered
Certificates of the related series may be highly unpredictable. Prepayments on
the Mortgage Loans in any Trust Fund will result in a faster rate of principal
payments on one or more classes of the related series of Certificates than if
payments on such Mortgage Loans were made as scheduled. Thus, the prepayment
experience on the Mortgage Loans in a Trust Fund may affect the average life of
one or more classes of Certificates of the related series, including a class of
Offered Certificates. The rate of principal payments on pools of mortgage loans
varies among pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. For example, if
prevailing interest rates fall significantly below the Mortgage Rates borne by
the Mortgage Loans included in a Trust Fund, then, subject to the particular
terms of the Mortgage Loans (e.g., provisions that prohibit voluntary
prepayments during specified periods or impose penalties in connection
therewith) and the ability of borrowers to obtain new financing, principal
prepayments on such Mortgage Loans are likely to be higher than if prevailing
interest rates remain at or above the rates borne by those Mortgage Loans.
Conversely, if prevailing interest rates rise significantly above the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, then principal
prepayments on such Mortgage Loans are likely to be lower than if prevailing
interest rates remain at or below the mortgage rates borne by those Mortgage
Loans. There can be no assurance as to the actual rate of prepayment on the
Mortgage Loans in any Trust Fund or that such rate of prepayment will conform to
any model described herein or in any Prospectus Supplement. As a result,
depending on the anticipated rate of prepayment for the Mortgage Loans in any
Trust Fund, the retirement of any class of Certificates of the related series
could occur significantly earlier or later, and the average life thereof could
be significantly shorter or longer, than expected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the related
series will depend on the terms and provisions of such Certificates. A class of
Certificates, including a class of Offered Certificates, may provide that on any
Distribution Date the holders of such Certificates are entitled to a pro rata
share of the prepayments on the Mortgage Loans in the related Trust Fund that
are distributable on such date, to a disproportionately large share (which, in
some cases, may be all) of such prepayments, or to a disproportionately small
share (which, in some cases, may be none) of such prepayments. A class of
Certificates that entitles the holders thereof to a disproportionately large
share of the prepayments on the Mortgage Loans in the related Trust Fund
increases the likelihood of early retirement of such class ("Call Risk") if the
rate of prepayment is relatively fast; while a class of Certificates that
entitles the holders thereof to a disproportionately small share of the
prepayments on the Mortgage Loans in the related Trust Fund increases the
likelihood of an extended average life of such class ("Extension Risk") if the
rate of prepayment is relatively slow. As and to the extent described in the
related Prospectus Supplement, the respective entitlements of the various
classes of Certificateholders of any series to receive payments (and, in
particular, prepayments) of principal of the Mortgage Loans in the related Trust
Fund may vary based on the occurrence of certain events (e.g., the retirement of
one or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such Mortgage
Loans).
A series of Certificates may include one or more Controlled Amortization
Classes, which will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of Certificates, a
Controlled Amortization Class will generally provide a relatively stable cash
flow so long as the actual rate of prepayment on the Mortgage Loans in the
related Trust Fund remains relatively constant at the rate, or within the range
of rates, of prepayment used to establish the specific principal payment
schedule for such Certificates. Prepayment risk with respect to a given Mortgage
Asset Pool does not disappear, however, and the stability afforded to a
Controlled Amortization Class comes at the expense of one or more Companion
Classes of the same series, any of which Companion Classes may also be a class
of Offered Certificates. In general, and as more specifically described in the
related Prospectus Supplement, a Companion Class may entitle the holders thereof
to a disproportionately large share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively fast, and/or may
entitle the holders thereof to a disproportionately small share of prepayments
on the Mortgage Loans in the related Trust Fund
<PAGE>
-11-
when the rate of prepayment is relatively slow. As and to the extent described
in the related Prospectus Supplement, a Companion Class absorbs some (but not
all) of the Call Risk and/or Extension Risk that would otherwise belong to the
related Controlled Amortization Class if all payments of principal of the
Mortgage Loans in the related Trust Fund were allocated on a pro rata basis.
Effect of Prepayments on Yield of Certificates
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately large,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might fail to recover its original investment
under some prepayment scenarios. The extent to which the yield to maturity of
any class of Offered Certificates may vary from the anticipated yield will
depend upon the degree to which such Certificates are purchased at a discount or
premium and the amount and timing of distributions thereon. An investor should
consider, in the case of any Offered Certificate purchased at a discount, the
risk that a slower than anticipated rate of principal payments on the Mortgage
Loans could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Offered Certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield. See "Yield and Maturity Considerations".
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of such Offered
Certificates will receive payments to which such Certificateholders are entitled
under the related Pooling Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Mortgage
Loans will be made, the degree to which the rate of such prepayments might
differ from that originally anticipated or the likelihood of early optional
termination of the related Trust Fund. Furthermore, such rating will not address
the possibility that prepayment of the related Mortgage Loans at a higher or
lower rate than anticipated by an investor may cause such investor to experience
a lower than anticipated yield or that an investor that purchases an Offered
Certificate at a significant premium might fail to recover its initial
investment under certain prepayment scenarios. Hence, a rating assigned by a
Rating Agency does not guarantee or ensure the realization of any anticipated
yield on a class of Offered Certificates.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of the Certificates of such
series. Those criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Loans. In other cases, such
criteria may be based upon determinations of the values of the Mortgaged
Properties that provide security for the Mortgage Loans. However, no assurance
can be given that those values will not decline in the future. As a result, the
Credit Support required in respect of the Offered Certificates of any series may
be insufficient to fully protect the holders thereof from losses on the related
Mortgage Asset Pool. See "Description of Credit Support" and "Rating".
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans
General. The payment performance of the Offered Certificates of any series
will be directly related to the payment performance of the underlying Mortgage
Loans. Set forth below is a discussion of certain factors that will affect the
full and
<PAGE>
-12-
timely payment of the Mortgage Loans in any Trust Fund. In addition, a
description of certain material considerations associated with investments in
mortgage loans is included herein under "Certain Legal Aspects of Mortgage
Loans".
The Offered Certificates will be directly or indirectly backed by mortgage
loans secured by multifamily and/or commercial properties. Mortgage loans made
on the security of multifamily or commercial property may have a greater
likelihood of delinquency and foreclosure, and a greater likelihood of loss in
the event thereof, than loans made on the security of an owner-occupied
single-family property. See "Description of the Trust Funds-Mortgage
Loans-Default and Loss Considerations with Respect to the Mortgage Loans". The
ability of a borrower to repay a loan secured by an income-producing property
typically is dependent primarily upon the successful operation of such property
rather than upon the existence of independent income or assets of the borrower;
thus, the value of an income-producing property is directly related to the net
operating income derived from such property. If the net operating income of the
property is reduced (for example, if rental or occupancy rates decline or real
estate tax rates or other operating expenses increase), the borrower's ability
to repay the loan may be impaired. A number of the Mortgage Loans may be secured
by liens on owner-occupied Mortgaged Properties or on Mortgaged Properties
leased to a single tenant or a small number of significant tenants. Accordingly,
a decline in the financial condition of the borrower or a significant tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
Mortgaged Property may be adversely affected by factors generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate
tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; natural
disasters and civil disturbances such as earthquakes, hurricanes, floods,
eruptions or riots; and other circumstances, conditions or events beyond the
control of a Master Servicer or a Special Servicer. Additional considerations
may be presented by the type and use of a particular Mortgaged Property. For
instance, Mortgaged Properties that operate as hospitals and nursing homes are
subject to significant governmental regulation of the ownership, operation,
maintenance and financing of health care institutions. Hotel and motel
properties are often operated pursuant to franchise, management or operating
agreements that may be terminable by the franchisor or operator, and the
transferability of a hotel's operating, liquor and other licenses upon a
transfer of the hotel, whether through purchase or foreclosure, is subject to
local law requirements.
In addition, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be greater
than for pools of single-family loans because Mortgage Loans in a Trust Fund
will generally consist of a smaller number of higher balance loans than would a
pool of single-family loans of comparable aggregate unpaid principal balance.
Limited Recourse Nature of the Mortgage Loans. It is anticipated that some
or all of the Mortgage Loans included in any Trust Fund will be nonrecourse
loans or loans for which recourse may be restricted or unenforceable. As to any
such Mortgage Loan, recourse in the event of borrower default will be limited to
the specific real property and other assets, if any, that were pledged to secure
the Mortgage Loan. However, even with respect to those Mortgage Loans that
provide for recourse against the borrower and its assets generally, there can be
no assurance that enforcement of such recourse provisions will be practicable,
or that the assets of the borrower will be sufficient to permit a recovery in
respect of a defaulted Mortgage Loan in excess of the liquidation value of the
related Mortgaged Property. See "Certain Legal Aspects of Mortgage
Loans-Foreclosure--Anti-Deficiency Legislation".
Limitations on Enforceability of Cross-Collateralization. A Mortgage Pool
may include groups of Mortgage Loans which are cross-collateralized and
cross-defaulted. These arrangements are designed primarily to ensure that all of
the collateral pledged to secure the respective Mortgage Loans in a
cross-collateralized group, and the cash flows generated
<PAGE>
-13-
thereby, are available to support debt service on, and ultimate repayment of,
the aggregate indebtedness evidenced by those Mortgage Loans. These arrangements
thus seek to reduce the risk that the inability of one or more of the Mortgaged
Properties securing any such group of Mortgage Loans to generate net operating
income sufficient to pay debt service will result in defaults and ultimate
losses.
There may not be complete identity of ownership of the Mortgaged Properties
securing a group of cross-collateralized Mortgage Loans. In such an instance,
creditors of one or more of the related borrowers could challenge the cross-
collateralization arrangement as a fraudulent conveyance. Generally, under
federal and state fraudulent conveyance statutes, the incurring of an obligation
or the transfer of property by a person will be subject to avoidance under
certain circumstances if the person did not receive fair consideration or
reasonably equivalent value in exchange for such obligation or transfer and was
then insolvent or was rendered insolvent by such obligation or transfer.
Accordingly, a creditor seeking ownership of a Mortgaged Property subject to
such cross-collateralization to repay such creditor's claim against the related
borrower could assert (i) that such borrower was insolvent at the time the
cross-collateralized Mortgage Loans were made and (ii) that such borrower did
not, when it allowed its property to be encumbered by a lien securing the
indebtedness represented by the other Mortgage Loans in the group of
cross-collateralized Mortgage Loans, receive fair consideration or reasonably
equivalent value for, in effect, "guaranteeing" the performance of the other
borrowers. Although the borrower making such "guarantee" will be receiving
"guarantees" from each of the other borrowers in return, there can be no
assurance that such exchanged "guarantees" would be found to constitute fair
consideration or be of reasonably equivalent value, and no unqualified legal
opinion to that effect will be obtained.
The cross-collateralized Mortgage Loans constituting any group thereof may
be secured by mortgage liens on Mortgaged Properties located in different
states. Because of various state laws governing foreclosure or the exercise of a
power of sale and because, in general, foreclosure actions are brought in state
court, and the courts of one state cannot exercise jurisdiction over property in
another state, it may be necessary upon a default under any such Mortgage Loan
to foreclose on the related Mortgaged Properties in a particular order rather
than simultaneously in order to ensure that the lien of the related Mortgages is
not impaired or released.
Increased Risk of Default Associated With Balloon Payments. Certain of the
Mortgage Loans included in a Trust Fund may be nonamortizing or only partially
amortizing over their terms to maturity and, thus, will require substantial
payments of principal and interest (that is, balloon payments) at their stated
maturity. Mortgage Loans of this type involve a greater likelihood of default
than self-amortizing loans because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to refinance the loan or
to sell the related Mortgaged Property. The ability of a borrower to accomplish
either of these goals will be affected by a number of factors, including the
value of the related Mortgaged Property, the level of available mortgage rates
at the time of sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition and operating history of the
borrower and the related Mortgaged Property, tax laws, rent control laws (with
respect to certain residential properties), Medicaid and Medicare reimbursement
rates (with respect to hospitals and nursing homes), prevailing general economic
conditions and the availability of credit for loans secured by multifamily or
commercial, as the case may be, real properties generally. Neither the Depositor
nor any of its affiliates will be required to refinance any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or the Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to which a
payment default is imminent. See "Description of the Pooling
Agreements-Realization Upon Defaulted Mortgage Loans". While the Master Servicer
or the Special Servicer generally will be required to determine that any such
extension or modification is reasonably likely to produce a greater recovery
than
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liquidation, taking into account the time value of money, there can be no
assurance that any such extension or modification will in fact increase the
present value of receipts from or proceeds of the affected Mortgage Loans.
Lender Difficulty in Collecting Rents Upon the Default and/or Bankruptcy of
Borrower. Each Mortgage Loan included in any Trust Fund secured by Mortgaged
Property that is subject to leases typically will be secured by an assignment of
leases and rents pursuant to which the borrower assigns to the lender its right,
title and interest as landlord under the leases of the related Mortgaged
Property, and the income derived therefrom, as further security for the related
Mortgage Loan, while retaining a license to collect rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect rents. Some state laws may require that the lender take
possession of the Mortgaged Property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
borrower, the lender's ability to collect the rents may be adversely affected.
See "Certain Legal Aspects of Mortgage Loans-Leases and Rents".
Limitations on Enforceability of Due-on-Sale and Debt-Acceleration Clauses.
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the Mortgage Loan if the borrower sells, transfers or
conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages also may include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or nonmonetary default of the
mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse the foreclosure of a mortgage or deed of trust when an acceleration
of the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
Risk of Liability Arising From Environmental Conditions. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, a lender may be liable, as
an "owner" or "operator", for costs of addressing releases or threatened
releases of hazardous substances at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether the environmental damage or threat was caused by the
borrower or a prior owner. A lender also risks such liability on foreclosure of
the mortgage. See "Certain Legal Aspects of Mortgage Loans-Environmental
Considerations".
Lack of Insurance Coverage for Certain Special Hazard Losses. Unless
otherwise specified in a Prospectus Supplement, the Master Servicer and Special
Servicer for the related Trust Fund will be required to cause the borrower on
each Mortgage Loan in such Trust Fund to maintain such insurance coverage in
respect of the related Mortgaged Property as is required under the related
Mortgage, including hazard insurance; provided that, as and to the extent
described herein and in the related Prospectus Supplement, each of the Master
Servicer and the Special Servicer may satisfy its obligation to cause hazard
insurance to be maintained with respect to any Mortgaged Property through
acquisition of a blanket policy. In general, the standard form of fire and
extended coverage policy covers physical damage to or destruction of the
improvements of the property by fire, lightning, explosion, smoke, windstorm and
hail, and riot, strike and civil commotion, subject to the conditions and
exclusions specified in each policy. Although the policies covering the
Mortgaged Properties will be underwritten by different insurers under different
state laws in accordance with different applicable state forms, and therefore
will not contain identical terms and conditions, most such policies typically do
not cover any physical damage resulting from war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), wet or dry rot, vermin, domestic animals
and certain other kinds of risks. Unless the related Mortgage specifically
requires the mortgagor to insure against physical damage arising from such
causes, then, to the extent any consequent losses are not covered by Credit
Support, such losses may be borne, at least in part, by the holders of one
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or more classes of Offered Certificates of the related series. See "Description
of the Pooling Agreements-Hazard Insurance Policies".
Risks of Geographic Concentration. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. For example, a
region's economic condition and housing market may be directly, or indirectly,
adversely affected by natural disasters or civil disturbances such as
earthquakes, hurricanes, floods, eruptions or riots. The economic impact of any
of these types of events may also be felt in areas beyond the region immediately
affected by the disaster or disturbance. The Mortgage Loans securing certain
series of Certificates may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset
Pool
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past due
or are nonperforming. However, Mortgage Loans which are seriously delinquent
loans (that is, loans more than 60 days delinquent or as to which foreclosure
has been commenced) will not constitute a material concentration of the Mortgage
Loans in any Trust Fund, based on principal balance at the time such Trust Fund
is formed. If so specified in the related Prospectus Supplement, the servicing
of such Mortgage Loans will be performed by the Special Servicer; however, the
same entity may act as both Master Servicer and Special Servicer. Credit Support
provided with respect to a particular series of Certificates may not cover all
losses related to such delinquent or nonperforming Mortgage Loans, and investors
should consider the risk that the inclusion of such Mortgage Loans in the Trust
Fund may adversely affect the rate of defaults and prepayments in respect of the
subject Mortgage Asset Pool and the yield on the Offered Certificates of such
series. See "Description of the Trust Funds-Mortgage Loans-General".
Termination
If so provided in the related Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to solicit bids for the purchase of all
the Mortgage Assets of the related Trust Fund, or of a sufficient portion of
such Mortgage Assets to retire such class or classes, under the circumstances
and in the manner set forth therein. The solicitation of bids will be conducted
in a commercially reasonable manner and, generally, assets will be sold at their
fair market value. In addition, if so specified in the related Prospectus
Supplement, upon the reduction of the aggregate principal balance of some or all
of the Mortgage Assets by a specified percentage, a party or parties designated
therein may be authorized to purchase such Mortgage Assets, generally at a price
equal to, in the case of any Mortgage Asset, the unpaid principal balance
thereof plus accrued interest (or, in some cases, at fair market value).
However, circumstances may arise in which such fair market value may be less
than the unpaid balance of the related Mortgage Assets, together with interest
thereon, sold and therefore, as a result of such a sale or purchase, the
Certificateholders of one or more Classes of Certificates may receive an amount
less than the Certificate Balance of, and accrued unpaid interest on, their
Certificates. See Description of the Certificates--Termination."
Risks Associated with Restaurants
Various factors may affect the economic viability of Restaurants, including
but not limited to competition from facilities having businesses similar to the
particular Restaurant; perceptions by prospective customers of the safety,
convenience, services and attractiveness of the Restaurant; the quality of
available food products; changes in demographics,
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consumer habits and traffic patterns; the ability to provide or contract for
capable management and adequate maintenance; and retroactive changes to building
codes, similar ordinances and other legal requirements. Additional factors that
can affect the success of a regionally or nationally-known chain Restaurant
include actions and omissions of any franchisor (including management practices
that adversely affect the nature of the business or that require renovation,
refurbishment, expansion or other expenditures); the degree of support provided
or arranged by any such franchisor, its franchisee organizations and third party
providers of products or services; the bankruptcy or business discontinuation of
any such franchisor, franchisee organization or third party; and increases in
operating expenses.
DESCRIPTION OF THE TRUST FUNDS
General
The primary assets of each Trust Fund will consist of (i) various types of
multifamily or commercial mortgage loans ("Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
("MBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily or commercial mortgage loans or (iii) a
combination of Mortgage Loans and MBS (collectively, "Mortgage Assets"). Each
Trust Fund will be established by the Depositor. Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator of
such Mortgage Loan or the issuer of such MBS. The Mortgage Assets will not be
guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under the
heading "-Mortgage Loans", unless otherwise noted, applies equally to mortgage
loans underlying any MBS included in a particular Trust Fund.
Mortgage Loans
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create first or junior liens on fee or
leasehold estates in properties (the "Mortgaged Properties") consisting of one
or more of the following types of real property: (i) residential properties
("Multifamily Properties") consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures, and mobile home parks; and (ii)
commercial properties ("Commercial Properties") consisting of office buildings,
retail shopping facilities (such as shopping centers, malls and individual
stores), hotels and motels, health care-related facilities (such as hospitals,
skilled nursing facilities, nursing homes, congregate care facilities and senior
housing), recreational vehicle parks, warehouse facilities, mini-warehouse
facilities, self-storage facilities, industrial facilities, parking lots,
individual restaurants and other establishments that are part of the food
service industry (collectively, "Restaurants"), mixed use properties (that is,
any combination of the foregoing), and unimproved land. However, health
care-related facilities will not represent security for a material concentration
of the Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed. The Multifamily Properties may include mixed
commercial and residential structures and apartment buildings owned by private
cooperative housing corporations ("Cooperatives"). Unless otherwise specified in
the related Prospectus Supplement, each Mortgage will create a first priority
mortgage lien on a fee estate in a Mortgaged Property. If a Mortgage creates a
lien on a borrower's leasehold estate in a property, then, unless otherwise
specified in the related Prospectus Supplement, the term of any such leasehold
will exceed the term of the Mortgage Note by at least ten years. Unless
otherwise specified in the related Prospectus Supplement, each Mortgage Loan
will have been originated by a person (the "Originator") other than the
Depositor.
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If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens, and
the loans secured by the related senior liens ("Senior Liens") may not be
included in the Mortgage Pool. The primary risk to holders of Mortgage Loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related Senior Liens to satisfy
fully both the Senior Liens and the Mortgage Loan. In the event that a holder of
a Senior Lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court costs
and fees in connection with the foreclosure, second to real estate taxes, third
in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the Senior
Liens. The claims of the holders of the Senior Liens will be satisfied in full
out of proceeds of the liquidation of the related Mortgage Property, if such
proceeds are sufficient, before the Trust Fund as holder of the junior lien
receives any payments in respect of the Mortgage Loan. If the Master Servicer
were to foreclose on any Mortgage Loan, it would do so subject to any related
Senior Liens. In order for the debt related to such Mortgage Loan to be paid in
full at such sale, a bidder at the foreclosure sale of such Mortgage Loan would
have to bid an amount sufficient to pay off all sums due under the Mortgage Loan
and any Senior Liens or purchase the Mortgaged Property subject to such Senior
Liens. In the event that such proceeds from a foreclosure or similar sale of the
related Mortgaged Property are insufficient to satisfy all Senior Liens and the
Mortgage Loan in the aggregate, the Trust Fund, as the holder of the junior
lien, and, accordingly, holders of one or more classes of the Certificates of
the related series bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment is not obtained and satisfied. Moreover, deficiency
judgments may not be available in certain jurisdictions, or the particular
Mortgage Loan may be a nonrecourse loan, which means that, absent special facts,
recourse in the case of default will be limited to the Mortgaged Property and
such other assets, if any, that were pledged to secure repayment of the Mortgage
Loan.
If so specified in the related Prospectus Supplement, the Mortgage Assets
for a particular series of Certificates may include Mortgage Loans that are
delinquent or nonperforming as of the date such Certificates are issued. In that
case, the related Prospectus Supplement will set forth, as to each such Mortgage
Loan, available information as to the period of such delinquency or
nonperformance, any forbearance arrangement then in effect, the condition of the
related Mortgaged Property and the ability of the Mortgaged Property to generate
income to service the mortgage debt. However, Mortgage Loans which are seriously
delinquent loans (that is, loans more than 60 days delinquent or as to which
foreclosure has been commenced) will not constitute a material concentration of
the Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed.
Default and Loss Considerations with Respect to the Mortgage Loans.
Mortgage loans secured by liens on income-producing properties are substantially
different from loans made on the security of owner-occupied single-family homes.
The repayment of a loan secured by a lien on an income-producing property is
typically dependent upon the successful operation of such property (that is, its
ability to generate income). Moreover, as noted above, some or all of the
Mortgage Loans included in a particular Trust Fund may be nonrecourse loans.
Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important factor in evaluating the likelihood
of default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income derived from the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments of principal and/or interest on the Mortgage Loan and any other loans
senior thereto that are secured by the related Mortgaged Property. Unless
otherwise defined in the related Prospectus Supplement, "Net Operating Income"
means, for any given period, the total operating revenues derived from a
Mortgaged Property during such period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than (i)
noncash items such as depreciation and amortization, (ii) capital expenditures
and (iii) debt service on the related Mortgage Loan or on any other loans that
are
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secured by such Mortgaged Property. The Net Operating Income of a Mortgaged
Property will generally fluctuate over time and may or may not be sufficient to
cover debt service on the related Mortgage Loan at any given time. As the
primary source of the operating revenues of a nonowner occupied,
income-producing property, rental income (and, with respect to a Mortgage Loan
secured by a Cooperative apartment building, maintenance payments from
tenant-stockholders of a Cooperative) may be affected by the condition of the
applicable real estate market and/or area economy. In addition, properties
typically leased, occupied or used on a short-term basis, such as certain health
care-related facilities, hotels and motels, and mini-warehouse and self-storage
facilities, tend to be affected more rapidly by changes in market or business
conditions than do properties typically leased for longer periods, such as
warehouses, retail stores, office buildings and industrial facilities.
Commercial Properties may be owner-occupied or leased to a small number of
tenants. Thus, the Net Operating Income of such a Mortgaged Property may depend
substantially on the financial condition of the borrower or a tenant, and
Mortgage Loans secured by liens on such properties may pose a greater likelihood
of default and loss than loans secured by liens on Multifamily Properties or on
multi-tenant Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the likelihood of default on a Mortgage Loan.
As may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a factor
in evaluating the likelihood of loss if a property must be liquidated following
a default. Unless otherwise defined in the related Prospectus Supplement, the
"Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of (i) the then outstanding principal balance of the
Mortgage Loan and any other loans senior thereto that are secured by the related
Mortgaged Property to (ii) the Value of the related Mortgaged Property. Unless
otherwise specified in the related Prospectus Supplement, the "Value" of a
Mortgaged Property will be its fair market value as determined by an appraisal
of such property conducted by or on behalf of the Originator in connection with
the origination of such loan. The lower the Loan-to-Value Ratio, the greater the
percentage of the borrower's equity in a Mortgaged Property, and thus (a) the
greater the incentive of the borrower to perform under the terms of the related
Mortgage Loan (in order to protect such equity) and (b) the greater the cushion
provided to the lender against loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure of
the likelihood of liquidation loss in a pool of Mortgage Loans. For example, the
value of a Mortgaged Property as of the date of initial issuance of the related
series of Certificates may be less than the Value determined at loan
origination, and will likely continue to fluctuate from time to time based upon
certain factors including changes in economic conditions and the real estate
market. Moreover, even when current, an appraisal is not necessarily a reliable
estimate of value. Appraised values of income-producing properties are generally
based on the market comparison method (recent resale value of comparable
properties at the date of the appraisal), the cost replacement method (the cost
of replacing the property at such date), the income capitalization method (a
projection of value based upon the property's projected net cash flow), or upon
a selection from or interpolation of the values derived from such methods. Each
of these appraisal methods can present analytical difficulties. It is often
difficult to find truly comparable properties that have recently been sold; the
replacement cost of a property may have little to do with its current market
value; and income capitalization is inherently based on inexact projections of
income and expense and the selection of an appropriate capitalization rate and
discount rate. Where more than one of these appraisal methods are used and
provide significantly different results, an accurate determination of value and,
correspondingly, a reliable analysis of the likelihood of default and loss, is
even more difficult.
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Although there may be multiple methods for determining the value of a
Mortgaged Property, value will in all cases be affected by property performance.
As a result, if a Mortgage Loan defaults because the income generated by the
related Mortgaged Property is insufficient to cover operating costs and expenses
and pay debt service, then the value of the Mortgaged Property will reflect such
and a liquidation loss may occur.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans, there can be no
assurance that all of such factors will in fact have been prudently considered
by the Originators of the Mortgage Loans, or that, for a particular Mortgage
Loan, they are complete or relevant. See "Risk Factors-Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage Loans-General" and "-Certain
Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans-Increased Risk of Default Associated With Balloon Payments".
Payment Provisions of the Mortgage Loans. All of the Mortgage Loans will
(i) have had original terms to maturity of not more than 40 years and (ii)
provide for scheduled payments of principal, interest or both, to be made on
specified dates ("Due Dates") that occur monthly, quarterly, semi-annually or
annually. A Mortgage Loan (i) may provide for no accrual of interest or for
accrual of interest thereon at a Mortgage Rate that is fixed over its term or
that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, (ii) may provide for level payments to maturity or for
payments that adjust from time to time to accommodate changes in the Mortgage
Rate or to reflect the occurrence of certain events, and may permit negative
amortization, (iii) may be fully amortizing or may be partially amortizing or
nonamortizing, with a balloon payment due on its stated maturity date, and (iv)
may prohibit over its term or for a certain period prepayments (the period of
such prohibition, a "Lock-out Period" and its date of expiration, a "Lock-out
Date") and/or require payment of a premium or a yield maintenance payment (a
"Prepayment Premium") in connection with certain prepayments, in each case as
described in the related Prospectus Supplement. A Mortgage Loan may also contain
a provision that entitles the lender to a share of appreciation of the related
Mortgaged Property, or profits realized from the operation or disposition of
such Mortgaged Property or the benefit, if any, resulting from the refinancing
of the Mortgage Loan (any such provision, an "Equity Participation"), as
described in the related Prospectus Supplement.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans in
the related Trust Fund, which, to the extent then applicable, will generally
include the following: (i) the aggregate outstanding principal balance and the
largest, smallest and average outstanding principal balance of the Mortgage
Loans, (ii) the type or types of property that provide security for repayment of
the Mortgage Loans, (iii) the earliest and latest origination date and maturity
date of the Mortgage Loans, (iv) the original and remaining terms to maturity of
the Mortgage Loans, or the respective ranges thereof, and the weighted average
original and remaining terms to maturity of the Mortgage Loans, (v) the
Loan-to-Value Ratios of the Mortgage Loans (either at origination or as of a
more recent date), or the range thereof, and the weighted average of such
Loan-to-Value Ratios, (vi) the Mortgage Rates borne by the Mortgage Loans, or
the range thereof, and the weighted average Mortgage Rate borne by the Mortgage
Loans, (vii) with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
Loans"), the index or indices upon which such adjustments are based, the
adjustment dates, the range of gross margins and the weighted average gross
margin, and any limits on Mortgage Rate adjustments at the time of any
adjustment and over the life of the ARM Loan, (viii) information regarding the
payment characteristics of the Mortgage Loans, including, without limitation,
balloon payment and other amortization provisions, Lockout Periods and
Prepayment Premiums, (ix) the Debt Service Coverage Ratios of the Mortgage Loans
(either at origination or as of a more recent date), or the range thereof, and
the weighted average of such Debt Service Coverage Ratios, and (x) the
geographic distribution of the Mortgaged Properties on a state-by-state basis.
In appropriate cases, the related Prospectus Supplement will also contain
certain information available to the Depositor that pertains to the provisions
of leases and the nature of tenants of the Mortgaged Properties. If the
Depositor is unable to provide the specific information described above
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at the time Offered Certificates of a series are initially offered, more general
information of the nature described above will be provided in the related
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of those Certificates at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Commission within fifteen days following such issuance.
If any Mortgage Loan, or group of related Mortgage Loans, constitutes a
concentration of credit risk, financial statements or other financial
information with respect to the related Mortgaged Property or Mortgaged
Properties will be included in the related Prospectus Supplement.
If and to the extent available and relevant to an investment decision in
the Offered Certificates of the related series, information regarding the
prepayment experience of a Master Servicer's multifamily and/or commercial
mortgage loan servicing portfolio will be included in the related Prospectus
Supplement. However, many servicers do not maintain records regarding such
matters or, at least, not in a format that can be readily aggregated. In
addition, the relevant characteristics of a Master Servicer's servicing
portfolio may be so materially different from those of the related Mortgage
Asset Pool that such prepayment experience would not be meaningful to an
investor. For example, differences in geographic dispersion, property type
and/or loan terms (e.g., mortgage rates, terms to maturity and/or prepayment
restrictions) between the two pools of loans could render the Master Servicer's
prepayment experience irrelevant. Because of the nature of the assets to be
serviced and administered by a Special Servicer, no comparable prepayment
information will be presented with respect to the Special Servicer's multifamily
and/or commercial mortgage loan servicing portfolio.
Mortgage Loans Secured by Restaurants. The Mortgaged Properties that
constitute Restaurants may include those that are individually owned and
operated and those which are part of a regionally- or nationally-known chain of
Restaurants. In each case, the related Mortgage Loan is secured by a first or
junior mortgage lien on the respective Restaurant and is further secured by a
first or junior priority security interest in certain equipment and other
property of the related borrower, which is used in the operation of the
respective Restaurant.
As with loans secured by other income-producing properties, a Mortgage Loan
secured by a Restaurant is dependent on the successful operation of the
Restaurant, which, in turn, is dependent on various factors, many of which are
beyond the control of the Restaurant operator, including but not limited to
competition from facilities having businesses similar to the Restaurant;
perceptions by prospective customers of the safety, convenience, services and
attractiveness of the Restaurant; the quality of available food products;
changes in demographics, consumer habits and traffic patterns; the ability to
provide or contract for capable management and adequate maintenance and
retroactive changes to building codes, similar ordinances and other legal
requirements. Adverse economic conditions, either local, regional or national,
may limit the amount that may be charged for food and may result in a reduction
in customers. The construction of competing food establishments can have similar
effects. Because of the nature of the business, Restaurants tend to respond to
adverse economic conditions and competition more quickly than do other
commercial properties.
The restaurant industry is highly competitive. The principal means of
competition are segment, product, price, value, quality, service, convenience,
location and the nature and condition of the Restaurant facility. A Restaurant
operator competes with all operators of comparable restaurant facilities in the
area in which its Restaurant is located. Other Restaurants could have lower
operating costs, more favorable locations, more effective marketing, more
efficient operations or better facilities.
The location and condition of a particular Restaurant will affect the
number of customers and, to a certain extent, the prices that may be charged.
The characteristics of an area or neighborhood in which a Restaurant is located
may change over time or in relation to competing facilities, and the cleanliness
and maintenance at a Restaurant will affect the appeal of the Restaurant to
customers. In addition, the effects of poor construction quality will increase
over time in the form of increased
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maintenance and capital improvements. Even good construction will deteriorate
over time if management does not schedule and perform adequate maintenance in a
timely fashion. In the case of regionally- or nationally-known chain
restaurants, there may be expenditures for renovation, refurbishment or
expansion at a Restaurant regardless of its condition. While a Restaurant may be
renovated, refurbished or expanded to either maintain its condition or remain
competitive, such renovation, refurbishment or expansion may itself entail
significant risks. In addition, the business conducted at a Restaurant may face
competition from other industries and industry segments.
The success of a Restaurant which is part of either a regionally- or
nationally-known chain of restaurants can be affected by various factors such as
the management practices of the respective franchisor, a lack of support by such
franchisor, its franchisee organizations or third party providers of products or
services or the bankruptcy or business discontinuation of any such franchisor,
franchisee organization or third party may adversely affect the operating
results of the related Restaurants. Furthermore, the transferability of
franchise license agreements may be restricted and, in the event of foreclosure,
there can be no assurance that the related Restaurant would have the right to
continue to use the license. In addition, the ability of a Restaurant to attract
customers, and some of such Restaurant's revenues, may depend in large part on
its having a liquor license. Such a license may not be transferable (for
example, in connection with a foreclosure).
MBS
MBS may include (i) private-label (that is, not issued, insured or
guaranteed by the United States or any agency or instrumentality thereof)
mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates issued and/or insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA"), the Governmental National Mortgage
Association ("GNMA") or the Federal Agricultural Mortgage Corporation ("FAMC"),
provided that, unless otherwise specified in the related Prospectus Supplement,
each MBS will evidence an interest in, or will be secured by a pledge of,
mortgage loans that conform to the descriptions of the Mortgage Loans contained
herein.
Except in the case of a pro rata mortgage participation in a single
mortgage loan or a pool of mortgage loans, each MBS included in a Mortgage Asset
Pool: (a) either will (i) have been previously registered under the Securities
Act of 1933, as amended, (ii) be exempt from such registration requirements or
(iii) have been held for at least the holding period specified in Rule 144(k)
under the Securities Act of 1933, as amended; and (b) either (i) will have been
acquired (other than from the Depositor or an affiliate thereof) in bona fide
secondary market transactions or (ii) if so specified in the related Prospectus
Supplement, may be derived from the Depositor's (or an affiliate's) unsold
allotments from the Depositor (or an affiliate's) previous offerings.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). The issuer of the MBS (the "MBS Issuer") and/or the
servicer of the underlying mortgage loans (the "MBS Servicer") will be parties
to the MBS Agreement, generally together with a trustee (the "MBS Trustee") or,
in the alternative, with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Issuer, the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. The MBS
Issuer or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
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Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit support, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify: (i) the aggregate approximate initial and
outstanding principal amount(s) and type of the MBS to be included in the Trust
Fund, (ii) the original and remaining term(s) to stated maturity of the MBS, if
applicable, (iii) the pass-through or bond rate(s) of the MBS or the formula for
determining such rate(s), (iv) the payment characteristics of the MBS, (v) the
MBS Issuer, MBS Servicer and MBS Trustee, as applicable, of each of the MBS,
(vi) a description of the related credit support, if any, (vii) the
circumstances under which the related underlying mortgage loans, or the MBS
themselves, may be purchased prior to their maturity, (viii) the terms on which
mortgage loans may be substituted for those originally underlying the MBS, (ix)
the type of mortgage loans underlying the MBS and, to the extent appropriate
under the circumstances, such other information in respect of the underlying
mortgage loans described under "-Mortgage Loans-Mortgage Loan Information in
Prospectus Supplements", and (x) the characteristics of any cash flow agreements
that relate to the MBS.
The Depositor will provide the same information regarding the MBS in any
Trust Fund in its reports filed under the Exchange Act with respect to such
Trust Fund as was provided by the related MBS Issuer in its own such reports if
such MBS was publicly offered or the reports the related MBS Issuer provides the
related MBS Trustee if such MBS was privately issued.
Certificate Accounts
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which all payments and collections received or advanced
with respect to the Mortgage Assets and other assets in the Trust Fund will be
deposited to the extent described herein and in the related Prospectus
Supplement. See "Description of the Pooling Agreements-Certificate Account".
Credit Support
If so provided in the Prospectus Supplement for a series of Certificates,
partial or full protection against certain defaults and losses on the Mortgage
Assets in the related Trust Fund may be provided to one or more classes of
Certificates of such series in the form of subordination of one or more other
classes of Certificates of such series or by one or more other types of Credit
Support, which may include a letter of credit, a surety bond, an insurance
policy, a guarantee, a reserve fund, or any combination thereof. The amount and
types of such Credit Support, the identity of the entity providing it (if
applicable) and related information with respect to each type of Credit Support,
if any, will be set forth in the Prospectus Supplement for a series of
Certificates. See "Risk Factors-Credit Support Limitations" and "Description of
Credit Support".
Cash Flow Agreements
If so provided in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include guaranteed investment contracts pursuant to
which moneys held in the funds and accounts established for such series will be
invested at a specified rate. The Trust Fund may also include interest rate
exchange agreements, interest rate cap or floor agreements, or other agreements
designed to reduce the effects of interest rate fluctuations on the Mortgage
Assets on one or more classes of Certificates. The principal terms of any such
Cash Flow Agreement, including, without limitation, provisions relating to
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the timing, manner and amount of payments thereunder and provisions relating to
the termination thereof, will be described in the related Prospectus Supplement.
The related Prospectus Supplement will also identify the obligor under the Cash
Flow Agreement.
YIELD AND MATURITY CONSIDERATIONS
General
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount and
timing of distributions on the Certificate. See "Risk Factors-Effect of
Prepayments on Average Life of Certificates". The following discussion
contemplates a Trust Fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying an MBS can generally
be expected to have the same effect on the yield to maturity and/or weighted
average life of a class of Certificates as will the characteristics and behavior
of comparable Mortgage Loans, the effect may differ due to the payment
characteristics of the MBS. If a Trust Fund includes MBS, the related Prospectus
Supplement will discuss the effect, if any, that the payment characteristics of
the MBS may have on the yield to maturity and weighted average lives of the
Offered Certificates of the related series.
Pass-Through Rate
The Certificates of any class within a series may have a fixed, variable or
adjustable Pass-Through Rate, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related Trust Fund. The Prospectus
Supplement with respect to any series of Certificates will specify the
Pass-Through Rate for each class of Offered Certificates of such series or, in
the case of a class of Offered Certificates with a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the effect,
if any, of the prepayment of any Mortgage Loan on the Pass-Through Rate of one
or more classes of Offered Certificates; and whether the distributions of
interest on the Offered Certificates of any class will be dependent, in whole or
in part, on the performance of any obligor under a Cash Flow Agreement.
Payment Delays
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related Trust
Fund are due and the Distribution Date on which such payments are passed through
to Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on the date they were due.
Certain Shortfalls in Collections of Interest
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest on the amount of such prepayment only
through the date of such prepayment, instead of through the Due Date for the
next succeeding scheduled payment. However, interest accrued on any series of
Certificates and distributable thereon on any Distribution Date will generally
correspond to interest accrued on the Mortgage Loans to their respective Due
Dates during the related Due Period. A "Due Period" will be a specified time
period (generally corresponding in length to the period between Distribution
Dates) and all scheduled payments on the Mortgage Loans in the related Trust
Fund that are due during a given Due Period will, to the extent received by a
specified date (the "Determination Date") or otherwise advanced by the related
Master Servicer, Special Servicer or other specified person, be distributed to
the holders of the Certificates of such series on the next succeeding
Distribution Date. Consequently, if a prepayment on any Mortgage Loan is
distributable to
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Certificateholders on a particular Distribution Date, but such prepayment is not
accompanied by interest thereon to the Due Date for such Mortgage Loan in the
related Due Period, then the interest charged to the borrower (net of servicing
and administrative fees) may be less (such shortfall, a "Prepayment Interest
Shortfall") than the corresponding amount of interest accrued and otherwise
payable on the Certificates of the related series. If and to the extent that any
such shortfall is allocated to a class of Offered Certificates, the yield
thereon will be adversely affected. The Prospectus Supplement for each series of
Certificates will describe the manner in which any such shortfalls will be
allocated among the classes of such Certificates. The related Prospectus
Supplement will also describe any amounts available to offset such shortfalls.
Yield and Prepayment Considerations
A Certificate's yield to maturity will be affected by the rate of principal
payments on the Mortgage Loans in the related Trust Fund and the allocation
thereof to reduce the principal balance (or notional amount, if applicable) of
such Certificate. The rate of principal payments on the Mortgage Loans in any
Trust Fund will in turn be affected by the amortization schedules thereof
(which, in the case of ARM Loans, may change periodically to accommodate
adjustments to the Mortgage Rates thereon), the dates on which any balloon
payments are due, and the rate of principal prepayments thereon (including for
this purpose, voluntary prepayments by borrowers and also prepayments resulting
from liquidations of Mortgage Loans due to defaults, casualties or condemnations
affecting the related Mortgaged Properties, or purchases of Mortgage Loans out
of the related Trust Fund). Because the rate of principal prepayments on the
Mortgage Loans in any Trust Fund will depend on future events and a variety of
factors (as described below), no assurance can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend upon
the degree to which they are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans in the related Trust
Fund are in turn distributed on such Certificates (or, in the case of a class of
Stripped Interest Certificates, result in the reduction of the Notional Amount
thereof). An investor should consider, in the case of any Offered Certificate
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans in the related Trust Fund could result
in an actual yield to such investor that is lower than the anticipated yield
and, in the case of any Offered Certificate purchased at a premium, the risk
that a faster than anticipated rate of principal payments on such Mortgage Loans
could result in an actual yield to such investor that is lower than the
anticipated yield. In addition, if an investor purchases an Offered Certificate
at a discount (or premium), and principal payments are made in reduction of the
principal balance or notional amount of such investor's Offered Certificates at
a rate slower (or faster) than the rate anticipated by the investor during any
particular period, any consequent adverse effects on such investor's yield would
not be fully offset by a subsequent like increase (or decrease) in the rate of
principal payments.
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related Trust Fund or (ii) equal the Certificate
Balances of one or more of the other classes of Certificates of the same series.
Accordingly, the yield on such Stripped Interest Certificates will be inversely
related to the rate at which payments and other collections of principal are
received on such Mortgage Assets or distributions are made in reduction of the
Certificate Balances of such classes of Certificates, as the case may be.
Consistent with the foregoing, if a class of Certificates of any series
consists of Stripped Interest Certificates or Stripped Principal Certificates, a
lower than anticipated rate of principal prepayments on the Mortgage Loans in
the related Trust Fund will negatively affect the yield to investors in Stripped
Principal Certificates, and a higher than anticipated rate of principal
prepayments on such Mortgage Loans will negatively affect the yield to investors
in Stripped Interest Certificates. If the Offered Certificates of a series
include any such Certificates, the related Prospectus Supplement will include a
table showing the effect of various constant assumed levels of prepayment on
yields on such Certificates. Such tables will be
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intended to illustrate the sensitivity of yields to various constant assumed
prepayment rates and will not be intended to predict, or to provide information
that will enable investors to predict, yields or prepayment rates.
The extent of prepayments of principal of the Mortgage Loans in any Trust
Fund may be affected by a number of factors, including, without limitation, the
availability of mortgage credit, the relative economic vitality of the area in
which the Mortgaged Properties are located, the quality of management of the
Mortgaged Properties, the servicing of the Mortgage Loans, possible changes in
tax laws and other opportunities for investment. In general, those factors which
increase the attractiveness of selling a Mortgaged Property or refinancing a
Mortgage Loan or which enhance a borrower's ability to do so, as well as those
factors which increase the likelihood of default under a Mortgage Loan, would be
expected to cause the rate of prepayment in respect of any Mortgage Asset Pool
to accelerate. In contrast, those factors having an opposite effect would be
expected to cause the rate of prepayment of any Mortgage Asset Pool to slow.
The rate of principal payments on the Mortgage Loans in any Trust Fund may
also be affected by the existence of Lock-out Periods and requirements that
principal prepayments be accompanied by Prepayment Premiums, and by the extent
to which such provisions may be practicably enforced. To the extent enforceable,
such provisions could constitute either an absolute prohibition (in the case of
a Lock-out Period) or a disincentive (in the case of a Prepayment Premium) to a
borrower's voluntarily prepaying its Mortgage Loan, thereby slowing the rate of
prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be affected
by prevailing market interest rates for mortgage loans of a comparable type,
term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Even in the case of ARM Loans, as prevailing market interest
rates decline, and without regard to whether the Mortgage Rates on such ARM
Loans decline in a manner consistent therewith, the related borrowers may have
an increased incentive to refinance for purposes of either (i) converting to a
fixed rate loan and thereby "locking in" such rate or (ii) taking advantage of a
different index, margin or rate cap or floor on another adjustable rate mortgage
loan. Therefore, as prevailing market interest rates decline, prepayment speeds
would be expected to accelerate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits. The Depositor
makes no representation as to the particular factors that will affect the
prepayment of the Mortgage Loans in any Trust Fund, as to the relative
importance of such factors, as to the percentage of the principal balance of
such Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment on such Mortgage Loans.
Weighted Average Life and Maturity
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average life
of one or more classes of the Certificates of such series. Unless otherwise
specified in the related Prospectus Supplement, weighted average life refers to
the average amount of time that will elapse from the date of issuance of an
instrument until each dollar allocable as principal of such instrument is repaid
to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related Mortgage
Loans, whether in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes voluntary prepayments by borrowers and
also prepayments resulting from liquidations of Mortgage Loans due to default,
casualties or condemnations affecting the related Mortgaged Properties and
purchases of
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Mortgage Loans out of the related Trust Fund), is paid to such class. Prepayment
rates on loans are commonly measured relative to a prepayment standard or model,
such as the Constant Prepayment Rate ("CPR") prepayment model or the Standard
Prepayment Assumption ("SPA") prepayment model. CPR represents an assumed
constant rate of prepayment each month (expressed as an annual percentage)
relative to the then outstanding principal balance of a pool of mortgage loans
for the life of such loans. SPA represents an assumed variable rate of
prepayment each month (expressed as an annual percentage) relative to the then
outstanding principal balance of a pool of mortgage loans, with different
prepayment assumptions often expressed as percentages of SPA. For example, a
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month, and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. Thus, it is unlikely that the
prepayment experience of the Mortgage Loans included in any Trust Fund will
conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Certificates of such series with a Certificate Balance,
and the percentage of the initial Certificate Balance of each such class that
would be outstanding on specified Distribution Dates, based on the assumptions
stated in such Prospectus Supplement, including assumptions that prepayments on
the related Mortgage Loans are made at rates corresponding to various
percentages of CPR or SPA, or at such other rates specified in such Prospectus
Supplement. Such tables and assumptions will illustrate the sensitivity of the
weighted average lives of the Certificates to various assumed prepayment rates
and will not be intended to predict, or to provide information that will enable
investors to predict, the actual weighted average lives of the Certificates.
Other Factors Affecting Yield, Weighted Average Life and Maturity
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage Loans
included in a particular Trust Fund may require that balloon payments be made at
maturity. Because the ability of a borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a possibility that Mortgage Loans that require
balloon payments may default at maturity, or that the maturity of such a
Mortgage Loan may be extended in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things, bankruptcy
of the borrower or adverse conditions in the market where the property is
located. In order to minimize losses on defaulted Mortgage Loans, the Master
Servicer or the Special Servicer, to the extent and under the circumstances set
forth herein and in the related Prospectus Supplement, may be authorized to
modify Mortgage Loans that are in default or as to which a payment default is
imminent. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan may delay distributions of principal on a class of
Offered Certificates and thereby extend the weighted average life of such
Certificates and, if such Certificates were purchased at a discount, reduce the
yield thereon.
Negative Amortization. The weighted average life of a class of Certificates
can be affected by Mortgage Loans that permit negative amortization to occur
(that is, Mortgage Loans that provide for the current payment of interest
calculated at a rate lower than the rate at which interest accrues thereon, with
the unpaid portion of such interest being added to the related principal
balance). Negative amortization on one or more Mortgage Loans in any Trust Fund
may result in negative amortization on the Offered Certificates of the related
series. The related Prospectus Supplement will describe, if applicable, the
manner in which negative amortization in respect of the Mortgage Loans in any
Trust Fund is allocated among the
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respective classes of Certificates of the related series. The portion of any
Mortgage Loan negative amortization allocated to a class of Certificates may
result in a deferral of some or all of the interest payable thereon, which
deferred interest may be added to the Certificate Balance thereof. In addition,
an ARM Loan that permits negative amortization would be expected during a period
of increasing interest rates to amortize at a slower rate (and perhaps not at
all) than if interest rates were declining or were remaining constant. Such
slower rate of Mortgage Loan amortization would correspondingly be reflected in
a slower rate of amortization for one or more classes of Certificates of the
related series. Accordingly, the weighted average lives of Mortgage Loans that
permit negative amortization (and that of the classes of Certificates to which
any such negative amortization would be allocated or that would bear the effects
of a slower rate of amortization on such Mortgage Loans) may increase as a
result of such feature.
Negative amortization may occur in respect of an ARM Loan that (i) limits
the amount by which its scheduled payment may adjust in response to a change in
its Mortgage Rate, (ii) provides that its scheduled payment will adjust less
frequently than its Mortgage Rate or (iii) provides for constant scheduled
payments notwithstanding adjustments to its Mortgage Rate. Accordingly, during a
period of declining interest rates, the scheduled payment on such a Mortgage
Loan may exceed the amount necessary to amortize the loan fully over its
remaining amortization schedule and pay interest at the then applicable Mortgage
Rate, thereby resulting in the accelerated amortization of such Mortgage Loan.
Any such acceleration in amortization of its principal balance will shorten the
weighted average life of such Mortgage Loan and, correspondingly, the weighted
average lives of those classes of Certificates entitled to a portion of the
principal payments on such Mortgage Loan.
The extent to which the yield on any Offered Certificate will be affected
by the inclusion in the related Trust Fund of Mortgage Loans that permit
negative amortization, will depend upon (i) whether such Offered Certificate was
purchased at a premium or a discount and (ii) the extent to which the payment
characteristics of such Mortgage Loans delay or accelerate the distributions of
principal on such Certificate (or, in the case of a Stripped Interest
Certificate, delay or accelerate the reduction of the notional amount thereof).
See "-Yield and Prepayment Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance with
their terms will affect the weighted average lives of those Mortgage Loans and,
accordingly, the weighted average lives of and yields on the Certificates of the
related series. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceedings or otherwise, may also
have an effect upon the payment patterns of particular Mortgage Loans and thus
the weighted average lives of and yields on the Certificates of the related
series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
Offered Certificates of any series will directly depend on the extent to which
such holders are required to bear the effects of any losses or shortfalls in
collections arising out of defaults on the Mortgage Loans in the related Trust
Fund and the timing of such losses and shortfalls. In general, the earlier that
any such loss or shortfall occurs, the greater will be the negative effect on
yield for any class of Certificates that is required to bear the effects
thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by (i) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of Certificates and/or (ii)
establishing a priority of payments among such classes of Certificates.
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The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the holders
thereof to a specified portion (which may during specified periods range from
none to all) of the principal payments received on the Mortgage Assets in the
related Trust Fund, one or more classes of Certificates of any series, including
one or more classes of Offered Certificates of such series, may provide for
distributions of principal thereof from (i) amounts attributable to interest
accrued but not currently distributable on one or more classes of Accrual
Certificates, (ii) Excess Funds or (iii) any other amounts described in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, "Excess Funds" will, in general, represent that portion
of the amounts distributable in respect of the Certificates of any series on any
Distribution Date that represent (i) interest received or advanced on the
Mortgage Assets in the related Trust Fund that is in excess of the interest
currently accrued on the Certificates of such series, or (ii) Prepayment
Premiums, payments from Equity Participations or any other amounts received on
the Mortgage Assets in the related Trust Fund that do not constitute interest
thereon or principal thereof.
The amortization of any class of Certificates out of the sources described
in the preceding paragraph would shorten the weighted average life of such
Certificates and, if such Certificates were purchased at a premium, reduce the
yield thereon. The related Prospectus Supplement will discuss the relevant
factors to be considered in determining whether distributions of principal of
any class of Certificates out of such sources is likely to have any material
effect on the rate at which such Certificates are amortized and the consequent
yield with respect thereto.
THE DEPOSITOR
The Depositor is a special purpose corporation incorporated in the State of
Delaware on March 22, 1996, for the purpose of engaging in the business, among
other things, of acquiring and depositing mortgage assets in trust in exchange
for certificates evidencing interest in such trusts and selling or otherwise
distributing such certificates. The Depositor is not an affiliate of Deutsche
Bank AG. The principal executive offices of the Depositor are located at One
International Place, Room 608, Boston, Massachusetts 02110. Its telephone number
is (617) 951-7690. The Depositor's capitalization is nominal. All of the shares
of capital stock of the Depositor are held by The Deutsche Mortgage & Asset
Receiving Trust, a Massachusetts charitable lead trust (the "DMARC Trust")
formed by J H Management Corporation and J H Holdings Corporation, both of which
are Massachusetts corporations. J H Holdings Corporation is the trustee of the
DMARC Trust, which holds no assets other than the stock of the Depositor. All of
the stock of J H Holdings Corporation and of J H Management Corporation is held
by the 1960 Trust, an independent charitable organization qualified under
Section 501(c)(3) of the Code, and operated for the benefit of a Massachusetts
charitable institution.
None of the Depositor, J H Management Corporation, Deutsche Bank A.G. or
any of their respective affiliates will insure or guarantee distributions on the
Certificates of any series.
DEUTSCHE BANK AG
It is anticipated that the assets conveyed to the Trust Fund by the
Depositor will have been acquired by the Depositor from Deutsche Bank AG or an
affiliate thereof. Deutsche Bank AG is the largest banking institution in the
Federal Republic of Germany and one of the largest in the world. It is the
parent company of a group (the "Deutsche Bank Group") consisting of commercial
banks, investment banking and fund management companies, mortgage banks and
property finance companies,
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installment financing and leasing companies, insurance companies, research and
consultancy companies and other domestic and foreign companies. The Deutsche
Bank Group employs over 74,000 staff members at more than 2,400 branches and
offices around the world.
DESCRIPTION OF THE CERTIFICATES
General
Each series of Certificates will represent the entire beneficial ownership
interest in the Trust Fund created pursuant to the related Pooling Agreement. As
described in the related Prospectus Supplement, the Certificates of each series,
including the Offered Certificates of such series, may consist of one or more
classes of Certificates that, among other things: (i) provide for the accrual of
interest on the Certificate Balance or Notional Amount thereof at a fixed,
variable or adjustable rate; (ii) constitute Senior Certificates or Subordinate
Certificates; (iii) constitute Stripped Interest Certificates or Stripped
Principal Certificates; (iv) provide for distributions of interest thereon or
principal thereof that commence only after the occurrence of certain events,
such as the retirement of one or more other classes of Certificates of such
series; (v) provide for distributions of principal thereof to be made, from time
to time or for designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower) than
the rate at which payments or other collections of principal are received on the
Mortgage Assets in the related Trust Fund; (vi) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology; or (vii) provide for
distributions based on collections on the Mortgage Assets in the related Trust
Fund attributable to Prepayment Premiums and Equity Participations.
If so specified in the related Prospectus Supplement, a class of
Certificates may have two or more component parts, each having characteristics
that are otherwise described herein as being attributable to separate and
distinct classes. For example, a class of Certificates may have a Certificate
Balance on which it accrues interest at a fixed, variable or adjustable rate.
Such class of Certificates may also have certain characteristics attributable to
Stripped Interest Certificates insofar as it may also entitle the holders
thereof to distributions of interest accrued on a Notional Amount at a different
fixed, variable or adjustable rate. In addition, a class of Certificates may
accrue interest on one portion of its Certificate Balance at one fixed, variable
or adjustable rate and on another portion of its Certificate Balance at a
different fixed, variable or adjustable rate.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the principal balances or, in case of certain
classes of Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully registered,
definitive form (such Certificates, "Definitive Certificates") or may be offered
in book-entry format (such Certificates, "Book-Entry Certificates") through the
facilities of DTC. The Offered Certificates of each series (if issued as
Definitive Certificates) may be transferred or exchanged, subject to any
restrictions on transfer described in the related Prospectus Supplement, at the
location specified in the related Prospectus Supplement, without the payment of
any service charges, other than any tax or other governmental charge payable in
connection therewith. Interests in a class of Book-Entry Certificates will be
transferred on the book-entry records of DTC and its participating
organizations. If so specified in the related Prospectus Supplement,
arrangements may be made for clearance and settlement through CEDEL, S.A. or the
Euroclear System, if they are participants in DTC.
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Distributions
Distributions on the Certificates of each series will be made on each
Distribution Date from the Available Distribution Amount for such series and
such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the "Available Distribution Amount" for any series of Certificates
and any Distribution Date will refer to the total of all payments or other
collections (or advances in lieu thereof) on, under or in respect of the
Mortgage Assets and any other assets included in the related Trust Fund that are
available for distribution to the holders of Certificates of such series on such
date. The particular components of the Available Distribution Amount for any
series and Distribution Date will be more specifically described in the related
Prospectus Supplement. In general, the Distribution Date for a series of
Certificates will be the 25th day of each month (or, if any such 25th day is not
a business day, the next succeeding business day), commencing in the month
immediately following the month in which such series of Certificates is issued.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such class
in proportion to the respective Percentage Interests evidenced thereby unless
otherwise specified in the related Prospectus Supplement. Payments will be made
either by wire transfer in immediately available funds to the account of a
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder has provided the person required to make
such payments with wiring instructions no later than the related Record Date or
such other date specified in the related Prospectus Supplement (and, if so
provided in the related Prospectus Supplement, such Certificateholder holds
Certificates in the requisite amount or denomination specified therein), or by
check mailed to the address of such Certificateholder as it appears on the
Certificate Register; provided, however, that the final distribution in
retirement of any class of Certificates (whether Definitive Certificates or
Book-Entry Certificates) will be made only upon presentation and surrender of
such Certificates at the location specified in the notice to Certificateholders
of such final distribution. The undivided percentage interest (the "Percentage
Interest") represented by an Offered Certificate of a particular class will be
equal to the percentage obtained by dividing the initial principal balance or
notional amount of such Certificate by the initial Certificate Balance or
Notional Amount of such class.
Distributions of Interest on the Certificates
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC Residual
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which in each case may be fixed, variable or adjustable. The related
Prospectus Supplement will specify the Pass-Through Rate or, in the case of a
variable or adjustable Pass-Through Rate, the method for determining the
Pass-Through Rate, for each class of Offered Certificates. Unless otherwise
specified in the related Prospectus Supplement, interest on the Certificates of
each series will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Distributions of interest in respect of any class of Certificates (other
than a class of Accrual Certificates, which will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement, and other than
any class of Stripped Principal Certificates or REMIC Residual Certificates that
is not entitled to any distributions of interest) will be made on each
Distribution Date based on the Accrued Certificate Interest for such class and
such Distribution Date, subject to the sufficiency of that portion, if any, of
the Available Distribution Amount allocable to such class on such Distribution
Date. Prior to the time interest is distributable on any class
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of Accrual Certificates, the amount of Accrued Certificate Interest otherwise
distributable on such class will be added to the Certificate Balance thereof on
each Distribution Date or otherwise deferred as described in the related
Prospectus Supplement. With respect to each class of Certificates (other than
certain classes of Stripped Interest Certificates and certain classes of REMIC
Residual Certificates), the "Accrued Certificate Interest" for each Distribution
Date will be equal to interest at the applicable Pass-Through Rate accrued for a
specified period (generally the most recently ended calendar month) on the
outstanding Certificate Balance of such class of Certificates immediately prior
to such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the Accrued Certificate Interest for each Distribution Date on a
class of Stripped Interest Certificates will be similarly calculated except that
it will accrue on a Notional Amount that is either (i) based on the principal
balances of some or all of the Mortgage Assets in the related Trust Fund or (ii)
equal to the Certificate Balances of one or more other classes of Certificates
of the same series. Reference to a Notional Amount with respect to a class of
Stripped Interest Certificates is solely for convenience in making certain
calculations and does not represent the right to receive any distributions of
principal. If so specified in the related Prospectus Supplement, the amount of
Accrued Certificate Interest that is otherwise distributable on (or, in the case
of Accrual Certificates, that may otherwise be added to the Certificate Balance
of) one or more classes of the Certificates of a series may be reduced to the
extent that any Prepayment Interest Shortfalls, as described under "Yield and
Maturity Considerations-Certain Shortfalls in Collections of Interest", exceed
the amount of any sums that are applied to offset the amount of such shortfalls.
The particular manner in which such shortfalls will be allocated among some or
all of the classes of Certificates of that series will be specified in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe the extent to which the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Certificates, that may
otherwise be added to the Certificate Balance of) a class of Offered
Certificates may be reduced as a result of any other contingencies, including
delinquencies, losses and deferred interest on or in respect of the Mortgage
Assets in the related Trust Fund. Unless otherwise provided in the related
Prospectus Supplement, any reduction in the amount of Accrued Certificate
Interest otherwise distributable on a class of Certificates by reason of the
allocation to such class of a portion of any deferred interest on or in respect
of the Mortgage Assets in the related Trust Fund will result in a corresponding
increase in the Certificate Balance of such class. See "Risk Factors-Effect of
Prepayments on Average Life of Certificates" and "-Effect of Prepayments on
Yield of Certificates" and "Yield and Maturity Considerations-Certain Shortfalls
in Collections of Interest".
Distributions of Principal of the Certificates
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of Certificates of such class will be
entitled to receive as principal out of the future cash flow on the Mortgage
Assets and other assets included in the related Trust Fund. The outstanding
Certificate Balance of a class of Certificates will be reduced by distributions
of principal made thereon from time to time and, if and to the extent so
provided in the related Prospectus Supplement, further by any losses incurred in
respect of the related Mortgage Assets allocated thereto from time to time. In
turn, the outstanding Certificate Balance of a class of Certificates may be
increased as a result of any deferred interest on or in respect of the related
Mortgage Assets being allocated thereto from time to time, and will be
increased, in the case of a class of Accrual Certificates prior to the
Distribution Date on which distributions of interest thereon are required to
commence, by the amount of any Accrued Certificate Interest in respect thereof
(reduced as described above). The initial aggregate Certificate Balance of all
classes of a series of Certificates will not be greater than the aggregate
outstanding principal balance of the related Mortgage Assets as of a specified
date (the "Cut-off Date"), after application of scheduled payments due on or
before such date, whether or not received. The initial Certificate Balance of
each class of a series of Certificates will be specified in the related
Prospectus Supplement. As and to the extent described in the related Prospectus
Supplement, distributions of principal with respect to a series of Certificates
will be made on each Distribution Date to the holders of the class or classes of
Certificates of such series entitled thereto until the Certificate Balances of
such Certificates have been reduced to zero. Distributions of principal with
respect to one or more classes of Certificates may be made at a
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rate that is faster (and, in some cases, substantially faster) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund. Distributions of principal with respect to one
or more classes of Certificates may not commence until the occurrence of certain
events, such as the retirement of one or more other classes of Certificates of
the same series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund.
Distributions of principal with respect to one or more classes of Certificates
(each such class, a "Controlled Amortization Class") may be made, subject to
available funds, based on a specified principal payment schedule. Distributions
of principal with respect to one or more other classes of Certificates (each
such class, a "Companion Class") may be contingent on the specified principal
payment schedule for a Controlled Amortization Class of the same series and the
rate at which payments and other collections of principal on the Mortgage Assets
in the related Trust Fund are received. Unless otherwise specified in the
related Prospectus Supplement, distributions of principal of any class of
Offered Certificates will be made on a pro rata basis among all of the
Certificates of such class.
Distributions on the Certificates in Respect of Prepayment Premiums or in
Respect of Equity Participations
If so provided in the related Prospectus Supplement, Prepayment Premiums or
payments in respect of Equity Participations received on or in connection with
the Mortgage Assets in any Trust Fund will be distributed on each Distribution
Date to the holders of the class of Certificates of the related series entitled
thereto in accordance with the provisions described in such Prospectus
Supplement. Alternatively, such items may be retained by the Depositor or any of
its affiliates or by any other specified person and/or may be excluded as Trust
Assets.
Allocation of Losses and Shortfalls
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by (i) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of Certificates and/or (ii)
establishing a priority of payments among such classes of Certificates. See
"Description of Credit Support".
Advances in Respect of Delinquencies
If and to the extent provided in the related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the Master Servicer, the Special Servicer,
the Trustee, any provider of Credit Support and/or any other specified person
may be obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of Certificates for such Distribution Date, an
amount up to the aggregate of any payments of principal (other than the
principal portion of any balloon payments) and interest that were due on or in
respect of such Mortgage Loans during the related Due Period and were delinquent
on the related Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made out of a specific entity's own funds will be reimbursable out of
related recoveries on the Mortgage Loans (including amounts drawn under any fund
or instrument constituting Credit Support) respecting which such advances were
made (as to any Mortgage Loan, "Related Proceeds") and such other specific
sources as may be identified in the related Prospectus Supplement, including, in
the case of a series that includes one or more classes of Subordinate
Certificates, if so identified,
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collections on other Mortgage Assets in the related Trust Fund that would
otherwise be distributable to the holders of one or more classes of such
Subordinate Certificates. No advance will be required to be made by a Master
Servicer, Special Servicer or Trustee if, in the judgment of the Master
Servicer, Special Servicer or Trustee, as the case may be, such advance would
not be recoverable from Related Proceeds or another specifically identified
source (any such advance, a "Nonrecoverable Advance"); and, if previously made
by a Master Servicer, Special Servicer or Trustee, a Nonrecoverable Advance will
be reimbursable thereto from any amounts in the related Certificate Account
prior to any distributions being made to the related series of
Certificateholders.
If advances have been made by a Master Servicer, Special Servicer, Trustee
or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will be
required to replace such funds in such Certificate Account on or prior to any
future Distribution Date to the extent that funds in such Certificate Account on
such Distribution Date are less than payments required to be made to the related
series of Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer, Special Servicer,
Trustee or other entity to make advances may be secured by a cash advance
reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest on certain or all of
such advances for a specified period during which such advances are outstanding
at the rate specified in such Prospectus Supplement, and such entity will be
entitled to payment of such interest periodically from general collections on
the Mortgage Loans in the related Trust Fund prior to any payment to the related
series of Certificateholders or as otherwise provided in the related Pooling
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a party
to the related MBS Agreement.
Reports to Certificateholders
On each Distribution Date, together with the distribution to the holders of
each class of the Offered Certificates of a series, a Master Servicer, Manager
or Trustee, as provided in the related Prospectus Supplement, will forward to
each such holder, a statement (a "Distribution Date Statement") that, unless
otherwise provided in the related Prospectus Supplement, will set forth, among
other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of Offered
Certificates that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of such class of Offered
Certificates that was applied to pay Accrued Certificate Interest;
(iii)the amount, if any, of such distribution to holders of such class of
Offered Certificates that was allocable to (A) Prepayment Premiums and (B)
payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of Offered Certificates are entitled;
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(v) if the related Trust Fund includes Mortgage Loans, the aggregate amount
of advances included in such distribution;
(vi) if the related Trust Fund includes Mortgage Loans, the amount of
servicing compensation received by the related Master Servicer (and, if payable
directly out of the related Trust Fund, by any Special Servicer and any
Sub-Servicer) and, if the related Trust Fund includes MBS, the amount of
administrative compensation received by the MBS Administrator;
(vii) information regarding the aggregate principal balance of the related
Mortgage Assets on or about such Distribution Date;
(viii) if the related Trust Fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of such Mortgage Loans that
are delinquent;
(ix) if the related Trust Fund includes Mortgage Loans, information
regarding the aggregate amount of losses incurred and principal prepayments made
with respect to such Mortgage Loans during the related Prepayment Period (that
is, the specified period, generally corresponding in length to the period
between Distribution Dates, during which prepayments and other unscheduled
collections on the Mortgage Loans in the related Trust Fund must be received in
order to be distributed on a particular Distribution Date);
(x) the Certificate Balance or Notional Amount, as the case may be, of such
class of Certificates at the close of business on such Distribution Date,
separately identifying any reduction in such Certificate Balance or Notional
Amount due to the allocation of any losses in respect of the related Mortgage
Assets, any increase in such Certificate Balance or Notional Amount due to the
allocation of any negative amortization in respect of the related Mortgage
Assets and any increase in the Certificate Balance of a class of Accrual
Certificates, if any, in the event that Accrued Certificate Interest has been
added to such balance;
(xi) if such class of Offered Certificates has a variable Pass-Through Rate
or an adjustable Pass-Through Rate, the Pass-Through Rate applicable thereto for
such Distribution Date and, if determinable, for the next succeeding
Distribution Date;
(xii) the amount deposited in or withdrawn from any reserve fund on such
Distribution Date, and the amount remaining on deposit in such reserve fund as
of the close of business on such Distribution Date;
(xiii) if the related Trust Fund includes one or more instruments of Credit
Support, such as a letter of credit, an insurance policy and/or a surety bond,
the amount of coverage under each such instrument as of the close of business on
such Distribution Date; and
(xiv) the amount of Credit Support being afforded by any classes of
Subordinate Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per specified
denomination of the relevant class of Offered Certificates or as a percentage.
The Prospectus Supplement for each series of Certificates may describe
additional information to be included in reports to the holders of the Offered
Certificates of such series.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer, Manager or Trustee for a series of Certificates, as the case
may be, will be required to furnish to each person who at any time during the
calendar
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year was a holder of an Offered Certificate of such series a statement
containing the information set forth in subclauses (i)-(iii) above, aggregated
for such calendar year or the applicable portion thereof during which such
person was a Certificateholder. Such obligation will be deemed to have been
satisfied to the extent that substantially comparable information is provided
pursuant to any requirements of the Code as are from time to time in force. See,
however, "-Book-Entry Registration and Definitive Certificates" below.
If the Trust Fund for a series of Certificates includes MBS, the ability of
the related Master Servicer, Manager or Trustee, as the case may be, to include
in any Distribution Date Statement information regarding the mortgage loans
underlying such MBS will depend on the reports received with respect to such
MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the Offered Certificates of that series
in connection with distributions made to them. The Depositor will provide the
same information with respect to any MBSs in its own reports that were publicly
offered and the reports the related MBS Issuer provides to the Trustee if
privately issued.
Voting Rights
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes of
such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except with
respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement. See
"Description of the Pooling Agreements-Amendment". The holders of specified
amounts of Certificates of a particular series will have the right to act as a
group to remove the related Trustee and also upon the occurrence of certain
events which if continuing would constitute an Event of Default on the part of
the related Master Servicer, Special Servicer or REMIC Administrator. See
"Description of the Pooling Agreements-Events of Default", "-Rights Upon Event
of Default" and "-Resignation and Removal of the Trustee".
Termination
The obligations created by the Pooling Agreement for each series of
Certificates will terminate following (i) the final payment or other liquidation
of the last Mortgage Asset subject thereto or the disposition of all property
acquired upon foreclosure of any Mortgage Loan subject thereto and (ii) the
payment (or provision for payment) to the Certificateholders of that series of
all amounts required to be paid to them pursuant to such Pooling Agreement.
Written notice of termination of a Pooling Agreement will be given to each
Certificateholder of the related series, and the final distribution will be made
only upon presentation and surrender of the Certificates of such series at the
location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the repurchase
of the Mortgage Assets in the related Trust Fund by the party or parties
specified therein, under the circumstances and in the manner set forth therein.
In addition, if so provided in the related Prospectus Supplement upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount or upon a specified date, a
party designated therein may be authorized or required to solicit bids for the
purchase of all the Mortgage Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth therein. The solicitation of
bids will be conducted in a commercially reasonable manner and, generally,
assets will
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be sold at their fair market value. Circumstances may arise in which such fair
market value may be less than the unpaid balance of the Mortgage Loans sold and
therefore, as a result of such a sale, the Certificateholders of one or more
Classes of Certificates may receive an amount less than the Certificate Balance
of, and accrued unpaid interest on, their Certificates.
Book-Entry Registration and Definitive Certificates
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of the Offered Certificates of such series will be offered
in book-entry format through the facilities of DTC, and each such class will be
represented by one or more global Certificates registered in the name of The
Depository Trust Company ("DTC") or its nominee. If so provided in the
Prospectus Supplement, arrangements may be made for clearance and settlement
through the Euroclear System or CEDEL, S.A., if they are participants in DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking corporation" 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 Exchange Act. DTC
was created to hold securities for its participating organizations ("DTC
Participants") and facilitate the clearance and settlement of securities
transactions between DTC Participants through electronic computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement of
securities certificates. DTC Participants that maintain accounts with DTC
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. DTC is owned by a number of
DTC Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with a DTC Participant that maintains as account with
DTC. The rules applicable to DTC and DTC Participants are on file with the
Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through, and 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 Certificates 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). Therefore, the beneficial owner must rely on the foregoing
procedures to evidence its beneficial ownership of such Certificates. The
beneficial ownership interest of the owner of a Book-Entry Certificate (a
"Certificate Owner") may only be transferred by compliance with the rules,
regulations and procedures of such Financial Intermediaries and DTC
Participants.
DTC has no knowledge of the actual Certificate Owners; DTC's records
reflect only the identity of the DTC Participants to whose accounts such
Certificates are credited, which may or may not be the Certificate Owners. The
DTC Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants
and by DTC Participants to Financial Intermediaries and Certificate Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such date.
Disbursement of such distributions by DTC Participants
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to Financial Intermediaries and Certificate Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name", and
will be the responsibility of each such DTC Participant (and not of DTC, the
Depositor or any Trustee, Master Servicer, Special Servicer or Manager), subject
to any statutory or regulatory requirements as may be in effect from time to
time. Accordingly, under a book-entry system, Certificate Owners may receive
payments after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the only
"Certificateholder" (as such term is used in the related Pooling Agreement) of
Book-Entry Certificates will be the nominee of DTC, and the Certificate Owners
will not be recognized as Certificateholders under the Pooling Agreement.
Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly through
the DTC Participants who in turn will exercise their rights through DTC. The
Depositor has been informed that DTC will take action permitted to be taken by a
Certificateholder under a Pooling Agreement only at the direction of one or more
DTC Participants to whose account with DTC interests in the Book-Entry
Certificates are credited. DTC may take conflicting actions with respect to the
Book-Entry Certificates to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Certificates.
Because DTC can act only on behalf of DTC Participants, who in turn act on
behalf of Financial Intermediaries and certain Certificate Owners, the ability
of a Certificate Owner to pledge its interest in Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of its interest in Book-Entry Certificates, may be limited
due to the lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, 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 such Certificates and the Depositor is unable to locate a
qualified successor or (ii) the Depositor, at its option, elects to terminate
the book-entry system through DTC with respect to such Certificates. Upon the
occurrence of either of the events described in the preceding sentence, DTC will
be required to notify all DTC Participants of the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the certificate or
certificates representing a class of Book-Entry Certificates, together with
instructions for registration, the Trustee for the related series or other
designated party will be required to issue to the Certificate Owners identified
in such instructions the Definitive Certificates to which they are entitled, and
thereafter the holders of such Definitive Certificates will be recognized as
"Certificateholders" under and within the meaning of the related Pooling
Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
General
The Certificates of each series will be issued pursuant to a Pooling
Agreement. In general, the parties to a Pooling Agreement will include the
Depositor, the Trustee, the Master Servicer, the Special Servicer and, if one or
more REMIC elections have been made with respect to the Trust Fund, the REMIC
Administrator. However, a Pooling Agreement that relates to a Trust Fund that
includes MBS may include a Manager as a party, but may not include a Master
Servicer, Special Servicer or other servicer as a party. All parties to each
Pooling Agreement under which Certificates of a series are issued will be
identified in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Mortgage Asset Seller or an affiliate thereof may
perform the functions of Master Servicer, Special Servicer, Manager or REMIC
Administrator. If so specified in the related Prospectus Supplement, the Master
Servicer may also perform the duties of Special Servicer, and the Master
Servicer, the Special Servicer or the Trustee may also perform the duties of
REMIC
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Administrator. Any party to a Pooling Agreement or any affiliate thereof may own
Certificates issued thereunder; however, except in limited circumstances
(including with respect to required consents to certain amendments to a Pooling
Agreement), Certificates issued thereunder that are held by the Master Servicer
or Special Servicer for the related Series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. However, the
provisions of each Pooling Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions that may appear in a Pooling
Agreement under which Certificates that evidence interests in Mortgage Loans
will be issued. The Prospectus Supplement for a series of Certificates will
describe any provision of the related Pooling Agreement that materially differs
from the description thereof contained in this Prospectus and, if the related
Trust Fund includes MBS, will summarize all of the material provisions of the
related Pooling Agreement. The summaries herein do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all of
the provisions of the Pooling Agreement for each series of Certificates and the
description of such provisions in the related Prospectus Supplement. The
Depositor will provide a copy of the Pooling Agreement (without exhibits) that
relates to any series of Certificates without charge upon written request of a
holder of a Certificate of such series addressed to it at its principal
executive offices specified herein under "The Depositor".
Assignment of Mortgage Loans; Repurchases
At the time of issuance of any series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Mortgage Loans to
be included in the related Trust Fund, together with, unless otherwise specified
in the related Prospectus Supplement, all principal and interest to be received
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. The Trustee will,
concurrently with such assignment, deliver the Certificates to or at the
direction of the Depositor in exchange for the Mortgage Loans and the other
assets to be included in the Trust Fund for such series. Each Mortgage Loan will
be identified in a schedule appearing as an exhibit to the related Pooling
Agreement. Such schedule generally will include detailed information that
pertains to each Mortgage Loan included in the related Trust Fund, which
information will typically include the address of the related Mortgaged Property
and type of such property; the Mortgage Rate and, if applicable, the applicable
index, gross margin, adjustment date and any rate cap information; the original
and remaining term to maturity; the amortization term; and the original and
outstanding principal balance.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Mortgage Loan to be included in a
Trust Fund, deliver, or cause to be delivered, to the related Trustee (or to a
custodian appointed by the Trustee as described below) the Mortgage Note
endorsed, without recourse, either in blank or to the order of such Trustee (or
its nominee), the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office), an assignment
of the Mortgage in blank or to the Trustee (or its nominee) in recordable form,
together with any intervening assignments of the Mortgage with evidence of
recording thereon (except for any such assignment not returned from the public
recording office), and, if applicable, any riders or modifications to such
Mortgage Note and Mortgage, together with certain other documents at such times
as set forth in the related Pooling Agreement. Such assignments may be blanket
assignments covering Mortgages on Mortgaged Properties located in the same
county, if permitted by law. Notwithstanding the foregoing, a Trust Fund may
include Mortgage Loans where the original Mortgage Note is not delivered to the
Trustee if the Depositor delivers, or causes to be delivered, to the related
Trustee (or such custodian) a copy or a duplicate original of the Mortgage Note,
together with an affidavit certifying that the original thereof has been lost or
destroyed. In addition, if the Depositor cannot deliver, with respect to any
Mortgage Loan, the Mortgage or any intervening assignment with evidence of
recording thereon concurrently with the execution and delivery of the related
Pooling Agreement
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because of a delay caused by the public recording office, the Depositor will
deliver, or cause to be delivered, to the related Trustee (or such custodian) a
true and correct photocopy of such Mortgage or assignment as submitted for
recording. The Depositor will deliver, or cause to be delivered, to the related
Trustee (or such custodian) such Mortgage or assignment with evidence of
recording indicated thereon after receipt thereof from the public recording
office. If the Depositor cannot deliver, with respect to any Mortgage Loan, the
Mortgage or any intervening assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Pooling Agreement
because such Mortgage or assignment has been lost, the Depositor will deliver,
or cause to be delivered, to the related Trustee (or such custodian) a true and
correct photocopy of such Mortgage or assignment with evidence of recording
thereon. Unless otherwise specified in the related Prospectus Supplement,
assignments of Mortgage to the Trustee (or its nominee) will be recorded in the
appropriate public recording office, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interests in the Mortgage Loan against the claim of any subsequent
transferee or any successor to or creditor of the Depositor or the originator of
such Mortgage Loan.
The Trustee (or a custodian appointed by the Trustee) for a series of
Certificates will be required to review the Mortgage Loan documents delivered to
it within a specified period of days after receipt thereof, and the Trustee (or
such custodian) will hold such documents in trust for the benefit of the
Certificateholders of such series. Unless otherwise specified in the related
Prospectus Supplement, if any such document is found to be missing or defective,
and such omission or defect, as the case may be, materially and adversely
affects the interests of the Certificateholders of the related series, the
Trustee (or such custodian) will be required to notify the Master Servicer, the
Special Servicer and the Depositor, and one of such persons will be required to
notify the relevant Mortgage Asset Seller. In that case, and if the Mortgage
Asset Seller cannot deliver the document or cure the defect within a specified
number of days after receipt of such notice, then, except as otherwise specified
below or in the related Prospectus Supplement, the Mortgage Asset Seller will be
obligated to repurchase the related Mortgage Loan from the Trustee at a price
generally equal to the unpaid principal balance thereof, together with accrued
but unpaid interest through a date on or about the date of purchase, or at such
other price as will be specified in the related Prospectus Supplement (in any
event, the "Purchase Price"). If so provided in the Prospectus Supplement for a
series of Certificates, a Mortgage Asset Seller, in lieu of repurchasing a
Mortgage Loan as to which there is missing or defective loan documentation, will
have the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of Certificates, to replace such
Mortgage Loan with one or more other mortgage loans, in accordance with
standards that will be described in the Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation will constitute the sole remedy to holders of the Certificates of any
series or to the related Trustee on their behalf for missing or defective
Mortgage Loan documentation, and neither the Depositor nor, unless it is the
Mortgage Asset Seller, the Master Servicer or the Special Servicer will be
obligated to purchase or replace a Mortgage Loan if a Mortgage Asset Seller
defaults on its obligation to do so.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage Loans
in any Trust Fund and to maintain possession of and, if applicable, to review
the documents relating to such Mortgage Loans, in any case as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Certificates will be set forth in the related Prospectus
Supplement.
Representations and Warranties; Repurchases
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example: (i) the
accuracy of the information set forth for such Mortgage Loan on the schedule of
Mortgage Loans appearing as an exhibit to the related Pooling Agreement; (ii)
the enforceability of the related Mortgage Note and Mortgage and the existence
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of title insurance insuring the lien priority of the related Mortgage; (iii) the
Warranting Party's title to the Mortgage Loan and the authority of the
Warranting Party to sell the Mortgage Loan; and (iv) the payment status of the
Mortgage Loan. It is expected that in most cases the Warranting Party will be
the Mortgage Asset Seller; however, the Warranting Party may also be an
affiliate of the Mortgage Asset Seller, the Depositor or an affiliate of the
Depositor, the Master Servicer, the Special Servicer or another person
acceptable to the Depositor. The Warranting Party, if other than the Mortgage
Asset Seller, will be identified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Certificateholders of the
related series. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will be
obligated to repurchase such Mortgage Loan from the Trustee at the applicable
Purchase Price. If so provided in the Prospectus Supplement for a series of
Certificates, a Warranting Party, in lieu of repurchasing a Mortgage Loan as to
which a breach has occurred, will have the option, exercisable upon certain
conditions and/or within a specified period after initial issuance of such
series of Certificates, to replace such Mortgage Loan with one or more other
mortgage loans, in accordance with standards that will be described in the
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, this repurchase or substitution obligation will constitute the sole
remedy available to holders of the Certificates of any series or to the related
Trustee on their behalf for a breach of representation and warranty by a
Warranting Party, and neither the Depositor nor the Master Servicer, in either
case unless it is the Warranting Party, will be obligated to purchase or replace
a Mortgage Loan if a Warranting Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan as of a date prior to the date upon which the related
series of Certificates is issued, and thus may not address events that may occur
following the date as of which they were made. However, the Depositor will not
include any Mortgage Loan in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties made in respect of such Mortgage Loan
will not be accurate in all material respects as of the date of issuance. The
date as of which the representations and warranties regarding the Mortgage Loans
in any Trust Fund were made will be specified in the related Prospectus
Supplement.
Collection and Other Servicing Procedures
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer and the Special Servicer for any Mortgage Pool, directly or through
Sub-Servicers, will each be obligated under the related Pooling Agreement to
service and administer the Mortgage Loans in such Mortgage Pool for the benefit
of the related Certificateholders, in accordance with applicable law and further
in accordance with the terms of such Pooling Agreement, such Mortgage Loans and
any instrument of Credit Support included in the related Trust Fund. Subject to
the foregoing, the Master Servicer and the Special Servicer will each have full
power and authority to do any and all things in connection with such servicing
and administration that it may deem necessary and desirable.
As part of its servicing duties, each of the Master Servicer and the
Special Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans that it
services and will be obligated to follow such collection procedures as it would
follow with respect to mortgage loans that are comparable to such Mortgage Loans
and held for its own account, provided (i) such procedures are consistent with
the terms of the related Pooling Agreement and (ii) do not impair recovery under
any instrument of Credit Support included in the related Trust Fund. Consistent
with the foregoing, the Master Servicer and the Special Servicer will each be
permitted, in
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its discretion, unless otherwise specified in the related Prospectus Supplement,
to waive any Prepayment Premium, late payment charge or other charge in
connection with any Mortgage Loan.
The Master Servicer and the Special Servicer for any Trust Fund, either
separately or jointly, directly or through Sub-Servicers, will also be required
to perform as to the Mortgage Loans in such Trust Fund various other customary
functions of a servicer of comparable loans, including maintaining escrow or
impound accounts, if required under the related Pooling Agreement, for payment
of taxes, insurance premiums, ground rents and similar items, or otherwise
monitoring the timely payment of those items; attempting to collect delinquent
payments; supervising foreclosures; negotiating modifications; conducting
property inspections on a periodic or other basis; managing (or overseeing the
management of) Mortgaged Properties acquired on behalf of such Trust Fund
through foreclosure, deed-in-lieu of foreclosure or otherwise (each, an "REO
Property"); and maintaining servicing records relating to such Mortgage Loans.
The related Prospectus Supplement will specify when and the extent to which
servicing of a Mortgage Loan is to be transferred from the Master Servicer to
the Special Servicer. In general, and subject to the discussion in the related
Prospectus Supplement, a Special Servicer will be responsible for the servicing
and administration of: (i) Mortgage Loans that are delinquent in respect of a
specified number of scheduled payments; (ii) Mortgage Loans as to which the
related borrower has entered into or consented to bankruptcy, appointment of a
receiver or conservator or similar insolvency proceeding, or the related
borrower has become the subject of a decree or order for such a proceeding which
shall have remained in force undischarged or unstayed for a specified number of
days; and (iii) REO Properties. If so specified in the related Prospectus
Supplement, a Pooling Agreement also may provide that if a default on a Mortgage
Loan has occurred or, in the judgment of the related Master Servicer, a payment
default is reasonably foreseeable, the related Master Servicer may elect to
transfer the servicing thereof, in whole or in part, to the related Special
Servicer. Unless otherwise provided in the related Prospectus Supplement, when
the circumstances no longer warrant a Special Servicer's continuing to service a
particular Mortgage Loan (e.g., the related borrower is paying in accordance
with the forbearance arrangement entered into between the Special Servicer and
such borrower), the Master Servicer will resume the servicing duties with
respect thereto. If and to the extent provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Special Servicer may
perform certain limited duties in respect of Mortgage Loans for which the Master
Servicer is primarily responsible (including, if so specified, performing
property inspections and evaluating financial statements); and a Master Servicer
may perform certain limited duties in respect of any Mortgage Loan for which the
Special Servicer is primarily responsible (including, if so specified,
continuing to receive payments on such Mortgage Loan (including amounts
collected by the Special Servicer), making certain calculations with respect to
such Mortgage Loan and making remittances and preparing certain reports to the
Trustee and/or Certificateholders with respect to such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be responsible for filing and settling claims in respect of particular
Mortgage Loans under any applicable instrument of Credit Support. See
"Description of Credit Support".
A mortgagor's failure to make required Mortgage Loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a mortgagor that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and otherwise to maintain and insure the
related Mortgaged Property. In general, the related Special Servicer will be
required to monitor any Mortgage Loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related Mortgaged Property and take such other actions as it deems necessary
and appropriate. A significant period of time may elapse before the Special
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Special Servicer can make
the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Certificateholders of the related series
may vary considerably depending on the particular Mortgage Loan, the
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Mortgaged Property, the mortgagor, the presence of an acceptable party to assume
the Mortgage Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a mortgagor files a bankruptcy petition, the Special
Servicer may not be permitted to accelerate the maturity of the Mortgage Loan or
to foreclose on the related Mortgaged Property for a considerable period of
time. See "Certain Legal Aspects of Mortgage Loans-Bankruptcy Laws."
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. In general, the Master Servicer may approve such a request if
it has determined, exercising its business judgment in accordance with the
applicable servicing standard, that such approval will not adversely affect the
security for, or the timely and full collectability of, the related Mortgage
Loan. Any fee collected by the Master Servicer for processing such request will
be retained by the Master Servicer as additional servicing compensation.
In the case of Mortgage Loans secured by junior liens on the related
Mortgaged Properties, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be required to file (or cause to be filed)
of record a request for notice of any action by a superior lienholder under the
Senior Lien for the protection of the related Trustee's interest, where
permitted by local law and whenever applicable state law does not require that a
junior lienholder be named as a party defendant in foreclosure proceedings in
order to foreclose such junior lienholder's equity of redemption. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
also will be required to notify any superior lienholder in writing of the
existence of the Mortgage Loan and request notification of any action (as
described below) to be taken against the mortgagor or the Mortgaged Property by
the superior lienholder. If the Master Servicer is notified that any superior
lienholder has accelerated or intends to accelerate the obligations secured by
the related Senior Lien, or has declared or intends to declare a default under
the mortgage or the promissory note secured thereby, or has filed or intends to
file an election to have the related Mortgaged Property sold or foreclosed,
then, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and the Special Servicer will each be required to take, on
behalf of the related Trust Fund, whatever actions are necessary to protect the
interests of the related Certificateholders and/or to preserve the security of
the related Mortgage Loan, subject to the application of the REMIC Provisions.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or Special Servicer, as applicable, will be required to advance the
necessary funds to cure the default or reinstate the Senior Lien, if such
advance is in the best interests of the related Certificateholders and the
Master Servicer or Special Servicer, as applicable, determines such advances are
recoverable out of payments on or proceeds of the related Mortgage Loan.
Sub-Servicers
A Master Servicer or Special Servicer may delegate its servicing
obligations in respect of the Mortgage Loans serviced thereby to one or more
third-party servicers (each, a "Sub-Servicer"); provided that, unless otherwise
specified in the related Prospectus Supplement, such Master Servicer or Special
Servicer will remain obligated under the related Pooling Agreement. Unless
otherwise provided in the related Prospectus Supplement, each sub-servicing
agreement between a Master Servicer and a Sub-Servicer (a "Sub-Servicing
Agreement") must provide for servicing of the applicable Mortgage Loans
consistent with the related Pooling Agreement. The Master Servicer and Special
Servicer in respect of any Mortgage Asset Pool will each be required to monitor
the performance of Sub-Servicers retained by it and will have the right to
remove a Sub-Servicer retained by it at any time it considers such removal to be
in the best interests of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, a Master
Servicer or Special Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, irrespective of whether the Master Servicer's or Special
Servicer's compensation pursuant to the related Pooling Agreement is sufficient
to pay such fees. Each Sub-Servicer will be reimbursed by the Master Servicer or
Special Servicer, as the case may be, that retained it for certain expenditures
which it makes,
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generally to the same extent such Master Servicer or Special Servicer would be
reimbursed under a Pooling Agreement. See "-Certificate Account" and "-Servicing
Compensation and Payment of Expenses".
Certificate Account
General. The Master Servicer, the Trustee and/or the Special Servicer will,
as to each Trust Fund that includes Mortgage Loans, establish and maintain or
cause to be established and maintained the corresponding Certificate Account,
which will be established so as to comply with the standards of each Rating
Agency that has rated any one or more classes of Certificates of the related
series. A Certificate Account may be maintained as an interest-bearing or a
noninterest-bearing account and the funds held therein may be invested pending
each succeeding Distribution Date in United States government securities and
other obligations that are acceptable to each Rating Agency that has rated any
one or more classes of Certificates of the related series ("Permitted
Investments"). Unless otherwise provided in the related Prospectus Supplement,
any interest or other income earned on funds in a Certificate Account will be
paid to the related Master Servicer, Trustee or Special Servicer as additional
compensation. A Certificate Account may be maintained with the related Master
Servicer, Special Servicer, Trustee or Mortgage Asset Seller or with a
depository institution that is an affiliate of any of the foregoing or of the
Depositor, provided that it complies with applicable Rating Agency standards. If
permitted by the applicable Rating Agency or Agencies, a Certificate Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds representing payments on mortgage loans
owned by the related Master Servicer or Special Servicer or serviced by either
on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the following payments and
collections received or made by the Master Servicer, the Trustee or the Special
Servicer subsequent to the Cut-off Date (other than payments due on or before
the Cut-off Date) are to be deposited in the Certificate Account for each Trust
Fund that includes Mortgage Loans, within a certain period following receipt (in
the case of collections on or in respect of the Mortgage Loans) or otherwise as
provided in the related Pooling Agreement:
(i) all payments on account of principal, including principal prepayments,
on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion thereof retained
by the Master Servicer or the Special Servicer as its servicing compensation or
as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial condemnation of
a Mortgaged Property (other than proceeds applied to the restoration of the
property or released to the related borrower) ("Insurance Proceeds" and
"Condemnation Proceeds", respectively) and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans or
property acquired in respect thereof, by foreclosure or otherwise (such amounts,
together with those amounts listed in clause (vii) below, "Liquidation
Proceeds"), together with the net operating income (less reasonable reserves for
future expenses) derived from the operation of any Mortgaged Properties acquired
by the Trust Fund through foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates;
(v) any advances made with respect to delinquent scheduled payments of
principal and interest on the Mortgage Loans;
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(vi) any amounts paid under any Cash Flow Agreement;
(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller or any
other specified person as described under "-Assignment of Mortgage Loans;
Repurchases" and "-Representations and Warranties; Repurchases", all proceeds of
the purchase of any defaulted Mortgage Loan as described under "-Realization
Upon Defaulted Mortgage Loans", and all proceeds of any Mortgage Asset purchased
as described under "Description of the Certificates-Termination; Retirement of
Certificates";
(viii) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or the Special Servicer and is not
otherwise retained by the Depositor or another specified person, any payments on
account of modification or assumption fees, late payment charges, Prepayment
Premiums or Equity Participations with respect to the Mortgage Loans;
(ix) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy as described
under "-Hazard Insurance Policies";
(x) any amount required to be deposited by the Master Servicer, the Special
Servicer or the Trustee in connection with losses realized on investments for
the benefit of the Master Servicer, the Special Servicer or the Trustee, as the
case may be, of funds held in the Certificate Account; and
(xi) any other amounts received on or in respect of the Mortgage Loans
required to be deposited in the Certificate Account as provided in the related
Pooling Agreement and described in the related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, a Master Servicer, Trustee or
Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund that includes Mortgage Loans for any of the following purposes:
(i) to make distributions to the Certificateholders on each Distribution
Date;
(ii) to pay the Master Servicer or the Special Servicer any servicing fees
not previously retained thereby, such payment to be made out of payments and
other collections of interest on the particular Mortgage Loans as to which such
fees were earned;
(iii) to reimburse the Master Servicer, the Special Servicer or any other
specified person for unreimbursed advances of delinquent scheduled payments of
principal and interest made by it, and certain unreimbursed servicing expenses
incurred by it, with respect to Mortgage Loans in the Trust Fund and properties
acquired in respect thereof, such reimbursement to be made out of amounts that
represent late payments collected on the particular Mortgage Loans, Liquidation
Proceeds, Insurance Proceeds and Condemnation Proceeds collected on the
particular Mortgage Loans and properties, and net income collected on the
particular properties, with respect to which such advances were made or such
expenses were incurred or out of amounts drawn under any form of Credit Support
with respect to such Mortgage Loans and properties, or if in the judgment of the
Master Servicer, the Special Servicer or such other person, as applicable, such
advances and/or expenses will not be recoverable from such amounts, such
reimbursement to be made from amounts collected on other Mortgage Loans in the
same Trust Fund or, if and to the extent so provided by the related Pooling
Agreement and described in the related Prospectus Supplement, only from that
portion of amounts collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of Subordinate Certificates of the related
series;
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(iv) if and to the extent described in the related Prospectus Supplement,
to pay the Master Servicer, the Special Servicer or any other specified person
interest accrued on the advances and servicing expenses described in clause
(iii) above incurred by it while such remain outstanding and unreimbursed;
(v) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged Properties
that constitute security for defaulted Mortgage Loans, and for any containment,
clean-up or remediation of hazardous wastes and materials present on such
Mortgaged Properties, as described under "-Realization Upon Defaulted Mortgage
Loans";
(vi) to reimburse the Master Servicer, the Special Servicer, the REMIC
Administrator, the Depositor, the Trustee, or any of their respective directors,
officers, employees and agents, as the case may be, for certain expenses, costs
and liabilities incurred thereby, as and to the extent described under "-Certain
Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor" and "-Certain Matters Regarding the Trustee";
(vii) if and to the extent described in the related Prospectus Supplement,
to pay the fees of the Trustee, the REMIC Administrator and any provider of
Credit Support;
(viii) if and to the extent described in the related Prospectus Supplement,
to reimburse prior draws on any form of Credit Support;
(ix) to pay the Master Servicer, the Special Servicer or the Trustee, as
appropriate, interest and investment income earned in respect of amounts held in
the Certificate Account as additional compensation;
(x) to pay any servicing expenses not otherwise required to be advanced by
the Master Servicer, the Special Servicer or any other specified person;
(xi) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local taxes
imposed on the Trust Fund or its assets or transactions, as and to the extent
described under "Certain Federal Income Tax Consequences-REMICs-Prohibited
Transactions Tax and Other Taxes";
(xii) to pay for the cost of various opinions of counsel obtained pursuant
to the related Pooling Agreement for the benefit of Certificateholders;
(xiii) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xiv) to clear and terminate the Certificate Account upon the termination
of the Trust Fund.
Modifications, Waivers and Amendments of Mortgage Loans
The Master Servicer and the Special Servicer may each agree to modify,
waive or amend any term of any Mortgage Loan serviced by it in a manner
consistent with the applicable Servicing Standard; provided that, unless
otherwise set forth in the related Prospectus Supplement, the modification,
waiver or amendment (i) will not affect the amount or timing of any scheduled
payments of principal or interest on the Mortgage Loan, (ii) will not, in the
judgment of the Master Servicer or the Special Servicer, as the case may be,
materially impair the security for the Mortgage Loan or reduce the likelihood of
timely payment of amounts due thereon and (iii) will not adversely affect the
coverage under any applicable instrument of
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Credit Support. Unless otherwise provided in the related Prospectus Supplement,
the Special Servicer also may agree to any other modification, waiver or
amendment if, in its judgment, (i) a material default on the Mortgage Loan has
occurred or a payment default is imminent, (ii) such modification, waiver or
amendment is reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation and (iii) such modification, waiver or amendment will not adversely
affect the coverage under any applicable instrument of Credit Support.
Realization Upon Defaulted Mortgage Loans
If a default on a Mortgage Loan has occurred or, in the Special Servicer's
judgment, a payment default is imminent, the Special Servicer, on behalf of the
Trustee, may at any time institute foreclosure proceedings, exercise any power
of sale contained in the related Mortgage, obtain a deed in lieu of foreclosure,
or otherwise acquire title to the related Mortgaged Property, by operation of
law or otherwise. Unless otherwise specified in the related Prospectus
Supplement, the Special Servicer may not, however, acquire title to any
Mortgaged Property, have a receiver of rents appointed with respect to any
Mortgaged Property or take any other action with respect to any Mortgaged
Property that would cause the Trustee, for the benefit of the related series of
Certificateholders, or any other specified person to be considered to hold title
to, to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator"
of such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Special Servicer has previously received a report prepared by a
person who regularly conducts environmental audits (which report will be an
expense of the Trust Fund) and either:
(i) such report indicates that (a) the Mortgaged Property is in
compliance with applicable environmental laws and regulations and (b)
there are no circumstances or conditions present at the Mortgaged
Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations; or
(ii) the Special Servicer, based solely (as to environmental
matters and related costs) on the information set forth in such
report, determines that taking such actions as are necessary to bring
the Mortgaged Property into compliance with applicable environmental
laws and regulations and/or taking the actions contemplated by clause
(i)(b) above, is reasonably likely to produce a greater recovery,
taking into account the time value of money, than not taking such
actions. See "Certain Legal Aspects of Mortgage Loans-Environmental
Considerations".
A Pooling Agreement may grant to the Master Servicer, the Special Servicer,
a provider of Credit Support and/or the holder or holders of certain classes of
the related series of Certificates a right of first refusal to purchase from the
Trust Fund, at a predetermined price (which, if less than the Purchase Price,
will be specified in the related Prospectus Supplement), any Mortgage Loan as to
which a specified number of scheduled payments are delinquent. In addition,
unless otherwise specified in the related Prospectus Supplement, the Special
Servicer may offer to sell any defaulted Mortgage Loan if and when the Special
Servicer determines, consistent with its normal servicing procedures, that such
a sale would produce a greater recovery, taking into account the time value of
money, than would liquidation of the related Mortgaged Property. In the absence
of any such sale, the Special Servicer will generally be required to proceed
against the related Mortgaged Property, subject to the discussion above.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Special Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within two years of acquisition, unless
(i) the Internal Revenue Service (the "IRS") grants an extension of time to sell
such property or (ii) the Trustee receives an opinion of independent counsel to
the effect that the holding of the property by the Trust Fund for more than two
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund (or any designated portion thereof) to fail
to qualify as a REMIC under
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the Code at any time that any Certificate is outstanding. Subject to the
foregoing and any other tax-related limitations, the Special Servicer will
generally be required to attempt to sell any Mortgaged Property so acquired on
the same terms and conditions it would if it were the owner. Unless otherwise
provided in the related Prospectus Supplement, if title to any Mortgaged
Property is acquired by a Trust Fund as to which a REMIC election has been made,
the Special Servicer will also be required to ensure that the Mortgaged Property
is administered so that it constitutes "foreclosure property" within the meaning
of Code Section 860G(a)(8) at all times, that the sale of such property does not
result in the receipt by the Trust Fund of any income from nonpermitted assets
as described in Code Section 860F(a)(2)(B), and that the Trust Fund does not
derive any "net income from foreclosure property" within the meaning of Code
Section 860G(c)(2), with respect to such property. If the Trust Fund acquires
title to any Mortgaged Property, the Special Servicer, on behalf of the Trust
Fund, may retain an independent contractor to manage and operate such property.
The retention of an independent contractor, however, will not relieve the
Special Servicer of its obligation to manage such Mortgaged Property as required
under the related Pooling Agreement.
If Liquidation Proceeds collected with respect to a defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon plus the aggregate amount of reimbursable expenses
incurred by the Special Servicer and/or the Master Servicer in connection with
such Mortgage Loan, then, to the extent that such shortfall is not covered by
any instrument or fund constituting Credit Support, the Trust Fund will realize
a loss in the amount of such shortfall. The Special Servicer and/or the Master
Servicer will be entitled to reimbursement out of the Liquidation Proceeds
recovered on any defaulted Mortgage Loan, prior to the distribution of such
Liquidation Proceeds to Certificateholders, any and all amounts that represent
unpaid servicing compensation in respect of the Mortgage Loan, unreimbursed
servicing expenses incurred with respect to the Mortgage Loan and any
unreimbursed advances of delinquent payments made with respect to the Mortgage
Loan. In addition, if and to the extent set forth in the related Prospectus
Supplement, amounts otherwise distributable on the Certificates may be further
reduced by interest payable to the Master Servicer and/or Special Servicer on
such servicing expenses and advances.
If any Mortgaged Property suffers damage such that the proceeds, if any, of
the related hazard insurance policy are insufficient to restore fully the
damaged property, neither the Special Servicer nor the Master Servicer will be
required to expend its own funds to effect such restoration unless (and to the
extent not otherwise provided in the related Prospectus Supplement) it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Special Servicer or the Master Servicer, as the case may be, for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds and/or amounts
drawn on any instrument or fund constituting Credit Support.
Hazard Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer (or the Special Servicer with
respect to Mortgage Loans serviced thereby) to use reasonable efforts to cause
each Mortgage Loan borrower to maintain a hazard insurance policy that provides
for such coverage as is required under the related Mortgage or, if the Mortgage
permits the holder thereof to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, such coverage as is consistent
with the Master Servicer's (or Special Servicer's) normal servicing procedures.
Unless otherwise specified in the related Prospectus Supplement, such coverage
generally will be in an amount equal to the lesser of the principal balance
owing on such Mortgage Loan and the replacement cost of the related Mortgaged
Property. The ability of a Master Servicer (or Special Servicer) to assure that
hazard insurance proceeds are appropriately applied may be dependent upon its
being named as an additional insured under any hazard insurance policy and under
any other insurance policy referred to below, or upon the extent to which
information concerning covered losses is furnished by borrowers. All amounts
collected by a Master Servicer (or Special Servicer) under any such policy
(except for
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amounts to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with the Master Servicer's (or Special
Servicer's) normal servicing procedures and/or to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the related
Certificate Account. The Pooling Agreement may provide that the Master Servicer
(or Special Servicer) may satisfy its obligation to cause each borrower to
maintain such a hazard insurance policy by maintaining a blanket policy insuring
against hazard losses on the Mortgage Loans in a Trust Fund. If such blanket
policy contains a deductible clause, the Master Servicer (or Special Servicer)
will be required, in the event of a casualty covered by such blanket policy, to
deposit in the related Certificate Account all additional sums that would have
been deposited therein under an individual policy but were not because of such
deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin and domestic animals. Accordingly, a Mortgaged
Property may not be insured for losses arising from any such cause unless the
related Mortgage specifically requires, or permits the holder thereof to
require, such coverage.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the improvements on the property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clauses generally provide that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (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.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale or
other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage Loan
upon the creation of any other lien or encumbrance upon the Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer (or Special Servicer) will determine whether to exercise any right the
Trustee may have under any such provision in a manner consistent with the Master
Servicer's (or Special Servicer's) normal servicing procedures. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or Special
Servicer, as applicable, will be entitled to retain as additional servicing
compensation any fee collected in connection with the permitted transfer of a
Mortgaged Property. See "Certain Legal Aspects of Mortgage Loans-Due-on-Sale and
Due-on-Encumbrance".
Servicing Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion of
the interest payments on each Mortgage Loan in the related Trust Fund, including
Mortgage Loans serviced by the related Special Servicer. If and to the extent
described in the related Prospectus Supplement, a Special Servicer's primary
compensation with respect to a
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series of Certificates may consist of any or all of the following components:
(i) a specified portion of the interest payments on each Mortgage Loan in the
related Trust Fund, whether or not serviced by it; (ii) an additional specified
portion of the interest payments on each Mortgage Loan then currently serviced
by it; and (iii) subject to any specified limitations, a fixed percentage of
some or all of the collections and proceeds received with respect to each
Mortgage Loan which was at any time serviced by it, including Mortgage Loans for
which servicing was returned to the Master Servicer. Insofar as any portion of
the Master Servicer's or Special Servicer's compensation consists of a specified
portion of the interest payments on a Mortgage Loan, such compensation will
generally be based on a percentage of the principal balance of such Mortgage
Loan outstanding from time to time and, accordingly, will decrease with the
amortization of the Mortgage Loan. As additional compensation, a Master Servicer
or Special Servicer may be entitled to retain all or a portion of late payment
charges, Prepayment Premiums, modification fees and other fees collected from
borrowers and any interest or other income that may be earned on funds held in
the related Certificate Account. A more detailed description of each Master
Servicer's and Special Servicer's compensation will be provided in the related
Prospectus Supplement. Any Sub-Servicer will receive as its sub-servicing
compensation a portion of the servicing compensation to be paid to the Master
Servicer or Special Servicer that retained such Sub-Servicer.
In addition to amounts payable to any Sub-Servicer, a Master Servicer or
Special Servicer may be required, to the extent provided in the related
Prospectus Supplement, to pay from amounts that represent its servicing
compensation certain expenses incurred in connection with the administration of
the related Trust Fund, including, without limitation, payment of the fees and
disbursements of independent accountants, payment of fees and disbursements of
the Trustee and any custodians appointed thereby and payment of expenses
incurred in connection with distributions and reports to Certificateholders.
Certain other expenses, including certain expenses related to Mortgage Loan
defaults and liquidations and, to the extent so provided in the related
Prospectus Supplement, interest on such expenses at the rate specified therein,
may be required to be borne by the Trust Fund.
Evidence as to Compliance
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will provide that on or before a specified date in each year,
beginning the first such date that is at least a specified number of months
after the Cut-off Date, there will be furnished to the related Trustee a report
of a firm of independent certified public accountants stating that (i) it has
obtained a letter of representation regarding certain matters from the
management of the Master Servicer which includes an assertion that the Master
Servicer has complied with certain minimum mortgage loan servicing standards (to
the extent applicable to commercial and multifamily mortgage loans), identified
in the Uniform Single Attestation Program for Mortgage Bankers established by
the Mortgage Bankers Association of America, with respect to the Master
Servicer's servicing of commercial and multifamily mortgage loans during the
most recently completed calendar year and (ii) on the basis of an examination
conducted by such firm in accordance with standards established by the American
Institute of Certified Public Accountants, such representation is fairly stated
in all material respects, subject to such exceptions and other qualifications
that, in the opinion of such firm, such standards require it to report. In
rendering its report such firm may rely, as to the matters relating to the
direct servicing of commercial and multifamily mortgage loans by Sub-Servicers,
upon comparable reports of firms of independent public accountants rendered on
the basis of examinations conducted in accordance the same standards (rendered
within one year of such report) with respect to those Sub-Servicers. The
Prospectus Supplement may provide that additional reports of independent
certified public accountants relating to the servicing of mortgage loans may be
required to be delivered to the Trustee.
Each Pooling Agreement will also provide that, on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, the Master Servicer and Special
Servicer shall each deliver to the related Trustee an annual statement signed by
one or more officers of the Master Servicer or the Special
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Servicer, as the case may be, to the effect that, to the best knowledge of each
such officer, the Master Servicer or the Special Servicer, as the case may be,
has fulfilled in all material respects its obligations under the Pooling
Agreement throughout the preceding year or, if there has been a material default
in the fulfillment of any such obligation, such statement shall specify each
such known default and the nature and status thereof. Such statement may be
provided as a single form making the required statements as to more than one
Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer or Special Servicer may be obtained by Certificateholders upon
written request to the Trustee.
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor
Unless otherwise specified in the Prospectus Supplement for a series of
Certificates, the related Pooling Agreement will permit the Master Servicer, the
Special Servicer and any REMIC Administrator to resign from its obligations
thereunder only upon (a) the appointment of, and the acceptance of such
appointment by, a successor thereto and receipt by the Trustee of written
confirmation from each applicable Rating Agency that such resignation and
appointment will not have an adverse effect on the rating assigned by such
Rating Agency to any class of Certificates of such series or (b) a determination
that such obligations are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it. No such resignation will become effective until the Trustee or other
successor has assumed the obligations and duties of the resigning Master
Servicer, Special Servicer or REMIC Administrator, as the case may be, under the
Pooling Agreement. The Master Servicer and Special Servicer for each Trust Fund
will be required to maintain a fidelity bond and errors and omissions policy or
their equivalent that provides coverage against losses that may be sustained as
a result of an officer's or employee's misappropriation of funds or errors and
omissions, subject to certain limitations as to amount of coverage, deductible
amounts, conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Special Servicer, the REMIC Administrator, the Depositor or any director,
officer, employee or agent of any of them will be under any liability to the
related Trust Fund or Certificateholders for any action taken, or not taken, in
good faith pursuant to the Pooling Agreement or for errors in judgment;
provided, however, that none of the Master Servicer, the Special Servicer, the
REMIC Administrator, the Depositor or any such person will be protected against
any liability that would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of obligations or duties
thereunder or by reason of reckless disregard of such obligations and duties.
Unless otherwise specified in the related Prospectus Supplement, each Pooling
Agreement will further provide that the Master Servicer, the Special Servicer,
the REMIC Administrator, the Depositor and any director, officer, employee or
agent of any of them will be entitled to indemnification by the related Trust
Fund against any loss, liability or expense incurred in connection with any
legal action that relates to such Pooling Agreement or the related series of
Certificates; provided, however, that such indemnification will not extend to
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or duties under such
Pooling Agreement, or by reason of reckless disregard of such obligations or
duties. In addition, each Pooling Agreement will provide that none of the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor will be
under any obligation to appear in, prosecute or defend any legal action that is
not incidental to its respective responsibilities under the Pooling Agreement
and that in its opinion may involve it in any expense or liability. However,
each of the Master Servicer, the Special Servicer, the REMIC Administrator and
the Depositor will be permitted, in the exercise of its discretion, to undertake
any such action that it may deem necessary or desirable with respect to the
enforcement and/or protection of the rights and duties of the parties to the
Pooling Agreement and the interests of the related series of 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
related series of Certificateholders,
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and the Master Servicer, the Special Servicer, the REMIC Administrator or the
Depositor, as the case may be, will be entitled to charge the related
Certificate Account therefor.
Any person into which the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Master Servicer, the
Special Servicer, the REMIC Administrator or the Depositor is a party, or any
person succeeding to the business of the Master Servicer, the Special Servicer,
the REMIC Administrator or the Depositor, will be the successor of the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor, as the
case may be, under the related Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, a REMIC
Administrator will be entitled to perform any of its duties under the related
Pooling Agreement either directly or by or through agents or attorneys, and the
REMIC Administrator will not be responsible for any willful misconduct or gross
negligence on the part of any such agent or attorney appointed by it with due
care.
Events of Default
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include, without limitation, (i) any failure by the Master Servicer to
distribute or cause to be distributed to the Certificateholders of such series,
or to remit to the Trustee for distribution to such Certificateholders, any
amount required to be so distributed or remitted, which failure continues
unremedied for five days after written notice thereof has been given to the
Master Servicer by any other party to the related Pooling Agreement, or to the
Master Servicer, with a copy to each other party to the related Pooling
Agreement, by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series; (ii) any failure by the Special Servicer to remit to the Master
Servicer or the Trustee, as applicable, any amount required to be so remitted,
which failure continues unremedied for five days after written notice thereof
has been given to the Special Servicer by any other party to the related Pooling
Agreement, or to the Special Servicer, with a copy to each other party to the
related Pooling Agreement, by the Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights of such series; (iii) any failure by the Master Servicer or
the Special Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after written notice thereof has
been given to the Master Servicer or the Special Servicer, as the case may be,
by any other party to the related Pooling Agreement, or to the Master Servicer
or the Special Servicer, as the case may be, with a copy to each other party to
the related Pooling Agreement, by Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights for such series; (iv) any failure by a REMIC Administrator (if
other than the Trustee) duly to observe or perform in any material respect any
of its covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after written notice thereof has
been given to the REMIC Administrator by any other party to the related Pooling
Agreement, or to the REMIC Administrator, with a copy to each other party to the
related Pooling Agreement, by Certificateholders entitled to not less than 25%
(or such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series; and (v) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings in respect of or relating to the Master Servicer, the Special
Servicer or the REMIC Administrator (if other than the Trustee), and certain
actions by or on behalf of the Master Servicer, the Special Servicer or the
REMIC Administrator (if other than the Trustee) indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events of
Default (other than to add thereto or shorten cure periods or eliminate notice
requirements) will be specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, when a single entity
acts as Master Servicer, Special Servicer and REMIC Administrator, or in any two
of the
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foregoing capacities, for any Trust Fund, an Event of Default in one capacity
will constitute an Event of Default in each capacity.
Rights Upon Event of Default
If an Event of Default occurs with respect to the Master Servicer, the
Special Servicer or a REMIC Administrator under a Pooling Agreement, then, in
each and every such case, so long as the Event of Default remains unremedied,
the Depositor or the Trustee will be authorized, and at the direction of
Certificateholders of the related series entitled to not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series, the Trustee will be required, to terminate all of the
rights and obligations of the defaulting party as Master Servicer, Special
Servicer or REMIC Administrator, as applicable, under the Pooling Agreement,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the defaulting party as Master Servicer, Special Servicer or
REMIC Administrator, as applicable, under the Pooling Agreement (except that if
the defaulting party is required to make advances thereunder regarding
delinquent Mortgage Loans, but the Trustee is prohibited by law from obligating
itself to make such advances, or if the related Prospectus Supplement so
specifies, the Trustee will not be obligated to make such advances) and will be
entitled to similar compensation arrangements. Unless otherwise specified in the
related Prospectus Supplement, if the Trustee is unwilling or unable so to act,
it may (or, at the written request of Certificateholders of the related series
entitled to not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series, it will be required
to) appoint, or petition a court of competent jurisdiction to appoint, a loan
servicing institution or other entity that (unless otherwise provided in the
related Prospectus Supplement) is acceptable to each applicable Rating Agency to
act as successor to the Master Servicer, Special Servicer or REMIC
Administrator, as the case may be, under the Pooling Agreement. Pending such
appointment, the Trustee will be obligated to act in such capacity.
If the same entity is acting as both Trustee and REMIC Administrator, it
may be removed in both such capacities as described under "-Resignation and
Removal of the Trustee" below.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class 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 sixty days after receipt of such
request and indemnity has neglected or refused to institute any such proceeding.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Pooling Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates covered by such Pooling
Agreement, unless such Certificateholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement, each
Pooling Agreement may be amended by the parties thereto, without the consent of
any of the holders of Certificates covered by such Pooling Agreement, (i) to
cure any ambiguity, (ii) to correct or supplement any provision therein which
may be inconsistent with any other provision therein or to correct any error,
(iii) to change the timing and/or nature of deposits in the Certificate Account,
provided that (A) such change would not adversely affect in any material respect
the interests of any Certificateholder, as evidenced by an opinion of counsel,
and (B) such change would not adversely affect the then-current rating of any
rated classes of Certificates, as evidenced by a letter from each applicable
Rating Agency, (iv) if a REMIC election has been made with respect to the
related
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Trust Fund, to modify, eliminate or add to any of its provisions (A) to such
extent as shall be necessary to maintain the qualification of the Trust Fund (or
any designated portion thereof) as a REMIC or to avoid or minimize the risk of
imposition of any tax on the related Trust Fund, provided that the Trustee has
received an opinion of counsel to the effect that (1) such action is necessary
or desirable to maintain such qualification or to avoid or minimize such risk,
and (2) such action will not adversely affect in any material respect the
interests of any holder of Certificates covered by the Pooling Agreement, or (B)
to restrict the transfer of the REMIC Residual Certificates, provided that the
Depositor has determined that the then-current ratings of the classes of the
Certificates that have been rated will not be adversely affected, as evidenced
by a letter from each applicable Rating Agency, and that any such amendment will
not give rise to any tax with respect to the transfer of the REMIC Residual
Certificates to a non-permitted transferee (See "Certain Federal Income Tax
Consequences-REMICs-Tax and Restrictions on Transfers of REMIC Residual
Certificates to Certain Organizations" herein), (v) to make any other provisions
with respect to matters or questions arising under such Pooling Agreement or any
other change, provided that such action will not adversely affect in any
material respect the interests of any Certificateholder, or (vi) to amend
specified provisions that are not material to holders of any class of
Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with the
consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66-2/3% (or such other percentage
specified in the related Prospectus Supplement) of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Pooling
Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that 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 a Certificate
of any class without the consent of the holder of such Certificate or (ii)
reduce the aforesaid percentage of Certificates of any class the holders of
which are required to consent to any such amendment without the consent of the
holders of all Certificates of such class covered by such Pooling Agreement then
outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be required to consent
to any amendment to a Pooling Agreement without having first received an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Master Servicer, the Special Servicer, the Depositor, the Trustee
or any other specified person in accordance with such amendment will not result
in the imposition of a tax on the related Trust Fund or cause such Trust Fund
(or any designated portion thereof) to fail to qualify as a REMIC.
List of Certificateholders
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders of record made for purposes
of communicating with other holders of Certificates of the same series with
respect to their rights under the related Pooling Agreement, the Trustee or
other specified person will afford such Certificateholders access during normal
business hours to the most recent list of Certificateholders of that series held
by such person. If such list is as of a date more than 90 days prior to the date
of receipt of such Certificateholders' request, then such person, if not the
registrar for such series of Certificates, will be required to request from such
registrar a current list and to afford such requesting Certificateholders access
thereto promptly upon receipt.
The Trustee
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any Master
Servicer, Special Servicer or REMIC Administrator and its affiliates.
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Duties of the Trustee
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, such
Certificates or any underlying Mortgage Asset or related document and will not
be accountable for the use or application by or on behalf of any Master Servicer
or Special Servicer of any funds paid to the Master Servicer or Special Servicer
in respect of the Certificates or the underlying Mortgage Assets. If no Event of
Default has occurred and is continuing, the Trustee for each series of
Certificates will be required to perform only those duties specifically required
under the related Pooling Agreement. However, upon receipt of any of the various
certificates, reports or other instruments required to be furnished to it
pursuant to the related Pooling Agreement, a Trustee will be required to examine
such documents and to determine whether they conform to the requirements of such
agreement.
Certain Matters Regarding the Trustee
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the related
Master Servicer or other specified person or may be required to be borne by the
related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling Agreement;
provided, however, that such indemnification will not extend to any loss
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of this
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
Resignation and Removal of the Trustee
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates of the applicable series evidencing not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee. Notwithstanding anything herein to the
contrary, if any entity is acting as both Trustee and REMIC Administrator, then
any resignation or removal of such entity as the Trustee will also constitute
the resignation or removal of such entity as REMIC Administrator, and the
successor trustee will serve as successor to the REMIC Administrator as well.
DESCRIPTION OF CREDIT SUPPORT
General
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Credit Support may be provided with respect to one or more classes of the
Certificates of any series or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a surety bond, an insurance
policy or a guarantee, the establishment of one or more reserve funds, or any
combination of the foregoing. If and to the extent so provided in the related
Prospectus Supplement, any of the foregoing forms of Credit Support may provide
credit enhancement for more than one series of Certificates.
The Credit Support may not provide protection against all risks of loss and
will not guarantee payment to Certificateholders of all amounts to which they
are entitled under the related Pooling Agreement. If losses or shortfalls occur
that exceed the amount covered by the related Credit Support or that are of a
type not covered by such Credit Support, Certificateholders will bear their
allocable share of deficiencies. Moreover, if a form of Credit Support covers
the Offered Certificates of more than one series and losses on the related
Mortgage Assets exceed the amount of such Credit Support, it is possible that
the holders of Offered Certificates of one (or more) such series will be
disproportionately benefited by such Credit Support to the detriment of the
holders of Offered Certificates of one (or more) other such series.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature and
amount of coverage under such Credit Support, (ii) any conditions to payment
thereunder not otherwise described herein, (iii) the conditions (if any) under
which the amount of coverage under such Credit Support may be reduced and under
which such Credit Support may be terminated or replaced and (iv) the material
provisions relating to such Credit Support. Additionally, the related Prospectus
Supplement will set forth certain information with respect to the obligor, if
any, under any instrument of Credit Support. See "Risk Factors-Credit Support
Limitations".
Subordinate Certificates
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate Account
on any Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Certificates. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of certain
types of losses or shortfalls. The related Prospectus Supplement will set forth
information concerning the method and amount of subordination provided by a
class or classes of Subordinate Certificates in a series and the circumstances
under which such subordination will be available.
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of the related
series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
Insurance or Guarantees with Respect to Mortgage Loans
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. The related Prospectus
Supplement will describe the nature of such default risks and the extent of such
coverage.
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Letter of Credit
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or other financial institution specified in such Prospectus Supplement (the
"Letter of Credit Bank"). Under a letter of credit, the Letter of Credit Bank
will be obligated to honor draws thereunder in an aggregate fixed dollar amount,
net of unreimbursed payments thereunder, generally equal to a percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of some or all of the related Mortgage Assets on the related Cut-off
Date or of the initial aggregate Certificate Balance of one or more classes of
Certificates. If so specified in the related Prospectus Supplement, the letter
of credit may permit draws only in the event of certain types of losses and
shortfalls. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments thereunder and may
otherwise be reduced as described in the related Prospectus Supplement. The
obligations of the Letter of Credit Bank under the letter of credit for each
series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund.
Certificate Insurance and Surety Bonds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies or surety bonds provided
by one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Certificates of the related series, timely
distributions of interest or distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. The related Prospectus
Supplement will describe any limitations on the draws that may be made under any
such instrument.
Reserve Funds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments, a
demand note or a combination thereof will be deposited, in the amounts specified
in such Prospectus Supplement. If so specified in the related Prospectus
Supplement, the reserve fund for a series may also be funded over time by a
specified amount of certain collections received on the related Mortgage Assets.
Amounts on deposit in any reserve fund for a series will be applied for the
purposes, in the manner, and to the extent specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, reserve funds
may be established to provide protection only against certain types of losses
and shortfalls. Following each Distribution Date, amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from the
reserve fund under the conditions and to the extent specified in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, any reinvestment income or other
gain from such investments will be credited to the related reserve fund for such
series, and any loss resulting from such investments will be charged to such
reserve fund. However, such income may be payable to any related Master Servicer
or another service provider as additional compensation for its services. The
reserve fund, if any, for a series will not be a part of the Trust Fund unless
otherwise specified in the related Prospectus Supplement.
Credit Support with respect to MBS
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If so provided in the Prospectus Supplement for a series of Certificates,
any MBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify, as to each
such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by commercial and multifamily residential
properties. Because such legal aspects are governed by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular state, or to encompass the laws
of all states in which the security for the Mortgage Loans (or mortgage loans
underlying any MBS) is situated. Accordingly, the summaries are qualified in
their entirety by reference to the applicable laws of those states. See
"Description of the Trust Funds-Mortgage Loans". If a significant percentage of
Mortgage Loans (or mortgage loans underlying MBS), by balance, are secured by
properties in a particular state, relevant state laws, to the extent they vary
materially from this discussion, will be discussed in the Prospectus Supplement.
For purposes of the following discussion, "Mortgage Loan" includes a mortgage
loan underlying an MBS.
General
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages". A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property, irrevocably until the debt is paid, in trust
and generally with a power of sale, to the trustee to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties, pursuant to which the borrower, or grantor, conveys title to the
real property to the grantee, or lender, generally with a power of sale, until
such time as the debt is repaid. In a case where the borrower is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the borrower.
At origination of a mortgage loan involving a land trust, the borrower may
execute a separate undertaking to make payments on the mortgage note. In no
event is the land trustee personally liable for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed by
the express provisions of the related instrument, the law of the state
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in which the real property is located, certain federal laws and, in some deed of
trust transactions, the directions of the beneficiary.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the borrower
as additional security for the loan. In general, the lender must file financing
statements in order to perfect its security interest in the room rates and must
file continuation statements, generally every five years, to maintain perfection
of such security interest. In certain cases, Mortgage Loans secured by hotels or
motels may be included in a Trust Fund even if the security interest in the room
rates was not perfected or the requisite UCC filings were allowed to lapse. Even
if the lender's security interest in room rates is perfected under applicable
nonbankruptcy law, it will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default. In the bankruptcy setting,
however, the lender will be stayed from enforcing its rights to collect room
rates, but those room rates (in light of certain revisions to the Bankruptcy
Code which are effective for all bankruptcy cases commenced on or after October
22, 1994) constitute "cash collateral" and therefore cannot be used by the
bankruptcy debtor without a hearing or lender's consent and unless the lender's
interest in the room rates is given adequate protection (e.g., cash payment for
otherwise encumbered funds or a replacement lien on unencumbered property, in
either case equal in value to the amount of room rates that the debtor proposes
to use, or other similar relief). See "-Bankruptcy Laws".
Personalty
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the borrower
and not previously pledged) may constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the UCC. Accordingly, if a borrower pledges personal
property as security for a mortgage loan, the lender generally must file UCC
financing statements in order to perfect its security interest therein, and must
file continuation statements, generally every five years, to maintain that
perfection. In certain cases, Mortgage Loans secured in part by personal
property may be included in a Trust Fund even if the security interest in such
personal property was not perfected or the requisite UCC filings were allowed to
lapse.
Foreclosure
General. Foreclosure is a legal procedure that allows the lender to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the lender has the right to institute foreclosure
proceedings to sell the real property at public auction to satisfy the
indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and nonjudicial foreclosure pursuant to a power of sale granted in the mortgage
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instrument. Other foreclosure procedures are available in some states, but they
are either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses are raised or counterclaims are interposed, and sometimes
requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
Upon successful completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
officer to conduct a public sale of the mortgaged property, the proceeds of
which are used to satisfy the judgment. Such sales are made in accordance with
procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain Provisions.
United States courts have traditionally imposed general equitable principles to
limit the remedies available to lenders in foreclosure actions. These principles
are generally designed to relieve borrowers from the effects of mortgage
defaults perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative actions to determine the cause of 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 and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a nonmonetary default, such as a failure to
adequately maintain the mortgaged property or an impermissible further
encumbrance of the mortgaged property. Finally, some courts have addressed the
issue of whether federal or state constitutional provisions reflecting due
process concerns for adequate notice require that a borrower receive notice in
addition to statutorily-prescribed minimum notice. For the most part, these
cases have upheld the reasonableness of the notice provisions or have found that
a public sale under a mortgage providing for a power of sale does not involve
sufficient state action to trigger constitutional protections.
In addition, some states may have statutory protection such as the right of
the borrower to reinstate mortgage loans after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained in
any other type of mortgage instrument if applicable law so permits. A power of
sale under a deed of trust allows a nonjudicial public sale to be conducted
generally following a request from the beneficiary/lender to the trustee to sell
the property upon default by the borrower and after notice of sale is given in
accordance with the terms of the mortgage and applicable state law. In some
states, prior to such sale, the trustee under the deed of trust must record a
notice of default and notice of sale and send a copy to the borrower and to any
other party who has recorded a request for a copy of a notice of default and
notice of sale. In addition, in some states the trustee must provide notice to
any other party having an interest of record in the real property, including
junior lienholders. A notice of sale must be posted in a public place and, in
most states, published for a specified period of time in one or more newspapers.
The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without regard to the acceleration of the
indebtedness), plus the lender's expenses incurred in enforcing the obligation.
In other states, the borrower or the junior lienholder is not provided a period
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to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, state law governs the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time periods.
Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other things, redemption rights
that may exist) and because of the possibility that physical deterioration of
the property may have occurred during the foreclosure proceedings. Therefore, it
is common for the lender to purchase the mortgaged property for an amount equal
to the secured indebtedness and accrued and unpaid interest plus the expenses of
foreclosure, in which event the borrower's debt will be extinguished, or for a
lesser amount in order to preserve its right to seek a deficiency judgment if
such is available under state law and under the terms of the Mortgage Loan
documents. (The Mortgage Loans, however, may be nonrecourse. See "Risk
Factors-Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans-Limited Recourse Nature of the Mortgage Loans".) Thereafter,
subject to the borrower's right in some states to remain in possession during a
redemption period, the lender will become the owner of the property and have
both the benefits and burdens of ownership, including the obligation to pay debt
service on any senior mortgages, to pay taxes, to obtain casualty insurance and
to make such repairs as are necessary to render the property suitable for sale.
The costs of operating and maintaining a commercial or multifamily residential
property may be significant and may be greater than the income derived from that
property. The lender also will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale or lease 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.
Moreover, because of the expenses associated with acquiring, owning and selling
a mortgaged property, a lender could realize an overall loss on a mortgage loan
even if the mortgaged property is sold at foreclosure, or resold after it is
acquired through foreclosure, for an amount equal to the full outstanding
principal amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all persons
who have interests in the property that are subordinate to that of the
foreclosing lender, from exercise of their "equity of redemption". The doctrine
of equity of redemption provides that, until the property encumbered by a
mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) right which should
be distinguished from post-sale statutory 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. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted 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 because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property
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and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a mortgage loan by its terms provides
for recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of trust. A deficiency judgment is a personal judgment
against the former borrower equal to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes may require the lender to exhaust the security afforded
under a mortgage 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 those states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists will usually proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
Leasehold Considerations. Mortgage Loans may be secured by a mortgage on
the borrower's leasehold interest in a ground lease. Leasehold mortgage loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of the borrower. The most significant of these risks is
that if the borrower's leasehold were to be terminated upon a lease default, the
leasehold mortgagee would lose its security. This risk may be lessened if the
ground lease requires the lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them, permits the leasehold estate to
be assigned to and by the leasehold mortgagee or the purchaser at a foreclosure
sale, and contains certain other protective provisions typically included in a
"mortgageable" ground lease. Certain Mortgage Loans, however, may be secured by
ground leases which do not contain these provisions.
Cooperative Shares. Mortgage Loans may be secured by a security interest on
the borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto, allocable to cooperative dwelling units that may be vacant
or occupied by nonowner tenants. Such loans are subject to certain risks not
associated with mortgage loans secured by a lien on the fee estate of a borrower
in real property. Such a loan typically is subordinate to the mortgage, if any,
on the Cooperative's building which, if foreclosed, could extinguish the equity
in the building and the proprietary leases of the dwelling units derived from
ownership of the shares of the Cooperative. Further, transfer of shares in a
Cooperative are subject to various regulations as well as to restrictions under
the governing documents of the Cooperative, and the shares may be cancelled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the Cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on Cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given the debtor and
the method, manner, time, place and terms of the sale. 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. A 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 leases.
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Bankruptcy Laws
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
Some bankruptcy courts have approved plans, based on the particular facts of the
reorganization case, that effected the cure of a mortgage loan default by paying
arrearages over a number of years. Also, a bankruptcy court may permit a debtor,
through its rehabilitative plan, to reinstate a loan mortgage payment schedule
even if the lender has obtained a final judgment of foreclosure prior to the
filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under the Bankruptcy
Code, a lender may be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents. Recent amendments to the
Bankruptcy code, however, may minimize the impairment of the lender's ability to
enforce the borrower's assignment of rents and leases. In addition to the
inclusion of hotel revenues within the definition of "cash collateral" as noted
previously in the section entitled "-Leases and Rents", the amendments provide
that a pre-petition security interest in rents or hotel revenues is designed to
overcome those cases holding that a security interest in rents is unperfected
under the laws of certain states until the lender has taken some further action,
such as commencing foreclosure or obtaining a receiver prior to activation of
the assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that ability
may be impaired by the commencement of a bankruptcy case relating to a lessee
under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition. In addition, the Bankruptcy Code generally provides that a
trustee or debtor-in-possession may, subject to approval of the court, (i)
assume the lease and retain it or assign it to a third party or (ii) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must cure any defaults under the lease, compensate the
lessor for its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also
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limits a lessor's damages for lease rejection to the rent reserved by the lease
(without regard to acceleration) for the greater of one year, or 15%, not to
exceed three years, of the remaining term of the lease.
Environmental Considerations
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Such environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In certain circumstances, a lender
may decide to abandon a contaminated mortgaged property as collateral for its
loan rather than foreclose and risk liability for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
participated in the management of such mortgaged property or the operations of
the borrower. Such liability may exist even if the lender did not cause or
contribute to the contamination and regardless of whether the lender has
actually taken possession of a mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, such liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator", however, is a person "who without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest". This is the so called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Act") amended, among other things, the provisions of CERCLA with respect
to lender liability and the secured creditor exemption. The Act offers
substantial protection to lenders by defining the activities in which a lender
can engage and still have the benefit of the secured creditor exemption. In
order for a lender to be deemed to have participated in the management of a
mortgaged property, the lender must actually participate in the operational
affairs of the property of the borrower. The Act provides that "merely having
the capacity to influence, or unexercised right to control" operations does not
constitute participation in management. A lender will lose the protection of the
secured creditor exemption only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property. The Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Certain Other Federal and State Laws. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption. In
addition, under federal law, there is potential liability relating to hazardous
wastes and underground storage tanks under the federal Resource Conservation and
Recovery Act.
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In a few states, transfers of some types of properties are conditioned upon
cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury or damage to property) related to hazardous environmental
conditions on a property. While it may be more difficult to hold a lender liable
in such cases, unanticipated or uninsured liabilities of the borrower may
jeopardize the borrower's ability to meet its loan obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. Such costs may jeopardize the
borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard, but that individual or entity may be without
substantial assets. Accordingly, it is possible that such costs could become a
liability of the Trust Fund and occasion a loss to the Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related Prospectus Supplement, the Pooling Agreement will provide that neither
the Master Servicer nor the Special Servicer, acting on behalf of the Trustee,
may acquire title to a Mortgaged Property or take over its operation unless the
Special Servicer, based solely (as to environmental matters) on a report
prepared by a person who regularly conducts environmental audits, has made the
determination that it is appropriate to do so, as described under "Description
of the Pooling Agreements-Realization Upon Defaulted Mortgage Loans".
If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will be
required to operate the property in accordance with those laws and regulations.
Such compliance may entail substantial expense, especially in the case of
industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental conditions
on a property to government entities and/or to prospective buyers (including
prospective buyers at a foreclosure sale or following foreclosure). Such
disclosure may decrease the amount that prospective buyers are willing to pay
for the affected property, sometimes substantially, and thereby decrease the
ability of the lender to recoup its investment in a loan upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to the
issuance of the related Certificates. Environmental site assessments, however,
vary considerably in their content, quality and cost. Even when adhering to good
professional practices, environmental consultants will sometimes not detect
significant environmental problems because to do an exhaustive environmental
assessment would be far too costly and time-consuming to be practical.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such
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clauses in many states. However, the Garn-St Germain Depository Institutions Act
of 1982 (the "Garn Act") generally preempts state laws that prohibit the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limitations as set forth in
the Garn Act and the regulations promulgated thereunder. Accordingly, a Master
Servicer may nevertheless have the right to accelerate the maturity of a
Mortgage Loan that contains a "due-on-sale" provision upon transfer of an
interest in the property, without regard to the Master Servicer's ability to
demonstrate that a sale threatens its legitimate security interest.
Junior Liens; Rights of Holders of Senior Liens
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens, and
the loans secured by the related Senior Liens may not be included in the
Mortgage Pool. The primary risk to holders of Mortgage Loans secured by junior
liens is the possibility that adequate funds will not be received in connection
with a foreclosure of the related Senior Liens to satisfy fully both the Senior
Liens and the Mortgage Loan. In the event that a holder of a Senior Lien
forecloses on a Mortgaged Property, the proceeds of the foreclosure or similar
sale will be applied first to the payment of court costs and fees in connection
with the foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Liens. The claims of the holders
of the Senior Liens will be satisfied in full out of proceeds of the liquidation
of the related Mortgage Property, if such proceeds are sufficient, before the
Trust Fund as holder of the junior lien receives any payments in respect of the
Mortgage Loan. In the event that such proceeds from a foreclosure or similar
sale of the related Mortgaged Property are insufficient to satisfy all Senior
Liens and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of
the junior lien, and, accordingly, holders of one or more classes of the
Certificates of the related series bear (i) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (ii) the risk
of loss if the deficiency judgment is not realized upon. Moreover, deficiency
judgments may not be available in certain jurisdictions or the Mortgage Loan may
be nonrecourse.
Subordinate Financing
The terms of certain of the Mortgage Loans may not restrict the ability of
the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be unenforceable. Where a borrower
encumbers a mortgaged property with one or more junior liens, the senior lender
is subjected to additional risk. First, the borrower may have difficulty
servicing and repaying multiple loans. Moreover, if the subordinate financing
permits recourse to the borrower (as is frequently the case) and the senior loan
does not, a borrower may have more incentive to repay sums due on the
subordinate loan. Second, acts of the senior lender that prejudice the junior
lender or impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate payable on
the senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments.
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Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid. In addition, the enforceability
of provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that 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.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or adoption)
be eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof are to be
construed in accordance with the laws of another state under which such interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that such choice of law provision would be given
effect.
Certain Laws and Regulations
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply (together
with an inability to remedy any such failure) could result in material
diminution in the value of a Mortgaged Property which could, together with the
possibility of limited alternative uses for a particular Mortgaged Property
(i.e., a nursing or convalescent home or hospital), result in a failure to
realize the full principal amount of the related Mortgage Loan.
Americans with Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
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Soldiers' and Sailors' Civil Relief Act of 1940
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 was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) 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. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of a Master Servicer or
Special Servicer to collect full amounts of interest on certain of the Mortgage
Loans. Any shortfalls in interest collections resulting from the application of
the Relief Act would result in a reduction of the amounts distributable to the
holders of the related series of Certificates, and would not be covered by
advances or, unless otherwise specified in the related Prospectus Supplement,
any form of Credit Support provided in connection with such Certificates. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer or Special Servicer to foreclose on an affected Mortgage
Loan during the borrower's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following general discussion of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of Offered
Certificates of any series thereof, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of counsel to
the Depositor with respect to that series on the material matters associated
with such consequences, subject to any qualifications set forth herein. Unless
otherwise specified in the related Prospectus Supplement, counsel to the
Depositor for each series will be Thacher Proffitt & Wood. This discussion is
directed primarily to Certificateholders that hold the Certificates as "capital
assets" within the meaning of Section 1221 of the Code (although portions
thereof may also apply to Certificateholders who do not hold Certificates as
"capital assets") and it does not purport to discuss all federal income tax
consequences that may be applicable to the individual circumstances of
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particular investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special treatment under the Code. Further,
the authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. Prospective investors should note that no rulings have been or
will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given the IRS will not
take contrary positions. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their tax advisors and tax return preparers regarding
the preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein. In addition to the federal income tax
consequences described herein, potential investors are advised to consider the
state and local tax consequences, if any, of the purchase, ownership and
disposition of Offered Certificates. See "State and Other Tax Consequences".
Certificateholders are advised to consult their tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of Offered Certificates.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the REMIC Administrator will elect to have treated as a
real estate mortgage investment conduit ("REMIC") under Sections 860A through
860G (the "REMIC Provisions") of the Code, and (ii) Grantor Trust Certificates
representing interests in a Trust Fund ("Grantor Trust Fund") as to which no
such election will be made. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election (or elections) will be made
for the related Trust Fund and, if such an election is to be made, will identify
all "regular interests" and "residual interests" in the REMIC. For purposes of
this tax discussion, references to a "Certificateholder" or a "holder" are to
the beneficial owner of a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that Mortgage
Assets held by a Trust Fund consist solely of Mortgage Loans. To the extent that
other Mortgage Assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a Trust Fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related Prospectus
Supplement. In addition, if Cash Flow Agreements other than guaranteed
investment contracts are included in a Trust Fund, the anticipated material tax
consequences associated with such Cash Flow Agreements also will be discussed in
the related Prospectus Supplement. See "Description of the Trust Funds-Cash Flow
Agreements".
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICs
Classification of REMICs. With respect to each series of REMIC
Certificates, counsel to the Depositor will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Trust Fund (or each applicable portion thereof) will
qualify as a REMIC and the REMIC Certificates offered with respect thereto will
be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in that REMIC within the meaning of the REMIC Provisions.
The following general discussion of the anticipated federal income
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tax consequences of the purchase, ownership and disposition of REMIC
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of counsel to the Depositor for the
applicable series as specified in the related Prospectus Supplement, subject to
any qualifications set forth herein. In addition, counsel to the Depositor have
prepared or reviewed the statements in this Prospectus under the heading
"Certain Federal Income Tax Consequences--REMICs," and are of the opinion that
such statements are correct in all material respects. Such statements are
intended as an explanatory discussion of the possible effects of the
classification of any Trust Fund (or applicable portion thereof) as a REMIC for
federal income tax purposes on investors generally and of related tax matters
affecting investors generally, but do not purport to furnish information in the
level of detail or with the attention to an investor's specific tax
circumstances that would be provided by an investor's own tax advisor.
Accordingly, each investor is advised to consult its own tax advisors with
regard to the tax consequences to it of investing in REMIC Certificates.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling Agreement with respect to each REMIC will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be inadvertently terminated.
Characterization of Investments in REMIC Certificates. In general, unless
otherwise provided in the related Prospectus Supplement, the REMIC Certificates
will be "qualifying real property loans" within the meaning of Section 593(d) of
the Code, "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC underlying such Certificates would be so
treated. However, to the extent that the REMIC assets constitute mortgages on
property not used for residential or certain other prescribed purposes, the
REMIC Certificates will not be treated as assets qualifying under Section
7701(a)(19)(C). Moreover, if 95% or more of the assets of the REMIC qualify for
any of the foregoing characterizations at all times during a calendar year, the
REMIC Certificates will qualify for the corresponding status in their entirety
for that calendar year. Interest (including original issue discount) on the
REMIC Regular Certificates and income allocated to the REMIC Residual
Certificates will be interest described in Section 856(c)(3)(B) of the Code to
the extent that such Certificates are treated as "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code. In addition, the REMIC Regular
Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. The determination as to the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during such calendar
quarter. The REMIC Administrator will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale, and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections of the Code)
otherwise would receive the same treatment as the Mortgage Loans for purposes of
all of the foregoing sections of the Code. In addition, in some instances
Mortgage Loans may not be treated entirely as assets described in the foregoing
sections of the Code. If so, the related Prospectus Supplement will describe the
Mortgage Loans
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that may not be so treated. The REMIC Regulations do provide, however, that cash
received from payments on Mortgage Loans held pending distribution is considered
part of the Mortgage Loans for purposes of Sections 593(d) and 856(c)(5)(A) of
the Code, and Treasury regulations provide that real property acquired by
foreclosure constitutes "qualifying real property loans" for purposes of section
593(d) of the Code.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. As to
each such series of REMIC Certificates, in the opinion of counsel to the
Depositor, assuming compliance with all provisions of the related Pooling
Agreement, the Tiered REMICs will each qualify as a REMIC and the REMIC
Certificates issued by the Tiered REMICs, will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates.
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the "constant yield" method described below,
in advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to Mortgage Loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor nor any other person will
make any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers
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and underwriters). If less than a substantial amount of a particular class of
REMIC Regular Certificates is sold for cash on or prior to the date of their
initial issuance (the "Closing Date"), the issue price for such class will be
the fair market value of such class on the Closing Date. Under the OID
Regulations, the stated redemption price of a REMIC Regular Certificate is equal
to the total of all payments to be made on such Certificate other than
"qualified stated interest". "Qualified stated interest" is interest that is
unconditionally payable at least annually (during the entire term of the
instrument) at a single fixed rate, or at a "qualified floating rate", an
"objective rate", a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate", or a
combination of "qualified floating rates" that does not operate in a manner that
accelerates or defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the IRS.
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on a
Distribution Date, in some cases, as a consequence of this "long first accrual
period", some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns provided to
the Certificateholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total
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amount of such de minimis original issue discount and a fraction, the numerator
of which is the amount of such principal payment and the denominator of which is
the outstanding stated principal amount of the REMIC Regular Certificate. The
OID Regulations also would permit a Certificateholder to elect to accrue de
minimis original issue discount into income currently based on a constant yield
method. See "-Taxation of Owners of REMIC Regular Certificates-Market Discount"
below for a description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated in the
related Prospectus Supplement, each period that begins on a date that
corresponds to a Distribution Date (or in the case of the first such period,
begins on the Closing Date) and ends on the day preceding the immediately
following Distribution Date, a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (a) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (b) the distributions made on
such REMIC Regular Certificate during the accrual period of amounts included in
the stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate will
be received in future periods based on the Mortgage Loans being prepaid at a
rate equal to the Prepayment Assumption, (ii) using a discount rate equal to the
original yield to maturity of the Certificate and (iii) taking into account
events (including actual prepayments) that have occurred before the close of the
accrual period. For these purposes, the original yield to maturity of the
Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price", in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price.
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In particular, under Section 1276 of the Code such a Certificateholder generally
will be required to allocate the portion of each such distribution representing
stated redemption price first to accrued market discount not previously included
in income, and to recognize ordinary income to that extent. A Certificateholder
may elect to include market discount in income currently as it accrues rather
than including it on a deferred basis in accordance with the foregoing. If made,
such election will apply to all market discount bonds acquired by such
Certificateholder on or after the first day of the first taxable year to which
such election applies. In addition, the OID Regulations permit a
Certificateholder to elect to accrue all interest and discount (including de
minimis market or original issue discount) in income as interest, and to
amortize premium, based on a constant yield method. If such an election were
made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "-Taxation of Owners of REMIC
Regular Certificates-Premium" below. Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable except with the approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder
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of a REMIC Regular Certificate generally will be required to treat a portion of
any gain on the sale or exchange of such Certificate as ordinary income to the
extent of the market discount accrued to the date of disposition under one of
the foregoing methods, less any accrued market discount previously reported as
ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount" above. The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171 of
the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its Certificate Balance has been reduced
to zero) and that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
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Taxation of Owners of REMIC Residual Certificates.
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"-Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "-Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC until the
REMIC's termination. Ordinary income derived from REMIC Residual Certificates
will be "portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses".
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate from the
seller of such Certificate in connection with the acquisition of such REMIC
Residual Certificate will be taken into account in determining the income of
such holder for federal income tax purposes. Although it appears likely that any
such payment would be includible in income immediately upon its receipt, the IRS
might assert that such payment should be included in income over time according
to an amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of such
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions",
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual
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Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt losses with respect
to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under "-Taxation
of Owners of REMIC Regular Certificates-Original Issue Discount". The issue
price of a REMIC Certificate received in exchange for an interest in the
Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the REMIC
Administrator may be required to estimate the fair market value of such
interests in order to determine the basis of the REMIC in the Mortgage Loans and
other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "-Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC
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Certificates constituting "regular interests" in the REMIC not offered hereby)
were indebtedness of the REMIC. Original issue discount will be considered to
accrue for this purpose as described above under "-Taxation of Owners of REMIC
Regular Certificates-Original Issue Discount", except that the de minimis rule
and the adjustments for subsequent holders of REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "-Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other noninterest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "-Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To
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the extent such REMIC Residual Certificateholders' initial bases are less than
the distributions to such REMIC Residual Certificateholders, and increases in
such initial bases either occur after such distributions or (together with their
initial bases) are less than the amount of such distributions, gain will be
recognized to such REMIC Residual Certificateholders on such distributions and
will be treated as gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "-Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder see "-Taxation of Owners of REMIC
Residual Certificates-General" above.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will, with an exception discussed below for certain REMIC Residual
Certificates held by thrift institutions, be subject to federal income tax in
all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "-Foreign Investors
in REMIC Certificates" below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value". The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Although it
has not done so, the Treasury also has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
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excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value". The related Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered to have "significant
value" under the REMIC Regulations; provided, however, that any disclosure that
a REMIC Residual Certificate will have "significant value" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will have "significant value" for purposes of the
above-described rules. The above-described exception for thrift institutions
applies only to those residual interests held directly by, and deductions,
losses and loss carryovers incurred by, such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income tax
return with such thrift institution) or by certain wholly-owned direct
subsidiaries of such institutions formed or operated exclusively in connection
with the organization and operation of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax". If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "-Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
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Mark-to-Market Rules. On December 28, 1993, the IRS released temporary
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a "negative value" REMIC Residual Certificate is not
treated as a security and thus generally may not be marked to market. This
exclusion from the mark-to-market requirement is expanded to include all REMIC
Residual Certificates under proposed Treasury regulations published January 4,
1995 which provide that any REMIC Residual Certificate issued after January 4,
1995 will not be treated as a security and therefore generally may not be marked
to market. Prospective purchasers of a REMIC Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate 2% of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over such amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of such a holder of a REMIC Certificate that is an individual, estate or trust,
or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should consult with
their tax advisors prior to making an investment in such Certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described above
under "-Taxation of Owners of REMIC Residual Certificates-Basis Rules, Net
Losses and Distributions". Except as provided in the following four paragraphs,
any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for
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investment) within the meaning of Section 1221 of the Code. The Code as of the
date of this Prospectus provides for a top marginal tax rate of 39.6% for
individuals and a maximum marginal rate for long-term capital gains of
individuals of 28%. No such rate differential exists for corporations. In
addition, the distinction between a capital gain or loss and ordinary income or
loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be a
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate), determined as of
the date of purchase of such REMIC Regular Certificate, over (ii) the amount of
ordinary income actually includible in the seller's income prior to such sale.
In addition, gain recognized on the sale of a REMIC Regular Certificate by a
seller who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "-Taxation of Owners of REMIC Regular Certificates-Market
Discount" and "-Premium".
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
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Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions" (a
"Prohibited Transactions Tax"). In general, subject to certain specified
exceptions a prohibited transaction means the disposition of a Mortgage Loan,
the receipt of income from a source other than a Mortgage Loan or certain other
permitted investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the Mortgage Loans
for temporary investment pending distribution on the REMIC Certificates. It is
not anticipated that any REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property", determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related REMIC Administrator, Master Servicer, Special Servicer, Manager or
Trustee, in any case out of its own funds, provided that such person has
sufficient assets to do so, and provided further that such tax arises out of a
breach of such person's obligations under the related Pooling Agreement and in
respect of compliance with applicable laws and regulations. Any such tax not
borne by a REMIC Administrator, a Master Servicer, Special Servicer, Manager or
Trustee will be charged against the related Trust Fund resulting in a reduction
in amounts payable to holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations. If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate) of the total anticipated
excess inclusions with respect to such REMIC Residual Certificate for periods
after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The anticipated excess inclusions must be determined
as of the date that the REMIC Residual Certificate is transferred and must be
based on events that have occurred up to the time of such transfer, the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable
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arrangements designed to ensure that (i) residual interests in such entity are
not held by disqualified organizations and (ii) information necessary for the
application of the tax described herein will be made available. Restrictions on
the transfer of REMIC Residual Certificates and certain other provisions that
are intended to meet this requirement will be included in each Pooling
Agreement, and will be discussed in any Prospectus Supplement relating to the
offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination. A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Mortgage
Loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder should
(but may not) be treated as realizing a loss equal to the amount of such
difference, and such loss may be treated as a capital loss.
Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, the REMIC
Administrator, which generally will hold at least a nominal amount of REMIC
Residual Certificates, will file REMIC federal income tax returns on behalf of
the related REMIC, and will be designated as and will act as the "tax matters
person" with respect to the REMIC in all respects.
As the tax matters person, the REMIC Administrator, subject to certain
notice requirements and various restrictions and limitations, generally will
have the authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders generally will be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the REMIC Administrator, as tax matters person, and the IRS concerning
any such REMIC item. Adjustments made to the REMIC tax return may require a
REMIC Residual Certificateholder to make corresponding
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adjustments on its return, and an audit of the REMIC's tax return, or the
adjustments resulting from such an audit, could result in an audit of a REMIC
Residual Certificateholder's return. No REMIC will be registered as a tax
shelter pursuant to Section 6111 of the Code because it is not anticipated that
any REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a REMIC Residual Certificate as a nominee for
another person may be required to furnish to the related REMIC, in a manner to
be provided in Treasury regulations, the name and address of such person and
other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other nonindividuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the IRS. Reporting with respect
to REMIC Residual Certificates, including income, excess inclusions, investment
expenses and relevant information regarding qualification of the REMIC's assets
will be made as required under the Treasury regulations, generally on a
quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount".
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the REMIC Administrator.
Backup Withholding with Respect to REMIC Certificates. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax. Furthermore, certain penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular Certificateholder
that is not a "United States Person" (as defined below) and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate will
not, unless otherwise disclosed in the related Prospectus Supplement, be subject
to United States federal income or withholding tax in respect of a distribution
on a REMIC Regular Certificate, provided that the holder complies to the extent
necessary with certain identification requirements (including delivery of a
statement, signed by the Certificateholder under penalties of perjury,
certifying that such Certificateholder is not a United States Person and
providing the name and address of such Certificateholder). For these purposes,
"United States Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof, or an estate or
trust whose income from sources
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without the United States is includible in gross income for United States
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States. It is possible that the IRS may
assert that the foregoing tax exemption should not apply with respect to a REMIC
Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a nonresident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are nonresident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling Agreement.
Grantor Trust Funds
Classification of Grantor Trust Funds. With respect to each series of
Grantor Trust Certificates, counsel to the Depositor will deliver its opinion to
the effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. The following general discussion of the
anticipated federal income tax consequences of the purchase, ownership and
disposition of Grantor Trust Certificates, to the extent it relates to matters
of law or legal conclusions with respect thereto, represents the opinion of
counsel to the Depositor for the applicable series as specified in the related
Prospectus Supplement, subject to any qualifications set forth herein. In
addition, counsel to the Depositor have prepared or reviewed the statements in
this Prospectus under the heading "Certain Federal Income Tax
Consequences--Grantor Trust Funds," and are of the opinion that such statements
are correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Grantor Trust Fund as a grantor trust for federal income tax purposes on
investors generally and of related tax matters affecting investors generally,
but do not purport to furnish information in the level of detail or with the
attention to an investor's specific tax circumstances that would be provided by
an investor's own tax advisor. Accordingly, each investor is advised to consult
its own tax advisors with regard to the tax consequences to it of investing in
Grantor Trust Certificates.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate". A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees) and interest paid to the holders of Grantor Trust
Fractional Interest Certificates issued with respect to such Grantor Trust Fund
will be referred to as a "Grantor Trust Strip Certificate". A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
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Characterization of Investments in Grantor Trust Certificates.
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Depositor will deliver an opinion
that, in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "qualifying real property loans" within the meaning of Section
593(d) of the Code; (ii) "loans . . . secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; (iii)
"obligation[s] (including any participation or Certificate of beneficial
ownership therein) which . . .[are] principally secured by an interest in real
property" within the meaning of Section 860G(a)(3) of the Code; and (iv) "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code. In
addition, counsel to the Depositor will deliver an opinion that interest on
Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of Mortgage Loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, "qualifying real property loans" within
the meaning of Section 593(d) of the Code, and "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code, and the interest on which is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(A) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying such sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that such characterization is appropriate. Counsel to the
Depositor will not deliver any opinion on these questions. Prospective
purchasers to which such characterization of an investment in Grantor Trust
Strip Certificates is material should consult their tax advisors regarding
whether the Grantor Trust Strip Certificates, and the income therefrom, will be
so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates.
General. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses) and
will be entitled to deduct their shares of any such reasonable servicing fees
and other expenses. Because of stripped interests, market or original issue
discount, or premium, the amount includible in income on account of a Grantor
Trust Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
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holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a Mortgage Asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. The
related Prospectus Supplement will include information regarding servicing fees
paid to a Master Servicer, a Special Servicer, any Sub-Servicer or their
respective affiliates.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-Market Discount" below. Under the stripped bond rules, the
holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser of the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest", if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest". In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "-Sales of Grantor Trust Certificates" below) and the yield of such Grantor
Trust Fractional Interest Certificate to such holder. Such yield would be
computed as the rate (compounded based on the regular interval between payment
dates) that, if used to discount the holder's share of future payments on the
Mortgage Loans, would cause the present value of those future payments to equal
the price at which the holder purchased such Certificate. In computing yield
under the stripped bond rules, a Certificateholder's share of future payments on
the Mortgage Loans will not include any payments made in respect of any
ownership interest in the Mortgage Loans retained by the Depositor, the Master
Servicer, the Special Servicer, any Sub-Servicer or their respective affiliates,
but will include such Certificateholder's share of any reasonable servicing fees
and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions
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to the Grantor Trust Fractional Interest Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Fractional Interest
Certificates or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "-REMICs-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount" above. It is
unclear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor any other person will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average
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maturity of the Mortgage Loans, then such original issue discount or market
discount will be considered to be de minimis. Original issue discount or market
discount of only a de minimis amount will be included in income in the same
manner as de minimis original issue and market discount described in "-Taxation
of Owners of Grantor Trust Fractional Interest Certificates-If Stripped Bond
Rules Do Not Apply" and "-Market Discount" below.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply, even if the stripped bond rules do not apply, to a
Grantor Trust Fractional Interest Certificate to the extent it evidences an
interest in Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. For a definition of "stated redemption price," see "-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount" above. In general,
the issue price of a Mortgage Loan will be the amount received by the borrower
from the lender under the terms of the Mortgage Loan, less any "points" paid by
the borrower, and the stated redemption price of a Mortgage Loan will equal its
principal amount, unless the Mortgage Loan provides for an initial "teaser," or
below-market interest rate. The determination as to whether original issue
discount will be considered to be de minimis will be calculated using the same
test as in the REMIC discussion. See "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee or
Master Servicer, as applicable, in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during
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such accrual period prior to such day. The adjusted issue price of a Mortgage
Loan at the beginning of any accrual period will equal the issue price of such
Mortgage Loan, increased by the aggregate amount of original issue discount with
respect to such Mortgage Loan that accrued in prior accrual periods, and reduced
by the amount of any payments made on such Mortgage Loan in prior accrual
periods of amounts included in its stated redemption price.
Unless otherwise provided in the related Prospectus Supplement, the Trustee
or Master Servicer, as applicable, will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may reasonably
request from time to time with respect to original issue discount accruing on
Grantor Trust Fractional Interest Certificates. See "-Grantor Trust Reporting"
below.
Market Discount. If the stripped bond rules do not apply to a Grantor Trust
Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount", that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in "-Taxation of Owners of REMIC Regular
Interests-Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
holder's option: (i) on the basis of a constant yield method, (ii) in the case
of a Mortgage Loan issued without original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "-REMICs-Taxation of Owners of REMIC Regular
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Certificates-Original Issue Discount" above within the exception that it is less
likely that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
Further, under the rules described above in "-REMICs-Taxation of Owners of
REMIC Regular Certificates-Market Discount", any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "-Taxation of Owners of Grantor Trust
Fractional Interest Certificates-If Stripped Bond Rules Apply", no regulations
or published rulings under Section 1286 of the Code have been issued and some
uncertainty exists as to how it will be applied to securities such as the
Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their tax advisors concerning the method to be used
in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons", although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "-Possible Application of Proposed Contingent Payment Rules"
below and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate
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to such holder. Such yield would be calculated based on the price paid for that
Grantor Trust Strip Certificate by its holder and the payments remaining to be
made thereon at the time of the purchase, plus an allocable portion of the
servicing fees and expenses to be paid with respect to the Mortgage Loans. See
"-Taxation of Owners of Grantor Trust Fractional Interest Certificates-If
Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
Possible Application of Proposed Contingent Payment Rules. The coupon
stripping rules' general treatment of stripped coupons is to regard them as
newly issued debt instruments in the hands of each purchaser. To the extent that
payments on the Grantor Trust Strip Certificates would cease if the Mortgage
Loans were prepaid in full, the Grantor Trust Strip Certificates could be
considered to be debt instruments providing for contingent payments. Under the
OID Regulations, debt instruments providing for contingent payments are not
subject to the same rules as debt instruments providing for noncontingent
payments, but no final regulations have been promulgated with respect to
contingent payment debt instruments. Proposed regulations were promulgated on
December 16, 1994 regarding contingent payment debt instruments. As in the case
of the OID Regulations, such proposed regulations do not specifically address
securities, such as the Grantor Trust Strip Certificates, that are subject to
the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply a "noncontingent bond method." Under that method, the issuer of a Grantor
Trust Strip
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Certificate would determine a projected payment schedule with respect to such
Grantor Trust Strip Certificate. Holders of Grantor Trust Strip Certificates
would be bound by the issuer's projected payment schedule, which would consist
of all noncontingent payments and a projected amount for each contingent payment
based on the projected yield (as described below) of the Grantor Trust Strip
Certificate. The projected amount of each payment would be determined so that
the projected payment schedule reflected the projected yield reasonably expected
to be received by the holder of a Grantor Trust Strip Certificate. The projected
yield referred to above would be a reasonable rate, not less than the
"applicable Federal rate" that, as of the issue date, reflected general market
conditions, the credit quality of the issuer, and the terms and conditions of
the Mortgage Loans. The holder of a Grantor Trust Strip Certificate would be
required to include as interest income in each month the adjusted issue price of
the Grantor Trust Strip Certificate at the beginning of the period multiplied by
the projected yield, and would add to, or subtract from, such income any
variation between the payment actually received in such month and the payment
originally projected to be made in such month.
In the absence of final Treasury regulations relating to debt instruments
providing for contingent payments, a projected payment schedule under the
"noncontingent bond method" is not intended to be provided to holders.
Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.
Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this Prospectus provides a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for that taxable year, for purposes
of the rule that limits
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the deduction of interest on indebtedness incurred to purchase or carry property
held for investment to a taxpayer's net investment income.
Grantor Trust Reporting. Unless otherwise provided in the related
Prospectus Supplement, the Trustee or Master Servicer, as applicable, will
furnish to each holder of a Grantor Trust Certificate with each distribution a
statement setting forth the amount of such distribution allocable to principal
on the underlying Mortgage Loans and to interest thereon at the related
Pass-Through Rate. In addition, the Trustee or Master Servicer, as applicable,
will furnish, within a reasonable time after the end of each calendar year, to
each holder of a Grantor Trust Certificate who was such a holder at any time
during such year, information regarding the amount of servicing compensation
received by the Master Servicer, the Special Servicer or any Sub-Servicer, and
such other customary factual information as the Depositor or the reporting party
deems necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are uncertain
in various respects, there is no assurance the IRS will agree with the Trustee's
or Master Servicer's, as the case may be, information reports of such items of
income and expense. Moreover, such information reports, even if otherwise
accepted as accurate by the IRS, will in any event be accurate only as to the
initial Certificateholders that bought their Certificates at the representative
initial offering price used in preparing such reports.
Backup Withholding. In general, the rules described above in
"-REMICs-Backup Withholding with Respect to REMIC Certificates" will also apply
to Grantor Trust Certificates.
Foreign Investors. In general, the discussion with respect to REMIC Regular
Certificates in "-REMICs-Foreign Investors in REMIC Certificates" above applies
to Grantor Trust Certificates except that Grantor Trust Certificates will,
unless otherwise disclosed in the related Prospectus Supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
nonresident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Offered Certificates. State tax law may differ substantially from the
corresponding federal law, and the discussion above does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their tax advisors with respect to the
various tax consequences of investments in the Offered Certificates.
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ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans, and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts (and as applicable, insurance company general accounts) in which such
plans, accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code ("Plans"), and
on persons who are fiduciaries with respect to such Plans, in connection with
the investment of Plan assets. 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 Section
3(33) of ERISA) are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Offered Certificates without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal and state law. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons ("parties in interest" within the meaning of ERISA and "disqualified
persons" within the meaning of the Code; collectively, "Parties in Interest")
who have certain specified relationships to the Plan, unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code or a penalty imposed pursuant to Section
502(i) of ERISA, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
Plan Asset Regulations
A Plan's investment in Offered Certificates may cause the underlying
Mortgage Assets and other assets included in a related Trust Fund to be deemed
assets of such Plan. Section 2510.3-101 of the regulations (the "Plan Asset
Regulations") of the United States Department of Labor (the "DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets include
both such equity interest and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions not applicable here apply, or
unless the equity participation in the entity by "benefit plan investors" (i.e.,
Plans and certain employee benefit plans not subject to ERISA) is not
"significant", both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. Equity participation in a Trust Fund will be significant
on any date if immediately after the most recent acquisition of any Certificate,
25% or more of any class of Certificates is held by benefit plan investors.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Depositor, the Master
Servicer, any Special Servicer, any Sub-Servicer, any Manager, the Trustee, the
obligor under any credit enhancement mechanism or certain affiliates thereof to
be considered or become Parties in Interest with respect to an investing Plan
(or of a Plan holding an interest in an investing entity). If so, the
acquisition or holding of Certificates by or on behalf of the investing Plan
could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Certificates
acquired by a Plan may be assets of that Plan. Under the Plan Asset Regulations,
the Trust Fund, including the Mortgage Asset Loans and the other assets held in
the Trust
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Fund, may also be deemed to be assets of each Plan that acquires Certificates.
Special caution should be exercised before Plan Assets are used to acquire a
Certificate in such circumstances, especially if, with respect to such assets,
the Depositor, the Master Servicer, any Special Servicer, any Sub-Servicer, any
Manager, the Trustee, the obligor under any credit enhancement mechanism or an
affiliate thereof either (i) has investment discretion with respect to the
investment of Plan Assets; or (ii) has authority or responsibility to give (or
regularly gives) investment advice with respect to Plan Assets for a fee
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such Plan assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Assets and other assets included in a Trust Fund
constitute Plan assets, then any party exercising management or discretionary
control regarding those assets, such as the Master Servicer, any Special
Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism, or certain affiliates thereof may be deemed to be a Plan
"fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code with respect to the
investing Plan. In addition, if the Mortgage Assets and other assets included in
a Trust Fund constitute Plan assets, the purchase of Certificates by a Plan, as
well as the operation of the Trust Fund, may constitute or involve a prohibited
transaction under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a "guaranteed
governmental mortgage pool certificate", the Plan's assets include such
certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Plan
Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" FHLMC Certificates, GNMA Certificates and FNMA
Certificates, but do not include FAMC Certificates. Accordingly, even if such
MBS (other than FAMC Certificates) included in a Trust Fund were deemed to be
assets of Plan investors, the mortgages underlying such MBS (other than FAMC
Certificates) would not be treated as assets of such Plans. Private label
mortgage participations, mortgage pass-through certificates, FAMC Certificates
or other mortgage-backed securities are not "guaranteed governmental mortgage
pool certificates" within the meaning of the Plan Asset Regulations. Potential
Plan investors should consult their counsel and review the ERISA discussion in
the related Prospectus Supplement before purchasing any such Certificates.
Prohibited Transaction Exemptions
In considering an investment in the Offered Certificates, a Plan fiduciary
should consider the availability of prohibited transaction exemptions
promulgated by the DOL including, among others, Prohibited Transaction Class
Exemption ("PTCE") 75-1, which exempts certain transactions involving Plans and
certain broker-dealers, reporting dealers and banks; PTCE 90-1, which exempts
certain transactions between insurance company separate accounts and Parties in
Interest; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; PTCE 95-60, which exempts certain transactions between insurance
company general accounts and Parties in Interest; and PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by an "in-house asset
manager". There can be no assurance that any of these class exemptions will
apply with respect to any particular Plan investment in the Certificates or,
even if it were deemed to apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such investment. The
Prospectus Supplement with respect to a series of Certificates may contain
additional information regarding the availability of other exemptions with
respect to the Certificates offered thereby.
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Insurance Company General Accounts
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Notes should consult with their legal counsel with
respect to the applicability of Section 401(c) of ERISA, including the general
account's ability to continue to hold the Certificates after the date which is
18 months after the date the 401(c) Regulations become final.
Consultation With Counsel
Any Plan fiduciary which proposes to purchase Offered Certificates on
behalf of or with assets of a Plan should consider its general fiduciary
obligations under ERISA and should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investment and the
availability of any prohibited transaction exemption in connection therewith.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences-REMICs-Taxation of
Owners of REMIC Residual Certificates-Excess Inclusions".
LEGAL INVESTMENT
If so specified in the related Prospectus Supplement, the Offered
Certificates will constitute "mortgage related securities" for purposes of
SMMEA. Generally, only classes of Offered Certificates that (i) are rated in one
of the two highest rating categories by one or more Rating Agencies and (ii) are
part of a series evidencing interests in a Trust Fund consisting of loans
secured by a single parcel of real estate upon which is located a dwelling or
mixed residential and commercial
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structure, such as certain Multifamily Loans, and originated by types of
Originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA. "Mortgage related securities" are legal investments to the
same extent that, under applicable law, obligations issued by or guaranteed as
to principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, insurance companies and pension funds created pursuant
to or existing under the laws of the United States or of any state, the
authorized investments of which are subject to state regulation). Under SMMEA,
if a state enacted legislation prior to October 3, 1991 that specifically limits
the legal investment authority of any such entities with respect to "mortgage
related securities", Offered Certificates would constitute legal investments for
entities subject to such legislation only to the extent provided in such
legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
Upon the issuance of final implementing regulations under the Riegle
Community Development and Regulatory Improvement Act of 1994 and subject to any
limitations such regulations may impose, a modification of the definition of
"mortgage related securities" will become effective to expand the types of loans
to which such securities may relate to include loans secured by "one or more
parcels of real estate upon which is located one or more commercial structures".
In addition, the related legislative history states that this expanded
definition includes multifamily residential loans secured by more than one
parcel of real estate upon which is located more than one structure. Until
September 23, 2001 any state may enact legislation limiting the extent to which
"mortgage related securities" under this expanded definition would constitute
legal investments under that state's laws.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities". The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS (as defined herein). The
Policy Statement generally indicates that a mortgage derivative product will be
deemed to be high risk if it exhibits greater price volatility than a standard
fixed rate thirty-year mortgage security. According to the Policy Statement,
prior to purchase, a depository institution will be required to determine
whether a mortgage derivative product that it is considering acquiring is
high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance as
to which classes of Certificates, including Offered Certificates, will be
treated as high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision (the "OTS") issued a
bulletin, entitled "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Offered Certificates. In addition, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes
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of Offered Certificates. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Offered Certificates or to purchase any class of
Offered Certificates representing more than a specified percentage of the
investor's assets. The Depositor will make no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all investors whose investment activities are subject
to legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Certificates of any class
constitute legal investments or are subject to investment, capital or other
restrictions.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or will
be used by the Depositor to cover expenses related thereto. The Depositor
expects to sell the Certificates from time to time, but the timing and amount of
offerings of Certificates will depend on a number of factors, including the
volume of Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Depositor from such sale.
The Depositor intends that Offered Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the Offered
Certificates of a particular series may be made through a combination of two or
more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public offering by one or more underwriters specified in the related
Prospectus Supplement;
2. By placements by the Depositor with institutional investors
through dealers; and
3. By direct placements by the Depositor with institutional
investors.
In addition, if specified in the related Prospectus Supplement, the Offered
Certificates of a series may be offered in whole or in part to the seller of the
related Mortgage Assets that would comprise the Trust Fund for such
Certificates.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to
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time in one or more transactions, including negotiated transactions, at fixed
public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. The managing underwriter or underwriters
with respect to the offer and sale of Offered Certificates of a particular
series will be set forth on the cover of the Prospectus Supplement relating to
such series and the members of the underwriting syndicate, if any, will be named
in such Prospectus Supplement.
In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Offered Certificates may be
deemed to be underwriters in connection with such Certificates, and any
discounts or commissions received by them from the Depositor and any profit on
the resale of Offered Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
the Offered Certificates of any series will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Depositor will indemnify the
several underwriters and the underwriters will indemnify the Depositor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Depositor and purchasers of
Offered Certificates of such series.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended, in connection with reoffers and sales by them of
Offered Certificates. Holders of Offered Certificates should consult with their
legal advisors in this regard prior to any such reoffer or sale.
As to any series of Certificates, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any unrated
class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or institutional investors.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the Depositor
by Thacher Proffitt & Wood.
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
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Supplement. The Depositor has determined that its financial statements will not
be material to the offering of any Offered Certificates.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by borrowers 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 Interest Certificates might, in extreme
cases fail to recoup their initial investments. Furthermore, ratings on mortgage
pass-through certificates do not address the price of such certificates or the
suitability of such certificates to the investor.
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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INDEX OF PRINCIPAL DEFINITIONS
401(c) Regulations.........................................................97
Accrual Certificates........................................................4
Accrual Period .........................................................72
Accrued Certificate Interest...............................................31
Act .........................................................63
ADA .........................................................66
ARM Loans .........................................................19
Available Distribution Amount..............................................30
Book-Entry Certificates....................................................29
Call Risk .........................................................10
Cash Flow Agreement.........................................................6
CERCLA .........................................................63
Certificate Account........................................................22
Certificate Balance.........................................................4
Certificate Owner .........................................................36
Certificates ..........................................................i
Closing Date .........................................................71
Code ..........................................................7
Commercial Properties................................................i, 2, 16
Commission .........................................................iv
Committee Report .........................................................70
Companion Class .........................................................32
Concept .........................................................20
Condemnation Proceeds......................................................43
Contributions Tax .........................................................82
Controlled Amortization Class..............................................32
Controlled Amortization Classes.............................................3
Cooperatives .........................................................16
CPR .........................................................26
Credit Support ..........................................................6
Crime Control Act .........................................................67
Cut-off Date ......................................................5, 31
Debt Service Coverage Ratio................................................17
Definitive Certificates....................................................29
Depositor ..........................................................i
Determination Date.....................................................23, 30
Deutsche Bank Group........................................................28
Distribution Date ..........................................................4
Distribution Date Statement................................................33
DMARC Trust .........................................................28
DOL .........................................................95
DTC ......................................................v, 36
DTC Participants .........................................................36
Due Dates .........................................................19
Due Period .........................................................23
Equity Participation.......................................................19
ERISA ......................................................7, 95
Exchange Act ..........................................................v
Extension Risk .........................................................10
FAMC .........................................................21
FHLMC .........................................................21
Financial Intermediary.....................................................36
FNMA .........................................................21
Garn Act .........................................................65
GNMA .........................................................21
Grantor Trust Certificates..................................................7
Grantor Trust Fractional Interest Certificate..............................85
Grantor Trust Fund.........................................................68
Insurance Proceeds.........................................................43
IRS .....................................................46, 68
Issue Premium .........................................................77
Letter of Credit Bank......................................................56
Liquidation Proceeds.......................................................43
Loan-to-Value Ratio........................................................18
Lock-out Date .........................................................19
Lock-out Period .........................................................19
Manager ..........................................................1
Mark-to-Market Regulations.................................................80
Master Servicer ..........................................................1
MBS ...................................................i, 3, 16
MBS Administrator ..........................................................1
MBS Agreement .........................................................21
MBS Issuer .........................................................21
MBS Servicer .........................................................21
MBS Trustee .........................................................21
Mortgage .........................................................16
Mortgage Asset Pool.........................................................i
Mortgage Asset Seller......................................................16
Mortgage Assets ......................................................i, 16
Mortgage Loans ...................................................i, 1, 16
Mortgage Notes .........................................................16
Mortgage Rate ..........................................................2
Mortgaged Properties.......................................................16
Mortgages .........................................................57
Multifamily Properties............................................., 1, 2, 16
Net Leases .........................................................18
Net Operating Income.......................................................17
Nonrecoverable Advance.....................................................33
Notional Amount ..........................................................4
Offered Certificates........................................................i
OID Regulations .........................................................68
Originator .........................................................16
OTS .........................................................98
Parties in Interest........................................................95
Pass-Through Rate ..........................................................4
Percentage Interest........................................................30
<PAGE>
-103-
Permitted Investments......................................................43
Plan Asset Regulations.....................................................95
Plans .........................................................95
Policy Statement .........................................................98
Pooling and Servicing Agreement.............................................3
Prepayment Assumption..................................................70, 88
Prepayment Interest Shortfall..............................................24
Prepayment Period .........................................................34
Prepayment Premium.........................................................19
Prohibited Transactions Tax................................................82
Prospectus Supplement.......................................................i
PTCE .........................................................96
Purchase Price .........................................................39
Rating Agency ..........................................................7
Record Date .........................................................30
Related Proceeds .........................................................32
Relief Act .........................................................67
REMIC ....................................................iii, 68
REMIC Administrator.....................................................iv, 1
REMIC Certificates.........................................................68
REMIC Provisions .........................................................68
REMIC Regular Certificates..................................................7
REMIC Regulations .........................................................68
REMIC Residual Certificates.................................................7
REO Property .........................................................41
Residual Owner .........................................................75
Restaurants ...................................................i, 2, 16
RICO .........................................................67
Security Interest .........................................................20
Senior Certificates.........................................................3
Senior Liens .........................................................17
SMMEA ..........................................................7
SPA .........................................................26
Special Servicer ..........................................................1
Stripped Interest Certificates..............................................3
Stripped Principal Certificates.............................................3
Sub-Servicer .........................................................42
Sub-Servicing Agreement....................................................42
Subordinate Certificates....................................................3
Superlien .........................................................63
Tax Exempt Investor........................................................97
Tiered REMICs .........................................................70
Title V .........................................................66
Trust Assets .........................................................iv
Trust Fund ..........................................................i
Trustee ..........................................................1
UBTI .........................................................97
UCC .........................................................58
Value .........................................................18
Voting Rights .........................................................35
Warranting Party .........................................................39
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ________, 199_
[Version 4 - Health Care and Restaurant Concentration]
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
Mortgage Pass-Through Certificates
The mortgage pass-through certificates offered hereby (the "Offered
Certificates") and by the supplements hereto (each, a "Prospectus Supplement")
will be offered from time to time in series. The Offered Certificates of any
series, together with any other mortgage pass-through certificates of such
series, are collectively referred to herein as the "Certificates".
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") to be formed by Deutsche Mortgage & Asset Receiving Corporation
(the "Depositor") and including a segregated pool (a "Mortgage Asset Pool") of
various types of multifamily and commercial mortgage loans ("Mortgage Loans"),
mortgage-backed securities ("MBS") that evidence interests in, or that are
secured by pledges of, one or more of various types of multifamily or commercial
mortgage loans, or a combination of Mortgage Loans and MBS (collectively,
"Mortgage Assets"). The Mortgage Loans in (and the mortgage loans underlying the
MBS in) any Trust Fund will be secured by first or junior liens on, or security
interests in, one or more of the following types of real property: (i)
residential properties consisting of five or more rental or cooperatively-owned
dwelling units and mobile home parks; and (ii) commercial properties consisting
of office buildings, retail shopping facilities, hotels and motels, Health
Care-Related Facilities (as defined herein), recreational vehicle parks,
warehouse facilities, mini-warehouse facilities, self-storage facilities,
industrial facilities, parking lots, individual restaurants and other
establishments that are part of the food service industry (collectively,
"Restaurants"), mixed use properties (that is, any combination of the
foregoing), and unimproved land. If so specified in the related Prospectus
Supplement, the Trust Fund for a series of Certificates may also include letters
of credit, surety bonds, insurance policies, guarantees, reserve funds,
guaranteed investment contracts, interest rate exchange agreements, interest
rate cap or floor agreements, or other agreements designed to reduce the effects
of interest rate fluctuations on the Mortgage Assets. See "Description of the
Trust Funds", "Description of the Certificates" and "Description of Credit
Support".
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. See
"Yield and Maturity Considerations". A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination;
Retirement of the Certificates".
(cover continued on next page)
--------
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR ANY
OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE ASSETS
WILL BE GUARANTEED OR INSURED BY THEF DEPOSITOR OR ANY OF ITS AFFILIATES OR,
UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITFIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------
Prospective investors should review the information appearing on page 8
herein under the caption "Risk Factors" and such information as may be set forth
under the caption "Risk Factors" in the related Prospectus Supplement before
purchasing any Offered Certificate.
The Offered Certificates of any series may be offered through one or more
different methods, including offerings through underwriters, as described under
"Method of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any
series prior to the offering thereof. There can be no assurance that a secondary
market for any Offered Certificates will develop or, if it does develop, that it
will continue. Unless otherwise provided in the related Prospectus Supplement,
the Certificates will not be listed on any securities exchange.
<PAGE>
(ii)
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Offered Certificates of any series unless
accompanied by the Prospectus Supplement for such series.
--------
The date of this Prospectus is ______, 199_
<PAGE>
(iii)
(cover continued)
As described in the related Prospectus Supplement, the Certificates of each
series, including the Offered Certificates of such series, may consist of one or
more classes of Certificates that: (i) provide for the accrual of interest
thereon based on a fixed, variable or adjustable interest rate; (ii) are senior
or subordinate to one or more other classes of Certificates in entitlement to
certain distributions on the Certificates; (iii) are entitled to distributions
of principal, with disproportionate, nominal or no distributions of interest;
(iv) are entitled to distributions of interest, with disproportionate, nominal
or no distributions of principal; (v) provide for distributions of interest
thereon or principal thereof that commence only following the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of such series; (vi) provide for distributions of principal thereof
to be made, from time to time or for designated periods, at a rate that is
faster (and, in some cases, substantially faster) or slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund; or
(vii) provide for distributions of principal thereof to be made, subject to
available funds, based on a specified principal payment schedule or other
methodology. Distributions in respect of the Certificates of each series will be
made on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. See "Description of the
Certificates".
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" (each, a "REMIC") for federal income
tax purposes. If applicable, the Prospectus Supplement for a series of
Certificates will specify which class or classes of such series of Certificates
will be considered to be regular interests in the related REMIC and which class
of Certificates or other interests will be designated as the residual interest
in the related REMIC. See "Certain Federal Income Tax Consequences".
An Index of Principal Definitions is included at the end of this Prospectus
specifying the location of definitions of important or frequently used defined
terms.
<PAGE>
(iv)
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to each series of Offered Certificates will, among other things, set forth, as
and to the extent appropriate: (i) a description of the class or classes of such
Offered Certificates, including the payment provisions with respect to each such
class, the aggregate principal amount, if any, of each such class, the rate at
which interest accrues from time to time, if at all, with respect to each such
class or the method of determining such rate, and whether interest with respect
to each such class will accrue from time to time on its aggregate principal
amount, if any, or on a specified notional amount, if at all; (ii) information
with respect to any other classes of Certificates of the same series; (iii) the
respective dates on which distributions are to be made; (iv) information as to
the assets, including the Mortgage Assets, constituting the related Trust Fund
(all such assets, with respect to the Certificates of any series, the "Trust
Assets"); (v) the circumstances, if any, under which the related Trust Fund may
be subject to early termination; (vi) additional information with respect to the
method of distribution of such Offered Certificates; (vii) whether one or more
REMIC elections will be made and the designation of the "regular interests" and
"residual interests" in each REMIC to be created and the identity of the person
(the "REMIC Administrator") responsible for the various tax-related duties in
respect of each REMIC to be created; (viii) the initial percentage ownership
interest in the related Trust Fund to be evidenced by each class of Certificates
of such series; (ix) information concerning the Trustee (as defined herein) of
the related Trust Fund; (x) if the related Trust Fund includes Mortgage Loans,
information concerning the Master Servicer and any Special Servicer (each as
defined herein) of such Mortgage Loans and the circumstances under which all or
a portion, as specified, of the servicing of a Mortgage Loan would transfer from
the Master Servicer to the Special Servicer; (xi) information as to the nature
and extent of subordination of any class of Certificates of such series,
including a class of Offered Certificates; and (xii) whether such Offered
Certificates will be initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to each
series of Offered Certificates contain 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, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http://www.sec.gov).
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or any related Prospectus Supplement, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Depositor or any other person. Neither the delivery of this Prospectus or
any related Prospectus Supplement nor any sale made hereunder or thereunder
shall under any circumstances create an implication that there has been no
change in the information herein since the date hereof or therein since the date
thereof. This Prospectus and any related Prospectus Supplement are not an offer
to sell or a solicitation of an offer to buy any security in any jurisdiction in
which it is unlawful to make such offer or solicitation.
<PAGE>
(v)
The Master Servicer, the Trustee or another specified person will cause to
be provided to registered holders of the Offered Certificates of each series
periodic unaudited reports concerning the related Trust Fund. If beneficial
interests in a class or series of Offered Certificates are being held and
transferred in book-entry format through the facilities of The Depository Trust
Company ("DTC") as described herein, then unless otherwise provided in the
related Prospectus Supplement, such reports will be sent on behalf of the
related Trust Fund to a nominee of DTC as the registered holder of the Offered
Certificates. Conveyance of notices and other communications by DTC to its
participating organizations, and directly or indirectly through such
participating organizations to the beneficial owners of the applicable Offered
Certificates, will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time. See
"Description of the Certificates--Reports to Certificateholders" and
"--Book-Entry Registration and Definitive Certificates".
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder. The Depositor intends to make a
written request to the staff of the Commission that the staff either (i) issue
an order pursuant to Section 12(h) of the Exchange Act exempting the Depositor
from certain reporting requirements under the Exchange Act with respect to each
Trust Fund or (ii) state that the staff will not recommend that the Commission
take enforcement action if the Depositor fulfills its reporting obligations as
described in its written request. If such request is granted, the Depositor will
file or cause to be filed with the Commission as to each Trust Fund the periodic
unaudited reports to holders of the Offered Certificates referenced in the
preceding paragraph; however, because of the nature of the Trust Funds, it is
unlikely that any significant additional information will be filed. In addition,
because of the limited number of Certificateholders expected for each series,
the Depositor anticipates that a significant portion of such reporting
requirements will be permanently suspended following the first fiscal year for
the related Trust Fund.
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 of 1934, as amended, prior
to the termination of an offering of Offered Certificates evidencing interests
therein. 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 Offered Certificates, upon written or oral request of
such person, 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 Offered Certificates, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by reference
in such documents). Such requests to the Depositor should be directed in writing
to the Depositor at One International Place, Room 608, Boston, Massachusetts
02110, Attention: Secretary, or by telephone at (617) 951-7690.
<PAGE>
(vi)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT........................................................................................................ iv
AVAILABLE INFORMATION........................................................................................................ iv
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................................................................ v
SUMMARY OF PROSPECTUS........................................................................................................ 1
RISK FACTORS................................................................................................................. 8
Limited Liquidity of Offered Certificates........................................................................... 8
Credit Support Limitations.......................................................................................... 9
Effect of Prepayments on Average Life of Certificates............................................................... 9
Effect of Prepayments on Yield of Certificates ..................................................................... 11
Limited Nature of Ratings........................................................................................... 11
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans................................... 11
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset Pool................................... 15
Termination......................................................................................................... 15
Risks Associated with Health Care-Related Properties................................................................ 15
Risks Associated with Restaurants................................................................................... 16
DESCRIPTION OF THE TRUST FUNDS............................................................................................... 16
General............................................................................................................. 16
Mortgage Loans...................................................................................................... 17
MBS................................................................................................................. 23
Certificate Accounts................................................................................................ 24
Credit Support...................................................................................................... 24
Cash Flow Agreements................................................................................................ 25
YIELD AND MATURITY CONSIDERATIONS............................................................................................ 25
General............................................................................................................. 25
Pass-Through Rate................................................................................................... 25
Payment Delays...................................................................................................... 25
Certain Shortfalls in Collections of Interest....................................................................... 25
Yield and Prepayment Considerations................................................................................. 26
Weighted Average Life and Maturity.................................................................................. 27
Other Factors Affecting Yield, Weighted Average Life and Maturity................................................... 28
THE DEPOSITOR................................................................................................................ 30
DEUTSCHE BANK AG............................................................................................................. 31
DESCRIPTION OF THE CERTIFICATES.............................................................................................. 31
</TABLE>
<PAGE>
(vii)
<TABLE>
<S> <C>
General............................................................................................................. 31
Distributions of Interest on the Certificates....................................................................... 32
Distributions of Principal of the Certificates...................................................................... 33
Distributions on the Certificates in Respect of Prepayment Premiums or in Respect of Equity
Participations...................................................................................................... 34
Allocation of Losses and Shortfalls................................................................................. 34
Advances in Respect of Delinquencies................................................................................ 34
Reports to Certificateholders....................................................................................... 35
Voting Rights....................................................................................................... 37
Termination......................................................................................................... 37
Book-Entry Registration and Definitive Certificates................................................................. 38
DESCRIPTION OF THE POOLING AGREEMENTS........................................................................................ 39
General............................................................................................................. 39
Assignment of Mortgage Loans; Repurchases........................................................................... 40
Representations and Warranties; Repurchases......................................................................... 42
Collection and Other Servicing Procedures........................................................................... 42
Sub-Servicers....................................................................................................... 44
Certificate Account................................................................................................. 45
Modifications, Waivers and Amendments of Mortgage Loans............................................................. 48
Realization Upon Defaulted Mortgage Loans........................................................................... 48
Hazard Insurance Policies........................................................................................... 50
Due-on-Sale and Due-on-Encumbrance Provisions....................................................................... 50
Servicing Compensation and Payment of Expenses...................................................................... 51
Evidence as to Compliance........................................................................................... 51
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor........................................................................................................... 52
Events of Default................................................................................................... 53
Rights Upon Event of Default........................................................................................ 54
Amendment........................................................................................................... 55
List of Certificateholders.......................................................................................... 56
The Trustee......................................................................................................... 56
Duties of the Trustee............................................................................................... 56
Certain Matters Regarding the Trustee............................................................................... 56
Resignation and Removal of the Trustee.............................................................................. 57
DESCRIPTION OF CREDIT SUPPORT................................................................................................ 57
General............................................................................................................. 57
Subordinate Certificates............................................................................................ 57
Insurance or Guarantees with Respect to Mortgage Loans.............................................................. 58
Letter of Credit.................................................................................................... 58
Certificate Insurance and Surety Bonds.............................................................................. 58
Reserve Funds....................................................................................................... 58
Credit Support with respect to MBS.................................................................................. 59
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS...................................................................................... 59
</TABLE>
<PAGE>
<TABLE>
(viii)
<S> <C>
General............................................................................................................. 59
Types of Mortgage Instruments....................................................................................... 60
Leases and Rents.................................................................................................... 60
Personalty.......................................................................................................... 60
Foreclosure......................................................................................................... 61
Bankruptcy Laws..................................................................................................... 64
Environmental Considerations........................................................................................ 65
Due-on-Sale and Due-on-Encumbrance Provisions....................................................................... 67
Junior Liens; Rights of Holders of Senior Liens..................................................................... 67
Subordinate Financing............................................................................................... 67
Default Interest and Limitations on Prepayments..................................................................... 68
Applicability of Usury Laws......................................................................................... 68
Certain Laws and Regulations........................................................................................ 68
Americans with Disabilities Act..................................................................................... 69
Soldiers' and Sailors' Civil Relief Act of 1940..................................................................... 69
Forfeitures in Drug and RICO Proceedings............................................................................ 69
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................................................................... 70
General............................................................................................................. 70
REMICs.............................................................................................................. 71
Grantor Trust Funds................................................................................................. 87
STATE AND OTHER TAX CONSEQUENCES............................................................................................. 97
ERISA CONSIDERATIONS......................................................................................................... 97
General............................................................................................................. 97
Plan Asset Regulations.............................................................................................. 97
Consultation With Counsel........................................................................................... 99
Tax Exempt Investors................................................................................................ 99
LEGAL INVESTMENT.............................................................................................................100
USE OF PROCEEDS..............................................................................................................101
METHOD OF DISTRIBUTION.......................................................................................................101
LEGAL MATTERS................................................................................................................102
FINANCIAL INFORMATION........................................................................................................103
RATING.......................................................................................................................103
INDEX OF PRINCIPAL DEFINITIONS...............................................................................................104
</TABLE>
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
Securities Offered.................. Mortgage pass-through certificates.
Depositor........................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation. See
"The Depositor".
Trustee............................. The trustee (the "Trustee") for each
series of Certificates will be named in
the related Prospectus Supplement. See
"Description of the Pooling
Agreements-The Trustee".
Master Servicer..................... If a Trust Fund includes Mortgage Loans,
then the master servicer (the "Master
Servicer") for the corresponding series
of Certificates will be named in the
related Prospectus Supplement. See
"Description of the Pooling
Agreements-Certain Matters Regarding the
Master Servicer, the Special Servicer,
the REMIC Administrator and the
Depositor".
Special Servicer.................... If a Trust Fund includes Mortgage Loans,
then the special servicer (the "Special
Servicer") for the corresponding series
of Certificates will be named, or the
circumstances under which a Special
Servicer may be appointed will be
described, in the related Prospectus
Supplement. See "Description of the
Pooling Agreements-Collection and Other
Servicing Procedures".
MBS Administrator................... If a Trust Fund includes MBS, then the
entity responsible for administering
such MBS (the "MBS Administrator") will
be named in the related Prospectus
Supplement. If an entity other than the
Trustee and the Master Servicer is the
MBS Administrator, such entity will be
herein referred to as the "Manager".
REMIC Administrator................. The person (the "REMIC Administrator")
responsible for the various tax- related
administration duties for a series of
Certificates as to which one or more
REMIC elections have been made, will be
named in the related Prospectus
Supplement. See "Certain Federal Income
Tax Consequences-REMIC's-Reporting and
Other Administrative Matters."
The Mortgage Assets................. The Mortgage Assets will be the primary
assets of any Trust Fund. The Mortgage
Assets with respect to each series of
Certificates will, in general, consist
of a pool of mortgage loans ("Mortgage
Loans") secured by first or junior liens
on, or security interests in, one or
more of the following types of real
property: (i) residential properties
("Multifamily Properties") consisting of
five or more rental or
cooperatively-owned dwelling units in
high-rise, mid-rise or garden apartment
buildings or other residential
<PAGE>
-2-
structures, and mobile home parks; and
(ii) commercial properties ("Commercial
Properties") consisting of office
buildings, retail shopping facilities
(such as shopping centers, malls and
individual stores), hotels and motels,
Health Care-Related Facilities (as
defined herein), recreational vehicle
parks, warehouse facilities,
mini-warehouse facilities, self-storage
facilities, industrial facilities,
parking lots, individual restaurants and
other establishments that are part of
the food service industry (collectively,
"Restaurants"), mixed use properties
(that is, any combination of the
foregoing), and unimproved land. The
Mortgage Loans will not be guaranteed or
insured by the Depositor or any of its
affiliates or, unless otherwise provided
in the related Prospectus Supplement, by
any governmental agency or
instrumentality or by any other person.
If so specified in the related
Prospectus Supplement, some Mortgage
Loans may be delinquent or nonperforming
as of the date the related Trust Fund is
formed.
As and to the extent described in the
related Prospectus Supplement, a
Mortgage Loan (i) may provide for no
accrual of interest or for accrual of
interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its
term or that adjusts from time to time,
or that may be converted at the
borrower's election from an adjustable
to a fixed Mortgage Rate, or from a
fixed to an adjustable Mortgage Rate,
(ii) may provide for level payments to
maturity or for payments that adjust
from time to time to accommodate changes
in the Mortgage Rate or to reflect the
occurrence of certain events, and may
permit negative amortization, (iii) may
be fully amortizing or may be partially
amortizing or nonamortizing, with a
balloon payment due on its stated
maturity date, (iv) may prohibit over
its term or for a certain period
prepayments and/or require payment of a
premium or a yield maintenance payment
in connection with certain prepayments
and (v) may provide for payments of
principal, interest or both, on due
dates that occur monthly, quarterly,
semi-annually or at such other interval
as is specified in the related
Prospectus Supplement. Each Mortgage
Loan will have had an original term to
maturity of not more than 40 years. No
Mortgage Loan will have been originated
by the Depositor. See "Description of
the Trust Funds-Mortgage Loans".
If any Mortgage Loan, or group of
related Mortgage Loans, constitutes a
concentration of credit risk, financial
statements or other financial
information with respect to the related
Mortgaged Property or Mortgaged
Properties will be included in the
related Prospectus Supplement. See
"Description of the Trust Funds-Mortgage
Loans-Mortgage Loan Information in
Prospectus Supplements".
If and to the extent specified in the
related Prospectus Supplement, the
Mortgage Assets with respect to a series
of Certificates may also include, or
consist of, mortgage participations,
mortgage pass-through certificates
and/or
<PAGE>
-3-
other mortgage-backed securities
(collectively, "MBS"), that evidence an
interest in, or are secured by a pledge
of, one or more mortgage loans that
conform to the descriptions of the
Mortgage Loans contained herein and
which may or may not be issued, insured
or guaranteed by the United States or an
agency or instrumentality thereof. See
"Description of the Trust Funds-MBS".
The Certificates..................... Each series of Certificates will be
issued in one or more classes pursuant
to a pooling and servicing agreement or
other agreement specified in the related
Prospectus Supplement (in any case, a
"Pooling Agreement") and will represent
in the aggregate the entire beneficial
ownership interest in the related Trust
Fund.
As described in the related Prospectus
Supplement, the Certificates of each
series, including the Offered
Certificates of such series, may consist
of one or more classes of Certificates
that, among other things: (i) are senior
(collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate
Certificates") to one or more other
classes of Certificates in entitlement
to certain distributions on the
Certificates; (ii) are entitled to
distributions of principal, with
disproportionate, nominal or no
distributions of interest (collectively,
"Stripped Principal Certificates");
(iii) are entitled to distributions of
interest, with disproportionate, nominal
or no distributions of principal
(collectively, "Stripped Interest
Certificates"); (iv) provide for
distributions of interest thereon or
principal thereof that commence only
after the occurrence of certain events,
such as the retirement of one or more
other classes of Certificates of such
series; (v) provide for distributions of
principal thereof to be made, from time
to time or for designated periods, at a
rate that is faster (and, in some cases,
substantially faster) or slower (and, in
some cases, substantially slower) than
the rate at which payments or other
collections of principal are received on
the Mortgage Assets in the related Trust
Fund; (vi) provide for distributions of
principal thereof to be made, subject to
available funds, based on a specified
principal payment schedule or other
methodology; or (vii) provide for
distribution based on collections on the
Mortgage Assets in the related Trust
Fund attributable to prepayment
premiums, yield maintenance payments or
equity participations.
If so specified in the related
Prospectus Supplement, a series of
Certificates may include one or more
"Controlled Amortization Classes", which
will entitle the holders thereof to
receive principal distributions
according to a specified principal
payment schedule. Although prepayment
risk cannot be eliminated entirely for
any class of Certificates, a Controlled
Amortization Class will generally
provide a relatively stable cash flow so
long as the actual rate of prepayment on
the Mortgage Loans in the related Trust
Fund remains relatively constant at the
rate, or within the range of rates, of
prepayment used to establish the
specific principal payment schedule for
such Certificates. Prepayment risk with
respect to a given Mortgage Asset Pool
does not
<PAGE>
-4-
disappear, however, and the stability
afforded to a Controlled Amortization
Class comes at the expense of one or
more other classes of the same series,
any of which other classes may also be a
class of Offered Certificates. See "Risk
Factors-Effect of Prepayments on Average
Life of Certificates" and "-Effect of
Prepayments on Yield of Certificates".
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain classes of
REMIC Residual Certificates (as defined
herein), will have an initial stated
principal amount (a "Certificate
Balance"); and each class of
Certificates, other than certain classes
of Stripped Principal Certificates and
certain classes of REMIC Residual
Certificates, will accrue interest on
its Certificate Balance or, in the case
of certain classes of Stripped Interest
Certificates, on a notional amount (a
"Notional Amount"), based on a fixed,
variable or adjustable interest rate (a
"Pass-Through Rate"). The related
Prospectus Supplement will specify the
Certificate Balance, Notional Amount
and/or Pass-Through Rate (or, in the
case of a variable or adjustable
Pass-Through Rate, the method for
determining such rate), as applicable,
for each class of Offered Certificates.
If so specified in the related
Prospectus Supplement, a class of
Certificates may have two or more
component parts, each having
characteristics that are otherwise
described herein as being attributable
to separate and distinct classes.
The Certificates will not be guaranteed
or insured by the Depositor or any of
its affiliates, by any governmental
agency or instrumentality or by any
other person or entity, unless otherwise
provided in the related Prospectus
Supplement. See "Risk Factors-Limited
Assets".
Distributions of Interest on the
Certificates...................... Interest on each class of Offered
Certificates (other than certain classes
of Stripped Principal Certificates and
certain classes of REMIC Residual
Certificates) of each series will accrue
at the applicable Pass-Through Rate on
the Certificate Balance or, in the case
of certain classes of Stripped Interest
Certificates, the Notional Amount
thereof outstanding from time to time
and will be distributed to
Certificateholders as provided in the
related Prospectus Supplement (each of
the specified dates on which
distributions are to be made, a
"Distribution Date"). Distributions of
interest with respect to one or more
classes of Certificates (collectively,
"Accrual Certificates") may not commence
until the occurrence of certain events,
such as the retirement of one or more
other classes of Certificates, and
interest accrued with respect to a class
of Accrual Certificates prior to the
occurrence of such an event will either
be added to the Certificate Balance
thereof or otherwise deferred as
described in the related Prospectus
Supplement. Distributions of interest
with respect to one or more classes of
Certificates may be reduced to the
extent of certain delinquencies, losses
and other contingencies described herein
and
<PAGE>
-5-
in the related Prospectus Supplement.
See "Risk Factors-Effect of Prepayments
on Average Life of Certificates" and
"-Effect of Prepayments on Yield of
Certificates", "Yield and Maturity
Considerations--Certain Shortfalls in
Collections of Interest" and
"Description of the Certificates-
Distributions of Interest on the
Certificates".
Distributions of Principal of
the Certificates.................. Each class of Certificates of each
series (other than certain classes of
Stripped Interest Certificates and
certain classes of REMIC Residual
Certificates) will have a Certificate
Balance. The Certificate Balance of a
class of Certificates outstanding from
time to time will represent the maximum
amount that the holders thereof are then
entitled to receive in respect of
principal from future cash flow on the
assets in the related Trust Fund. The
initial aggregate Certificate Balance of
all classes of a series of Certificates
will not be greater than the outstanding
principal balance of the related
Mortgage Assets as of a specified date
(the "Cut-off Date"), after application
of scheduled payments due on or before
such date, whether or not received. As
and to the extent described in each
Prospectus Supplement, distributions of
principal with respect to the related
series of Certificates will be made on
each Distribution Date to the holders of
the class or classes of Certificates of
such series then entitled thereto until
the Certificate Balances of such
Certificates have been reduced to zero.
Distributions of principal with respect
to one or more classes of Certificates:
(i) may be made at a rate that is faster
(and, in some cases, substantially
faster) or slower (and, in some cases,
substantially slower) than the rate at
which payments or other collections of
principal are received on the Mortgage
Assets in the related Trust Fund; (ii)
may not commence until the occurrence of
certain events, such as the retirement
of one or more other classes of
Certificates of the same series; (iii)
may be made, subject to certain
limitations, based on a specified
principal payment schedule; or (iv) may
be contingent on the specified principal
payment schedule for another class of
the same series and the rate at which
payments and other collections of
principal on the Mortgage Assets in the
related Trust Fund are received. Unless
otherwise specified in the related
Prospectus Supplement, distributions of
principal of any class of Offered
Certificates will be made on a pro rata
basis among all of the Certificates of
such class. See "Description of the
Certificates-Distributions of Principal
of the Certificates".
Credit Support and
Cash Flow Agreements............... If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on
the Mortgage Assets in the related Trust
Fund may be provided to one or more
classes of Certificates of the related
series in the form of subordination of
one or more other classes of
Certificates of such series, which other
classes may include one or more classes
of Offered Certificates, or by one or
more other types of credit support,
which may include a letter of credit, a
surety bond, an insurance
<PAGE>
-6-
policy, a guarantee, a reserve fund, or
a combination thereof (any such coverage
with respect to the Certificates of any
series, "Credit Support"). If so
provided in the related Prospectus
Supplement, a Trust Fund may include:
(i) guaranteed investment contracts
pursuant to which moneys held in the
funds and accounts established for the
related series will be invested at a
specified rate; or (ii) interest rate
exchange agreements, interest rate cap
or floor agreements, or other agreements
designed to reduce the effects of
interest rate fluctuations on the
Mortgage Assets or on one or more
classes of Certificates (any such
agreement, in the case of clause (i) or
(ii), a "Cash Flow Agreement"). Certain
relevant information regarding any
applicable Credit Support or Cash Flow
Agreement will be set forth in the
Prospectus Supplement for a series of
Offered Certificates. See "Risk
Factors-Credit Support Limitations",
"Description of the Trust Funds-Credit
Support" and "-Cash Flow Agreements" and
"Description of Credit Support".
Advances............................ If and to the extent provided in the
related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the
Master Servicer, the Special Servicer,
the Trustee, any provider of Credit
Support and/or any other specified
person may be obligated to make, or have
the option of making, certain advances
with respect to delinquent scheduled
payments of principal and/or interest on
such Mortgage Loans. Any such advances
made with respect to a particular
Mortgage Loan will be reimbursable from
subsequent recoveries in respect of such
Mortgage Loan and otherwise to the
extent described herein and in the
related Prospectus Supplement. See
"Description of the Certificates
-Advances in Respect of Delinquencies".
If and to the extent provided in the
Prospectus Supplement for a series of
Certificates, any entity making such
advances may be entitled to receive
interest thereon for a specified period
during which certain or all of such
advances are outstanding, payable from
amounts in the related Trust Fund. See
"Description of the Certificates-
Advances in Respect of Delinquencies".
If a Trust Fund includes MBS, any
comparable advancing obligation of a
party to the related Pooling Agreement,
or of a party to the related MBS
Agreement, will be described in the
related Prospectus Supplement.
Optional Termination................ If so specified in the related
Prospectus Supplement, a series of
Certificates may be subject to optional
early termination through the repurchase
of the Mortgage Assets in the related
Trust Fund by the party or parties
specified therein, under the
circumstances and in the manner set
forth therein. If so provided in the
related Prospectus Supplement, upon the
reduction of the Certificate Balance of
a specified class or classes of
Certificates by a specified percentage
or amount or upon a specified date, a
party specified therein may be
authorized or required to solicit bids
for the purchase of all of the Mortgage
Assets of the related Trust Fund, or of
a sufficient portion of such Mortgage
Assets to retire such class or classes,
under the circumstances and in the
manner set forth therein. See
"Description of the Certificates-
Termination".
<PAGE>
-7-
Certain Federal Income Tax
Consequences...................... The Certificates of each series will
constitute or evidence ownership of
either (i) "regular interests" ("REMIC
Regular Certificates") and "residual
interests" ("REMIC Residual
Certificates") in a Trust Fund, or a
designated portion thereof, treated as a
REMIC under Sections 860A through 860G
of the Internal Revenue Code of 1986
(the "Code"), or (ii) interests
("Grantor Trust Certificates") in a
Trust Fund treated as a grantor trust
(or a partnership) under applicable
provisions of the Code.
Investors are advised to consult their
tax advisors concerning the specific tax
consequences to them of the purchase,
ownership and disposition of the Offered
Certificates and to review "Certain
Federal Income Tax Consequences" herein
and in the related Prospectus
Supplement.
ERISA Considerations................ Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh
plans, and collective investment funds
and separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that are
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of
Offered Certificates could give rise to
a transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code. See
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Legal Investment.................... The Offered Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
amended ("SMMEA"), only if so specified
in the related Prospectus Supplement.
Investors whose investment authority is
subject to legal restrictions should
consult their legal advisors to
determine whether and to what extent the
Offered Certificates constitute legal
investments for them. See "Legal
Investment" herein and in the related
Prospectus Supplement.
Rating.............................. At their respective dates of issuance,
each class of Offered Certificates will
be rated not lower than investment grade
by one or more nationally recognized
statistical rating agencies (each, a
"Rating Agency"). See "Rating" herein
and in the related Prospectus
Supplement.
<PAGE>
-8-
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly pertain
to and be influenced by the characteristics or behavior of the mortgage loans
underlying any MBS included in such Trust Fund.
Limited Liquidity of Offered Certificates
General. The Offered Certificates of any series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related Prospectus
Supplement, Certificateholders will have no redemption rights, and the Offered
Certificates of each series are subject to early retirement only under certain
specified circumstances described herein and in the related Prospectus
Supplement. See "Description of the Certificates-Termination".
Lack of a Secondary Market. There can be no assurance that a secondary
market for the Offered Certificates of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any series of Offered Certificates may indicate that
an underwriter specified therein intends to establish a secondary market in such
Offered Certificates; however, no underwriter will be obligated to do so. Any
such secondary market may provide less liquidity to investors than any
comparable market for securities that evidence interests in single-family
mortgage loans. Unless otherwise provided in the related Prospectus Supplement,
the Certificates will not be listed on any securities exchange.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Certificates of any series, including
information regarding the status of the related Mortgage Assets and any Credit
Support for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling Agreement as
described herein under the heading "Description of the Certificates-Reports to
Certificateholders". There can be no assurance that any additional ongoing
information regarding the Offered Certificates of any series will be available
through any other source. The limited nature of such information in respect of a
series of Offered Certificates may adversely affect the liquidity thereof, even
if a secondary market for such Certificates does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any series of Offered Certificates
or class thereof, the market value of such Certificates will be affected by
several factors, including the perceived liquidity thereof, the anticipated cash
flow thereon (which may vary widely depending upon the prepayment and default
assumptions applied in respect of the underlying Mortgage Loans) and prevailing
interest rates. The price payable at any given time in respect of certain
classes of Offered Certificates (in particular, a class with a relatively long
average life, a Companion Class (as defined herein) or a class of Stripped
Interest Certificates or Stripped Principal Certificates) may be extremely
sensitive to small fluctuations in prevailing interest rates; and the relative
change in price for an Offered Certificate in response to an upward or downward
movement in prevailing interest rates may not necessarily equal the relative
change in price for such Offered Certificate in response to an equal but
opposite movement in such rates. Accordingly, the sale of Offered Certificates
by a holder in any secondary market that may develop may be at a discount from
the price paid by such holder. The Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis.
Limited Assets
<PAGE>
-9-
Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other person
or entity; and no Offered Certificate of any series will represent a claim
against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make payments
on a series of Offered Certificates, no other assets will be available for
payment of the deficiency, and the holders of one or more classes of such
Offered Certificates will be required to bear the consequent loss. Furthermore,
certain amounts on deposit from time to time in certain funds or accounts
constituting part of a Trust Fund, including the Certificate Account and any
accounts maintained as Credit Support, may be withdrawn under certain
conditions, if and to the extent described in the related Prospectus Supplement,
for purposes other than the payment of principal of or interest on the related
series of Certificates. If and to the extent so provided in the Prospectus
Supplement for a series of Certificates consisting of one or more classes of
Subordinate Certificates, on any Distribution Date in respect of which losses or
shortfalls in collections on the Mortgage Assets have been incurred, all or a
portion of the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Certificates, and, thereafter, by the remaining
classes of Certificates in the priority and manner and subject to the
limitations specified in such Prospectus Supplement.
Credit Support Limitations
Limitations Regarding Types of Losses Covered. The Prospectus Supplement
for a series of Certificates will describe any Credit Support provided with
respect thereto. Use of Credit Support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement. Moreover,
such Credit Support may not cover all potential losses; for example, Credit
Support may or may not cover loss by reason of fraud or negligence by a mortgage
loan originator or other parties. Any such losses not covered by Credit Support
may, at least in part, be allocated to one or more classes of Offered
Certificates.
Disproportionate Benefits to Certain Classes and Series. A series of
Certificates may include one or more classes of Subordinate Certificates (which
may include Offered Certificates), if so provided in the related Prospectus
Supplement. Although subordination is intended to reduce the likelihood of
temporary shortfalls and ultimate losses to holders of Senior Certificates, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Offered Certificates of a series are made in a specified order of priority, any
related Credit Support may be exhausted before the principal of the later paid
classes of Offered Certificates of such series has been repaid in full. As a
result, the impact of losses and shortfalls experienced with respect to the
Mortgage Assets may fall primarily upon those classes of Offered Certificates
having a later right of payment. Moreover, if a form of Credit Support covers
the Offered Certificates of more than one series and losses on the related
Mortgage Assets exceed the amount of such Credit Support, it is possible that
the holders of Offered Certificates of one (or more) such series will be
disproportionately benefited by such Credit Support to the detriment of the
holders of Offered Certificates of one (or more) other such series.
Limitations Regarding the Amount of Credit Support. The amount of any
applicable Credit Support supporting one or more classes of Offered
Certificates, including the subordination of one or more other classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level of
defaults, delinquencies and losses on the underlying Mortgage Assets and certain
other factors. There can, however, be no assurance that the loss experience on
the related Mortgage Assets will not exceed such assumed levels. See
"Description of the Certificates--Allocation of Losses and Shortfalls" and
"Description of Credit Support". If the losses on the related Mortgage Assets do
exceed such assumed levels, the holders of one or more classes of Offered
Certificates will be required to bear such additional losses.
Effect of Prepayments on Average Life of Certificates
<PAGE>
-10-
As a result of prepayments on the Mortgage Loans in any Trust Fund, the
amount and timing of distributions of principal and/or interest on the Offered
Certificates of the related series may be highly unpredictable. Prepayments on
the Mortgage Loans in any Trust Fund will result in a faster rate of principal
payments on one or more classes of the related series of Certificates than if
payments on such Mortgage Loans were made as scheduled. Thus, the prepayment
experience on the Mortgage Loans in a Trust Fund may affect the average life of
one or more classes of Certificates of the related series, including a class of
Offered Certificates. The rate of principal payments on pools of mortgage loans
varies among pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. For example, if
prevailing interest rates fall significantly below the Mortgage Rates borne by
the Mortgage Loans included in a Trust Fund, then, subject to the particular
terms of the Mortgage Loans (e.g., provisions that prohibit voluntary
prepayments during specified periods or impose penalties in connection
therewith) and the ability of borrowers to obtain new financing, principal
prepayments on such Mortgage Loans are likely to be higher than if prevailing
interest rates remain at or above the rates borne by those Mortgage Loans.
Conversely, if prevailing interest rates rise significantly above the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, then principal
prepayments on such Mortgage Loans are likely to be lower than if prevailing
interest rates remain at or below the mortgage rates borne by those Mortgage
Loans. There can be no assurance as to the actual rate of prepayment on the
Mortgage Loans in any Trust Fund or that such rate of prepayment will conform to
any model described herein or in any Prospectus Supplement. As a result,
depending on the anticipated rate of prepayment for the Mortgage Loans in any
Trust Fund, the retirement of any class of Certificates of the related series
could occur significantly earlier or later, and the average life thereof could
be significantly shorter or longer, than expected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the related
series will depend on the terms and provisions of such Certificates. A class of
Certificates, including a class of Offered Certificates, may provide that on any
Distribution Date the holders of such Certificates are entitled to a pro rata
share of the prepayments on the Mortgage Loans in the related Trust Fund that
are distributable on such date, to a disproportionately large share (which, in
some cases, may be all) of such prepayments, or to a disproportionately small
share (which, in some cases, may be none) of such prepayments. A class of
Certificates that entitles the holders thereof to a disproportionately large
share of the prepayments on the Mortgage Loans in the related Trust Fund
increases the likelihood of early retirement of such class ("Call Risk") if the
rate of prepayment is relatively fast; while a class of Certificates that
entitles the holders thereof to a disproportionately small share of the
prepayments on the Mortgage Loans in the related Trust Fund increases the
likelihood of an extended average life of such class ("Extension Risk") if the
rate of prepayment is relatively slow. As and to the extent described in the
related Prospectus Supplement, the respective entitlements of the various
classes of Certificateholders of any series to receive payments (and, in
particular, prepayments) of principal of the Mortgage Loans in the related Trust
Fund may vary based on the occurrence of certain events (e.g., the retirement of
one or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such Mortgage
Loans).
A series of Certificates may include one or more Controlled Amortization
Classes, which will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of Certificates, a
Controlled Amortization Class will generally provide a relatively stable cash
flow so long as the actual rate of prepayment on the Mortgage Loans in the
related Trust Fund remains relatively constant at the rate, or within the range
of rates, of prepayment used to establish the specific principal payment
schedule for such Certificates. Prepayment risk with respect to a given Mortgage
Asset Pool does not disappear, however, and the stability afforded to a
Controlled Amortization Class comes at the expense of one or more Companion
Classes of the same series, any of which Companion Classes may also be a class
of Offered Certificates. In general, and as more specifically described in the
related Prospectus Supplement, a Companion Class may entitle the holders thereof
to a disproportionately large share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively fast, and/or may
entitle the holders thereof to a disproportionately small share of prepayments
on the Mortgage Loans in the related Trust Fund
<PAGE>
-11-
when the rate of prepayment is relatively slow. As and to the extent described
in the related Prospectus Supplement, a Companion Class absorbs some (but not
all) of the Call Risk and/or Extension Risk that would otherwise belong to the
related Controlled Amortization Class if all payments of principal of the
Mortgage Loans in the related Trust Fund were allocated on a pro rata basis.
Effect of Prepayments on Yield of Certificates
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately large,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might fail to recover its original investment
under some prepayment scenarios. The extent to which the yield to maturity of
any class of Offered Certificates may vary from the anticipated yield will
depend upon the degree to which such Certificates are purchased at a discount or
premium and the amount and timing of distributions thereon. An investor should
consider, in the case of any Offered Certificate purchased at a discount, the
risk that a slower than anticipated rate of principal payments on the Mortgage
Loans could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Offered Certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield. See "Yield and Maturity Considerations".
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of such Offered
Certificates will receive payments to which such Certificateholders are entitled
under the related Pooling Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Mortgage
Loans will be made, the degree to which the rate of such prepayments might
differ from that originally anticipated or the likelihood of early optional
termination of the related Trust Fund. Furthermore, such rating will not address
the possibility that prepayment of the related Mortgage Loans at a higher or
lower rate than anticipated by an investor may cause such investor to experience
a lower than anticipated yield or that an investor that purchases an Offered
Certificate at a significant premium might fail to recover its initial
investment under certain prepayment scenarios. Hence, a rating assigned by a
Rating Agency does not guarantee or ensure the realization of any anticipated
yield on a class of Offered Certificates.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of the Certificates of such
series. Those criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Loans. In other cases, such
criteria may be based upon determinations of the values of the Mortgaged
Properties that provide security for the Mortgage Loans. However, no assurance
can be given that those values will not decline in the future. As a result, the
Credit Support required in respect of the Offered Certificates of any series may
be insufficient to fully protect the holders thereof from losses on the related
Mortgage Asset Pool. See "Description of Credit Support" and "Rating".
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans
General. The payment performance of the Offered Certificates of any series
will be directly related to the payment performance of the underlying Mortgage
Loans. Set forth below is a discussion of certain factors that will affect the
full and
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timely payment of the Mortgage Loans in any Trust Fund. In addition, a
description of certain material considerations associated with investments in
mortgage loans is included herein under "Certain Legal Aspects of Mortgage
Loans".
The Offered Certificates will be directly or indirectly backed by mortgage
loans secured by multifamily and/or commercial properties. Mortgage loans made
on the security of multifamily or commercial property may have a greater
likelihood of delinquency and foreclosure, and a greater likelihood of loss in
the event thereof, than loans made on the security of an owner-occupied
single-family property. See "Description of the Trust Funds-Mortgage
Loans-Default and Loss Considerations with Respect to the Mortgage Loans". The
ability of a borrower to repay a loan secured by an income-producing property
typically is dependent primarily upon the successful operation of such property
rather than upon the existence of independent income or assets of the borrower;
thus, the value of an income-producing property is directly related to the net
operating income derived from such property. If the net operating income of the
property is reduced (for example, if rental or occupancy rates decline or real
estate tax rates or other operating expenses increase), the borrower's ability
to repay the loan may be impaired. A number of the Mortgage Loans may be secured
by liens on owner-occupied Mortgaged Properties or on Mortgaged Properties
leased to a single tenant or a small number of significant tenants. Accordingly,
a decline in the financial condition of the borrower or a significant tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
Mortgaged Property may be adversely affected by factors generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate
tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; natural
disasters and civil disturbances such as earthquakes, hurricanes, floods,
eruptions or riots; and other circumstances, conditions or events beyond the
control of a Master Servicer or a Special Servicer. Additional considerations
may be presented by the type and use of a particular Mortgaged Property. For
instance, Mortgaged Properties that operate as hospitals and nursing homes are
subject to significant governmental regulation of the ownership, operation,
maintenance and financing of health care institutions. Hotel and motel
properties are often operated pursuant to franchise, management or operating
agreements that may be terminable by the franchisor or operator, and the
transferability of a hotel's operating, liquor and other licenses upon a
transfer of the hotel, whether through purchase or foreclosure, is subject to
local law requirements.
In addition, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be greater
than for pools of single-family loans because Mortgage Loans in a Trust Fund
will generally consist of a smaller number of higher balance loans than would a
pool of single-family loans of comparable aggregate unpaid principal balance.
Limited Recourse Nature of the Mortgage Loans. It is anticipated that some
or all of the Mortgage Loans included in any Trust Fund will be nonrecourse
loans or loans for which recourse may be restricted or unenforceable. As to any
such Mortgage Loan, recourse in the event of borrower default will be limited to
the specific real property and other assets, if any, that were pledged to secure
the Mortgage Loan. However, even with respect to those Mortgage Loans that
provide for recourse against the borrower and its assets generally, there can be
no assurance that enforcement of such recourse provisions will be practicable,
or that the assets of the borrower will be sufficient to permit a recovery in
respect of a defaulted Mortgage Loan in excess of the liquidation value of the
related Mortgaged Property. See "Certain Legal Aspects of Mortgage
Loans-Foreclosure--Anti-Deficiency Legislation".
Limitations on Enforceability of Cross-Collateralization. A Mortgage Pool
may include groups of Mortgage Loans which are cross-collateralized and
cross-defaulted. These arrangements are designed primarily to ensure that all of
the collateral pledged to secure the respective Mortgage Loans in a
cross-collateralized group, and the cash flows generated
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thereby, are available to support debt service on, and ultimate repayment of,
the aggregate indebtedness evidenced by those Mortgage Loans. These arrangements
thus seek to reduce the risk that the inability of one or more of the Mortgaged
Properties securing any such group of Mortgage Loans to generate net operating
income sufficient to pay debt service will result in defaults and ultimate
losses.
There may not be complete identity of ownership of the Mortgaged Properties
securing a group of cross-collateralized Mortgage Loans. In such an instance,
creditors of one or more of the related borrowers could challenge the
cross-collateralization arrangement as a fraudulent conveyance. Generally, under
federal and state fraudulent conveyance statutes, the incurring of an obligation
or the transfer of property by a person will be subject to avoidance under
certain circumstances if the person did not receive fair consideration or
reasonably equivalent value in exchange for such obligation or transfer and was
then insolvent or was rendered insolvent by such obligation or transfer.
Accordingly, a creditor seeking ownership of a Mortgaged Property subject to
such cross-collateralization to repay such creditor's claim against the related
borrower could assert (i) that such borrower was insolvent at the time the
cross-collateralized Mortgage Loans were made and (ii) that such borrower did
not, when it allowed its property to be encumbered by a lien securing the
indebtedness represented by the other Mortgage Loans in the group of
cross-collateralized Mortgage Loans, receive fair consideration or reasonably
equivalent value for, in effect, "guaranteeing" the performance of the other
borrowers. Although the borrower making such "guarantee" will be receiving
"guarantees" from each of the other borrowers in return, there can be no
assurance that such exchanged "guarantees" would be found to constitute fair
consideration or be of reasonably equivalent value, and no unqualified legal
opinion to that effect will be obtained.
The cross-collateralized Mortgage Loans constituting any group thereof may
be secured by mortgage liens on Mortgaged Properties located in different
states. Because of various state laws governing foreclosure or the exercise of a
power of sale and because, in general, foreclosure actions are brought in state
court, and the courts of one state cannot exercise jurisdiction over property in
another state, it may be necessary upon a default under any such Mortgage Loan
to foreclose on the related Mortgaged Properties in a particular order rather
than simultaneously in order to ensure that the lien of the related Mortgages is
not impaired or released.
Increased Risk of Default Associated With Balloon Payments. Certain of the
Mortgage Loans included in a Trust Fund may be nonamortizing or only partially
amortizing over their terms to maturity and, thus, will require substantial
payments of principal and interest (that is, balloon payments) at their stated
maturity. Mortgage Loans of this type involve a greater likelihood of default
than self-amortizing loans because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to refinance the loan or
to sell the related Mortgaged Property. The ability of a borrower to accomplish
either of these goals will be affected by a number of factors, including the
value of the related Mortgaged Property, the level of available mortgage rates
at the time of sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition and operating history of the
borrower and the related Mortgaged Property, tax laws, rent control laws (with
respect to certain residential properties), Medicaid and Medicare reimbursement
rates (with respect to hospitals and nursing homes), prevailing general economic
conditions and the availability of credit for loans secured by multifamily or
commercial, as the case may be, real properties generally. Neither the Depositor
nor any of its affiliates will be required to refinance any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or the Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to which a
payment default is imminent. See "Description of the Pooling
Agreements-Realization Upon Defaulted Mortgage Loans". While the Master Servicer
or the Special Servicer generally will be required to determine that any such
extension or modification is reasonably likely to produce a greater recovery
than
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liquidation, taking into account the time value of money, there can be no
assurance that any such extension or modification will in fact increase the
present value of receipts from or proceeds of the affected Mortgage Loans.
Lender Difficulty in Collecting Rents Upon the Default and/or Bankruptcy of
Borrower. Each Mortgage Loan included in any Trust Fund secured by Mortgaged
Property that is subject to leases typically will be secured by an assignment of
leases and rents pursuant to which the borrower assigns to the lender its right,
title and interest as landlord under the leases of the related Mortgaged
Property, and the income derived therefrom, as further security for the related
Mortgage Loan, while retaining a license to collect rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect rents. Some state laws may require that the lender take
possession of the Mortgaged Property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
borrower, the lender's ability to collect the rents may be adversely affected.
See "Certain Legal Aspects of Mortgage Loans-Leases and Rents".
Limitations on Enforceability of Due-on-Sale and Debt-Acceleration Clauses.
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the Mortgage Loan if the borrower sells, transfers or
conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages also may include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or nonmonetary default of the
mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse the foreclosure of a mortgage or deed of trust when an acceleration
of the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
Risk of Liability Arising From Environmental Conditions. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, a lender may be liable, as
an "owner" or "operator", for costs of addressing releases or threatened
releases of hazardous substances at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether the environmental damage or threat was caused by the
borrower or a prior owner. A lender also risks such liability on foreclosure of
the mortgage. See "Certain Legal Aspects of Mortgage Loans-Environmental
Considerations".
Lack of Insurance Coverage for Certain Special Hazard Losses. Unless
otherwise specified in a Prospectus Supplement, the Master Servicer and Special
Servicer for the related Trust Fund will be required to cause the borrower on
each Mortgage Loan in such Trust Fund to maintain such insurance coverage in
respect of the related Mortgaged Property as is required under the related
Mortgage, including hazard insurance; provided that, as and to the extent
described herein and in the related Prospectus Supplement, each of the Master
Servicer and the Special Servicer may satisfy its obligation to cause hazard
insurance to be maintained with respect to any Mortgaged Property through
acquisition of a blanket policy. In general, the standard form of fire and
extended coverage policy covers physical damage to or destruction of the
improvements of the property by fire, lightning, explosion, smoke, windstorm and
hail, and riot, strike and civil commotion, subject to the conditions and
exclusions specified in each policy. Although the policies covering the
Mortgaged Properties will be underwritten by different insurers under different
state laws in accordance with different applicable state forms, and therefore
will not contain identical terms and conditions, most such policies typically do
not cover any physical damage resulting from war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), wet or dry rot, vermin, domestic animals
and certain other kinds of risks. Unless the related Mortgage specifically
requires the mortgagor to insure against physical damage arising from such
causes, then, to the extent any consequent losses are not covered by Credit
Support, such losses may be borne, at least in part, by the holders of one
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or more classes of Offered Certificates of the related series. See "Description
of the Pooling Agreements-Hazard Insurance Policies".
Risks of Geographic Concentration. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. For example, a
region's economic condition and housing market may be directly, or indirectly,
adversely affected by natural disasters or civil disturbances such as
earthquakes, hurricanes, floods, eruptions or riots. The economic impact of any
of these types of events may also be felt in areas beyond the region immediately
affected by the disaster or disturbance. The Mortgage Loans securing certain
series of Certificates may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset
Pool
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past due
or are nonperforming. However, Mortgage Loans which are seriously delinquent
loans (that is, loans more than 60 days delinquent or as to which foreclosure
has been commenced) will not constitute a material concentration of the Mortgage
Loans in any Trust Fund, based on principal balance at the time such Trust Fund
is formed. If so specified in the related Prospectus Supplement, the servicing
of such Mortgage Loans will be performed by the Special Servicer; however, the
same entity may act as both Master Servicer and Special Servicer. Credit Support
provided with respect to a particular series of Certificates may not cover all
losses related to such delinquent or nonperforming Mortgage Loans, and investors
should consider the risk that the inclusion of such Mortgage Loans in the Trust
Fund may adversely affect the rate of defaults and prepayments in respect of the
subject Mortgage Asset Pool and the yield on the Offered Certificates of such
series. See "Description of the Trust Funds-Mortgage Loans-General".
Termination
If so provided in the related Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to solicit bids for the purchase of all
the Mortgage Assets of the related Trust Fund, or of a sufficient portion of
such Mortgage Assets to retire such class or classes, under the circumstances
and in the manner set forth therein. The solicitation of bids will be conducted
in a commercially reasonable manner and, generally, assets will be sold at their
fair market value. In addition, if so specified in the related Prospectus
Supplement, upon the reduction of the aggregate principal balance of some or all
of the Mortgage Assets by a specified percentage, a party or parties designated
therein may be authorized to purchase such Mortgage Assets, generally at a price
equal to, in the case of any Mortgage Asset, the unpaid principal balance
thereof plus accrued interest (or, in some cases, at fair market value).
However, circumstances may arise in which such fair market value may be less
than the unpaid balance of the related Mortgage Assets, together with interest
thereon, sold and therefore, as a result of such a sale or purchase, the
Certificateholders of one or more Classes of Certificates may receive an amount
less than the Certificate Balance of, and accrued unpaid interest on, their
Certificates. See Description of the Certificates--Termination."
Risks Associated with Health Care-Related Properties
Government Reimbursement Programs. Certain types of Health Care-Related
Facilities typically receive a substantial portion of their revenues from
government reimbursement programs, primarily Medicaid and Medicare. Medicaid and
Medicare are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings, policy
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interpretations, delays by fiscal intermediaries and government funding
restrictions. Accordingly, there can be no assurance that payments under
government reimbursement programs will, in the future, be sufficient to fully
reimburse the cost of caring for program beneficiaries. If such payments are
insufficient, net operating income of those Health Care-Related Facilities that
receive revenues from those sources, and consequently the ability of the related
borrowers to meet their obligations under any Mortgage Loans secured thereby,
could be adversely affected.
Government Regulation. Health Care-Related Facilities are generally subject
to federal and state laws and licensing requirements that relate to the adequacy
of medical care, distribution of pharmaceuticals, rate setting, equipment,
personnel, operating policies and additions to facilities and services. The
failure of an operator to maintain or renew any required license or regulatory
approval could prevent it from continuing operations at a Health Care-Related
Facility or, if applicable, bar it from participation in government
reimbursement programs. Furthermore, under applicable federal and state laws and
regulations, Medicare and Medicaid reimbursements are generally not permitted to
be made to any person other than the provider who actually furnished the related
medical goods and services. Accordingly, in the event of foreclosure, none of
the Trustee, the Master Servicer, the Special Servicer or a subsequent lessee or
operator of a Health Care-Related Facility securing a defaulted Mortgage Loan
would generally be entitled to obtain from federal or state governments any
outstanding reimbursement payments relating to services furnished at such
property prior to such foreclosure. In those cases where Health Care-Related
Facilities constitute Mortgaged Properties, any of the aforementioned events may
adversely affect the ability of the related borrowers to meet their obligations
under the Mortgage Loans secured thereby.
Risks Associated with Restaurants
Various factors may affect the economic viability of Restaurants, including
but not limited to competition from facilities having businesses similar to the
particular Restaurant; perceptions by prospective customers of the safety,
convenience, services and attractiveness of the Restaurant; the quality of
available food products; changes in demographics, consumer habits and traffic
patterns; the ability to provide or contract for capable management and adequate
maintenance; and retroactive changes to building codes, similar ordinances and
other legal requirements. Additional factors that can affect the success of a
regionally or nationally-known chain Restaurant include actions and omissions of
any franchisor (including management practices that adversely affect the nature
of the business or that require renovation, refurbishment, expansion or other
expenditures); the degree of support provided or arranged by any such
franchisor, its franchisee organizations and third party providers of products
or services; the bankruptcy or business discontinuation of any such franchisor,
franchisee organization or third party; and increases in operating expenses.
DESCRIPTION OF THE TRUST FUNDS
General
The primary assets of each Trust Fund will consist of (i) various types of
multifamily or commercial mortgage loans ("Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
("MBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily or commercial mortgage loans or (iii) a
combination of Mortgage Loans and MBS (collectively, "Mortgage Assets"). Each
Trust Fund will be established by the Depositor. Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator of
such Mortgage Loan or the issuer of such MBS. The Mortgage Assets will not be
guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under the
heading
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"-Mortgage Loans", unless otherwise noted, applies equally to mortgage loans
underlying any MBS included in a particular Trust Fund.
Mortgage Loans
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create first or junior liens on fee or
leasehold estates in properties (the "Mortgaged Properties") consisting of one
or more of the following types of real property: (i) residential properties
("Multifamily Properties") consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures, and mobile home parks; and (ii)
commercial properties ("Commercial Properties") consisting of office buildings,
retail shopping facilities (such as shopping centers, malls and individual
stores), hotels and motels, Health Care-Related Facilities (as defined herein),
recreational vehicle parks, warehouse facilities, mini-warehouse facilities,
self-storage facilities, industrial facilities, parking lots, individual
restaurants and other establishments that are part of the food service industry
(collectively, "Restaurants"), mixed use properties (that is, any combination of
the foregoing), and unimproved land. The Multifamily Properties may include
mixed commercial and residential structures and apartment buildings owned by
private cooperative housing corporations ("Cooperatives"). Unless otherwise
specified in the related Prospectus Supplement, each Mortgage will create a
first priority mortgage lien on a fee estate in a Mortgaged Property. If a
Mortgage creates a lien on a borrower's leasehold estate in a property, then,
unless otherwise specified in the related Prospectus Supplement, the term of any
such leasehold will exceed the term of the Mortgage Note by at least ten years.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Loan will have been originated by a person (the "Originator") other than the
Depositor.
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens, and
the loans secured by the related senior liens ("Senior Liens") may not be
included in the Mortgage Pool. The primary risk to holders of Mortgage Loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related Senior Liens to satisfy
fully both the Senior Liens and the Mortgage Loan. In the event that a holder of
a Senior Lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court costs
and fees in connection with the foreclosure, second to real estate taxes, third
in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the Senior
Liens. The claims of the holders of the Senior Liens will be satisfied in full
out of proceeds of the liquidation of the related Mortgage Property, if such
proceeds are sufficient, before the Trust Fund as holder of the junior lien
receives any payments in respect of the Mortgage Loan. If the Master Servicer
were to foreclose on any Mortgage Loan, it would do so subject to any related
Senior Liens. In order for the debt related to such Mortgage Loan to be paid in
full at such sale, a bidder at the foreclosure sale of such Mortgage Loan would
have to bid an amount sufficient to pay off all sums due under the Mortgage Loan
and any Senior Liens or purchase the Mortgaged Property subject to such Senior
Liens. In the event that such proceeds from a foreclosure or similar sale of the
related Mortgaged Property are insufficient to satisfy all Senior Liens and the
Mortgage Loan in the aggregate, the Trust Fund, as the holder of the junior
lien, and, accordingly, holders of one or more classes of the Certificates of
the related series bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment is not obtained and satisfied. Moreover, deficiency
judgments may not be available in certain jurisdictions, or the particular
Mortgage Loan may be a nonrecourse loan, which means that, absent special facts,
recourse in the case of default will be limited to the Mortgaged Property and
such other assets, if any, that were pledged to secure repayment of the Mortgage
Loan.
If so specified in the related Prospectus Supplement, the Mortgage Assets
for a particular series of Certificates may include Mortgage Loans that are
delinquent or nonperforming as of the date such Certificates are issued. In that
case, the
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related Prospectus Supplement will set forth, as to each such Mortgage Loan,
available information as to the period of such delinquency or nonperformance,
any forbearance arrangement then in effect, the condition of the related
Mortgaged Property and the ability of the Mortgaged Property to generate income
to service the mortgage debt. However, Mortgage Loans which are seriously
delinquent loans (that is, loans more than 60 days delinquent or as to which
foreclosure has been commenced) will not constitute a material concentration of
the Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed.
Default and Loss Considerations with Respect to the Mortgage Loans.
Mortgage loans secured by liens on income-producing properties are substantially
different from loans made on the security of owner-occupied single-family homes.
The repayment of a loan secured by a lien on an income-producing property is
typically dependent upon the successful operation of such property (that is, its
ability to generate income). Moreover, as noted above, some or all of the
Mortgage Loans included in a particular Trust Fund may be nonrecourse loans.
Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important factor in evaluating the likelihood
of default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income derived from the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments of principal and/or interest on the Mortgage Loan and any other loans
senior thereto that are secured by the related Mortgaged Property. Unless
otherwise defined in the related Prospectus Supplement, "Net Operating Income"
means, for any given period, the total operating revenues derived from a
Mortgaged Property during such period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than (i)
noncash items such as depreciation and amortization, (ii) capital expenditures
and (iii) debt service on the related Mortgage Loan or on any other loans that
are secured by such Mortgaged Property. The Net Operating Income of a Mortgaged
Property will generally fluctuate over time and may or may not be sufficient to
cover debt service on the related Mortgage Loan at any given time. As the
primary source of the operating revenues of a nonowner occupied,
income-producing property, rental income (and, with respect to a Mortgage Loan
secured by a Cooperative apartment building, maintenance payments from
tenant-stockholders of a Cooperative) may be affected by the condition of the
applicable real estate market and/or area economy. In addition, properties
typically leased, occupied or used on a short-term basis, such as certain health
care-related facilities, hotels and motels, and mini-warehouse and self-storage
facilities, tend to be affected more rapidly by changes in market or business
conditions than do properties typically leased for longer periods, such as
warehouses, retail stores, office buildings and industrial facilities.
Commercial Properties may be owner-occupied or leased to a small number of
tenants. Thus, the Net Operating Income of such a Mortgaged Property may depend
substantially on the financial condition of the borrower or a tenant, and
Mortgage Loans secured by liens on such properties may pose a greater likelihood
of default and loss than loans secured by liens on Multifamily Properties or on
multi-tenant Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the likelihood of default on a Mortgage Loan.
As may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a factor
in evaluating the likelihood of loss if a property must be liquidated following
a default. Unless otherwise defined in the related Prospectus Supplement, the
"Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of (i) the then
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outstanding principal balance of the Mortgage Loan and any other loans senior
thereto that are secured by the related Mortgaged Property to (ii) the Value of
the related Mortgaged Property. Unless otherwise specified in the related
Prospectus Supplement, the "Value" of a Mortgaged Property will be its fair
market value as determined by an appraisal of such property conducted by or on
behalf of the Originator in connection with the origination of such loan. The
lower the Loan-to-Value Ratio, the greater the percentage of the borrower's
equity in a Mortgaged Property, and thus (a) the greater the incentive of the
borrower to perform under the terms of the related Mortgage Loan (in order to
protect such equity) and (b) the greater the cushion provided to the lender
against loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure of
the likelihood of liquidation loss in a pool of Mortgage Loans. For example, the
value of a Mortgaged Property as of the date of initial issuance of the related
series of Certificates may be less than the Value determined at loan
origination, and will likely continue to fluctuate from time to time based upon
certain factors including changes in economic conditions and the real estate
market. Moreover, even when current, an appraisal is not necessarily a reliable
estimate of value. Appraised values of income-producing properties are generally
based on the market comparison method (recent resale value of comparable
properties at the date of the appraisal), the cost replacement method (the cost
of replacing the property at such date), the income capitalization method (a
projection of value based upon the property's projected net cash flow), or upon
a selection from or interpolation of the values derived from such methods. Each
of these appraisal methods can present analytical difficulties. It is often
difficult to find truly comparable properties that have recently been sold; the
replacement cost of a property may have little to do with its current market
value; and income capitalization is inherently based on inexact projections of
income and expense and the selection of an appropriate capitalization rate and
discount rate. Where more than one of these appraisal methods are used and
provide significantly different results, an accurate determination of value and,
correspondingly, a reliable analysis of the likelihood of default and loss, is
even more difficult.
Although there may be multiple methods for determining the value of a
Mortgaged Property, value will in all cases be affected by property performance.
As a result, if a Mortgage Loan defaults because the income generated by the
related Mortgaged Property is insufficient to cover operating costs and expenses
and pay debt service, then the value of the Mortgaged Property will reflect such
and a liquidation loss may occur.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans, there can be no
assurance that all of such factors will in fact have been prudently considered
by the Originators of the Mortgage Loans, or that, for a particular Mortgage
Loan, they are complete or relevant. See "Risk Factors-Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage Loans-General" and "-Certain
Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage
Loans-Increased Risk of Default Associated With Balloon Payments".
Payment Provisions of the Mortgage Loans. All of the Mortgage Loans will
(i) have had original terms to maturity of not more than 40 years and (ii)
provide for scheduled payments of principal, interest or both, to be made on
specified dates ("Due Dates") that occur monthly, quarterly, semi-annually or
annually. A Mortgage Loan (i) may provide for no accrual of interest or for
accrual of interest thereon at a Mortgage Rate that is fixed over its term or
that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, (ii) may provide for level payments to maturity or for
payments that adjust from time to time to accommodate changes in the Mortgage
Rate or to reflect the occurrence of certain events, and may permit negative
amortization, (iii) may be fully amortizing or may be partially amortizing or
nonamortizing, with a balloon payment due on its stated maturity date, and (iv)
may prohibit over its term or for a certain period prepayments (the period of
such prohibition, a "Lock-out Period" and its date of expiration, a "Lock-out
Date") and/or require payment of a premium or a yield maintenance payment (a
"Prepayment Premium") in connection with certain prepayments, in each case as
described in the
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related Prospectus Supplement. A Mortgage Loan may also contain a provision that
entitles the lender to a share of appreciation of the related Mortgaged
Property, or profits realized from the operation or disposition of such
Mortgaged Property or the benefit, if any, resulting from the refinancing of the
Mortgage Loan (any such provision, an "Equity Participation"), as described in
the related Prospectus Supplement.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans in
the related Trust Fund, which, to the extent then applicable, will generally
include the following: (i) the aggregate outstanding principal balance and the
largest, smallest and average outstanding principal balance of the Mortgage
Loans, (ii) the type or types of property that provide security for repayment of
the Mortgage Loans, (iii) the earliest and latest origination date and maturity
date of the Mortgage Loans, (iv) the original and remaining terms to maturity of
the Mortgage Loans, or the respective ranges thereof, and the weighted average
original and remaining terms to maturity of the Mortgage Loans, (v) the
Loan-to-Value Ratios of the Mortgage Loans (either at origination or as of a
more recent date), or the range thereof, and the weighted average of such
Loan-to-Value Ratios, (vi) the Mortgage Rates borne by the Mortgage Loans, or
the range thereof, and the weighted average Mortgage Rate borne by the Mortgage
Loans, (vii) with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
Loans"), the index or indices upon which such adjustments are based, the
adjustment dates, the range of gross margins and the weighted average gross
margin, and any limits on Mortgage Rate adjustments at the time of any
adjustment and over the life of the ARM Loan, (viii) information regarding the
payment characteristics of the Mortgage Loans, including, without limitation,
balloon payment and other amortization provisions, Lockout Periods and
Prepayment Premiums, (ix) the Debt Service Coverage Ratios of the Mortgage Loans
(either at origination or as of a more recent date), or the range thereof, and
the weighted average of such Debt Service Coverage Ratios, and (x) the
geographic distribution of the Mortgaged Properties on a state-by-state basis.
In appropriate cases, the related Prospectus Supplement will also contain
certain information available to the Depositor that pertains to the provisions
of leases and the nature of tenants of the Mortgaged Properties. If the
Depositor is unable to provide the specific information described above at the
time Offered Certificates of a series are initially offered, more general
information of the nature described above will be provided in the related
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of those Certificates at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Commission within fifteen days following such issuance.
If any Mortgage Loan, or group of related Mortgage Loans, constitutes a
concentration of credit risk, financial statements or other financial
information with respect to the related Mortgaged Property or Mortgaged
Properties will be included in the related Prospectus Supplement.
If and to the extent available and relevant to an investment decision in
the Offered Certificates of the related series, information regarding the
prepayment experience of a Master Servicer's multifamily and/or commercial
mortgage loan servicing portfolio will be included in the related Prospectus
Supplement. However, many servicers do not maintain records regarding such
matters or, at least, not in a format that can be readily aggregated. In
addition, the relevant characteristics of a Master Servicer's servicing
portfolio may be so materially different from those of the related Mortgage
Asset Pool that such prepayment experience would not be meaningful to an
investor. For example, differences in geographic dispersion, property type
and/or loan terms (e.g., mortgage rates, terms to maturity and/or prepayment
restrictions) between the two pools of loans could render the Master Servicer's
prepayment experience irrelevant. Because of the nature of the assets to be
serviced and administered by a Special Servicer, no comparable prepayment
information will be presented with respect to the Special Servicer's multifamily
and/or commercial mortgage loan servicing portfolio.
Mortgage Loans Secured by Health Care-Related Properties. The Mortgaged
Properties may include Senior Housing, Assisted Living Facilities, Skilled
Nursing Facilities and Acute Care Facilities (any of the foregoing, "Health
Care-Related Facilities"). "Senior Housing" generally consist of facilities with
respect to which the residents are ambulatory, handle their
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own affairs and typically are couples whose children have left the home and at
which the accommodations are usually apartment style. "Assisted Living
Facilities" are typically single or double room occupancy, dormitory-style
housing facilities which provide food service, cleaning and some personal care
and with respect to which the tenants are able to medicate themselves but may
require assistance with certain daily routines. "Skilled Nursing Facilities"
provide services to post trauma and frail residents with limited mobility who
require extensive medical treatment. "Acute Care Facilities" generally consist
of hospital and other facilities providing short-term, acute medical care
services.
Certain types of Health Care-Related Properties, particularly Acute Care
Facilities, Skilled Nursing Facilities and some Assisted Living Facilities,
typically receive a substantial portion of their revenues from government
reimbursement programs, primarily Medicaid and Medicare. Medicaid and Medicare
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, policy interpretations, delays by fiscal intermediaries
and government funding restrictions. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers, and
there exist various proposals for national health care reform that could further
limit those payments. Accordingly, there can be no assurance that payments under
government reimbursement programs will, in the future, be sufficient to fully
reimburse the cost of caring for program beneficiaries. If such payments are
insufficient, net operating income of those Health Care-Related Facilities that
receive revenues from those sources, and consequently the ability of the related
borrowers to meet their obligations under any Mortgage Loans secured thereby,
could be adversely affected.
Moreover, Health Care-Related Facilities are generally subject to federal
and state laws that relate to the adequacy of medical care, distribution of
pharmaceuticals, rate setting, equipment, personnel, operating policies and
additions to facilities and services. In addition, facilities where such care or
other medical services are provided are subject to periodic inspection by
governmental authorities to determine compliance with various standards
necessary to continued licensing under state law and continued participation in
the Medicaid and Medicare reimbursement programs. Providers of assisted living
services are also subject to state licensing requirements in certain states. The
failure of an operator to maintain or renew any required license or regulatory
approval could prevent it from continuing operations at a Health Care-Related
Facility or, if applicable, bar it from participation in government
reimbursement programs. Furthermore, under applicable federal and state laws and
regulations, Medicare and Medicaid reimbursements are generally not permitted to
be made to any person other than the provider who actually furnished the related
medical goods and services. Accordingly, in the event of foreclosure, none of
the Trustee, the Master Servicer, the Special Servicer or a subsequent lessee or
operator of any Health Care-Related Facility securing a defaulted Mortgage Loan
(a "Health Care-Related Mortgaged Property") would generally be entitled to
obtain from federal or state governments any outstanding reimbursement payments
relating to services furnished at such property prior to such foreclosure. Any
of the aforementioned events may adversely affect the ability of the related
borrowers to meet their Mortgage Loan obligations.
Government regulation applying specifically to Acute Care Facilities,
Skilled Nursing Facilities and certain types of Assisted Living Facilities
includes health planning legislation, enacted by most states, intended, at least
in part, to regulate the supply of nursing beds. The most common method of
control is the requirement that a state authority first make a determination of
need, evidenced by its issuance of a Certificate of Need ("CON"), before a
long-term care provider can establish a new facility, add beds to an existing
facility or, in some states, take certain other actions (for example, acquire
major medical equipment, make major capital expenditures, add services,
refinance long-term debt, or transfer ownership of a facility). States also
regulate nursing bed supply in other ways. For example, some states have imposed
moratoria on the licensing of new beds, or on the certification of new Medicaid
beds, or have discouraged the construction of new nursing facilities by limiting
Medicaid reimbursements allocable to the cost of new construction and equipment.
In general, a CON is site specific and operator specific; it cannot be
transferred from one site to another, or to another operator, without the
approval of the appropriate state agency. Accordingly, if a Mortgage Loan
secured by a lien on such a Health Care-Related Mortgaged Property were
foreclosed upon, the purchaser at foreclosure might be required to obtain a new
CON or an
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appropriate exemption. In addition, compliance by a purchaser with applicable
regulations may in any case require the engagement of a new operator and the
issuance of a new operating license. Upon a foreclosure, a state regulatory
agency may be willing to expedite any necessary review and approval process to
avoid interruption of care to a facility's residents, but there can be no
assurance that any will do so or that any necessary licenses or approvals will
be issued.
Further government regulation applicable to Health Care-Related Facilities
is found in the form of federal and state "fraud and abuse" laws that generally
prohibit payment or fee-splitting arrangements between health care providers
that are designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products or services.
Violation of these restrictions can result in license revocation, civil and
criminal penalties, and exclusion from participation in Medicare or Medicaid
programs. The state law restrictions in this area vary considerably from state
to state. Moreover, the federal anti- kickback law includes broad language that
potentially could be applied to a wide range of referral arrangements, and
regulations designed to create "safe harbors" under the law provide only limited
guidance. Accordingly, there can be no assurance that such laws will be
interpreted in a manner consistent with the practices of the owners or operators
of the Health Care-Related Mortgaged Properties that are subject to such laws.
The operators of Health Care-Related Facilities are likely to compete on a
local and regional basis with others that operate similar facilities, some of
which competitors may be better capitalized, may offer services not offered by
such operators, or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other sources not available to such operators. The successful operation of a
Health Care-Related Facility will generally depend upon the number of competing
facilities in the local market, as well as upon other factors such as its age,
appearance, reputation and management, the types of services it provides and,
where applicable, the quality of care and the cost of that care. The inability
of a Health Care-Related Mortgaged Property to flourish in a competitive market
may increase the likelihood of foreclosure on the related Mortgage Loan,
possibly affecting the yield on one or more classes of the related series of
Offered Certificates.
Mortgage Loans Secured by Restaurants. The Mortgaged Properties that
constitute Restaurants may include those that are individually owned and
operated and those which are part of a regionally- or nationally-known chain of
Restaurants. In each case, the related Mortgage Loan is secured by a first or
junior mortgage lien on the respective Restaurant and is further secured by a
first or junior priority security interest in certain equipment and other
property of the related borrower, which is used in the operation of the
respective Restaurant.
As with loans secured by other income-producing properties, a Mortgage Loan
secured by a Restaurant is dependent on the successful operation of the
Restaurant, which, in turn, is dependent on various factors, many of which are
beyond the control of the Restaurant operator, including but not limited to
competition from facilities having businesses similar to the Restaurant;
perceptions by prospective customers of the safety, convenience, services and
attractiveness of the Restaurant; the quality of available food products;
changes in demographics, consumer habits and traffic patterns; the ability to
provide or contract for capable management and adequate maintenance and
retroactive changes to building codes, similar ordinances and other legal
requirements. Adverse economic conditions, either local, regional or national,
may limit the amount that may be charged for food and may result in a reduction
in customers. The construction of competing food establishments can have similar
effects. Because of the nature of the business, Restaurants tend to respond to
adverse economic conditions and competition more quickly than do other
commercial properties.
The restaurant industry is highly competitive. The principal means of
competition are segment, product, price, value, quality, service, convenience,
location and the nature and condition of the Restaurant facility. A Restaurant
operator competes with all operators of comparable restaurant facilities in the
area in which its Restaurant is located. Other Restaurants could have lower
operating costs, more favorable locations, more effective marketing, more
efficient operations or better facilities.
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The location and condition of a particular Restaurant will affect the
number of customers and, to a certain extent, the prices that may be charged.
The characteristics of an area or neighborhood in which a Restaurant is located
may change over time or in relation to competing facilities, and the cleanliness
and maintenance at a Restaurant will affect the appeal of the Restaurant to
customers. In addition, the effects of poor construction quality will increase
over time in the form of increased maintenance and capital improvements. Even
good construction will deteriorate over time if management does not schedule and
perform adequate maintenance in a timely fashion. In the case of regionally- or
nationally-known chain restaurants, there may be expenditures for renovation,
refurbishment or expansion at a Restaurant regardless of its condition. While a
Restaurant may be renovated, refurbished or expanded to either maintain its
condition or remain competitive, such renovation, refurbishment or expansion may
itself entail significant risks. In addition, the business conducted at a
Restaurant may face competition from other industries and industry segments.
The success of a Restaurant which is part of either a regionally- or
nationally-known chain of restaurants can be affected by various factors such as
the management practices of the respective franchisor, a lack of support by such
franchisor, its franchisee organizations or third party providers of products or
services or the bankruptcy or business discontinuation of any such franchisor,
franchisee organization or third party may adversely affect the operating
results of the related Restaurants. Furthermore, the transferability of
franchise license agreements may be restricted and, in the event of foreclosure,
there can be no assurance that the related Restaurant would have the right to
continue to use the license. In addition, the ability of a Restaurant to attract
customers, and some of such Restaurant's revenues, may depend in large part on
its having a liquor license. Such a license may not be transferable (for
example, in connection with a foreclosure).
MBS
MBS may include (i) private-label (that is, not issued, insured or
guaranteed by the United States or any agency or instrumentality thereof)
mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates issued and/or insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA"), the Governmental National Mortgage
Association ("GNMA") or the Federal Agricultural Mortgage Corporation ("FAMC"),
provided that, unless otherwise specified in the related Prospectus Supplement,
each MBS will evidence an interest in, or will be secured by a pledge of,
mortgage loans that conform to the descriptions of the Mortgage Loans contained
herein.
Except in the case of a pro rata mortgage participation in a single
mortgage loan or a pool of mortgage loans, each MBS included in a Mortgage Asset
Pool: (a) either will (i) have been previously registered under the Securities
Act of 1933, as amended, (ii) be exempt from such registration requirements or
(iii) have been held for at least the holding period specified in Rule 144(k)
under the Securities Act of 1933, as amended; and (b) either (i) will have been
acquired (other than from the Depositor or an affiliate thereof) in bona fide
secondary market transactions or (ii) if so specified in the related Prospectus
Supplement, may be derived from the Depositor's (or an affiliate's) unsold
allotments from the Depositor (or an affiliate's) previous offerings.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). The issuer of the MBS (the "MBS Issuer") and/or the
servicer of the underlying mortgage loans (the "MBS Servicer") will be parties
to the MBS Agreement, generally together with a trustee (the "MBS Trustee") or,
in the alternative, with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Issuer, the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. The MBS
Issuer or the MBS Servicer or another person specified
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in the related Prospectus Supplement may have the right or obligation to
repurchase or substitute assets underlying the MBS after a certain date or under
other circumstances specified in the related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit support, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify: (i) the aggregate approximate initial and
outstanding principal amount(s) and type of the MBS to be included in the Trust
Fund, (ii) the original and remaining term(s) to stated maturity of the MBS, if
applicable, (iii) the pass-through or bond rate(s) of the MBS or the formula for
determining such rate(s), (iv) the payment characteristics of the MBS, (v) the
MBS Issuer, MBS Servicer and MBS Trustee, as applicable, of each of the MBS,
(vi) a description of the related credit support, if any, (vii) the
circumstances under which the related underlying mortgage loans, or the MBS
themselves, may be purchased prior to their maturity, (viii) the terms on which
mortgage loans may be substituted for those originally underlying the MBS, (ix)
the type of mortgage loans underlying the MBS and, to the extent appropriate
under the circumstances, such other information in respect of the underlying
mortgage loans described under "-Mortgage Loans-Mortgage Loan Information in
Prospectus Supplements", and (x) the characteristics of any cash flow agreements
that relate to the MBS.
The Depositor will provide the same information regarding the MBS in any
Trust Fund in its reports filed under the Exchange Act with respect to such
Trust Fund as was provided by the related MBS Issuer in its own such reports if
such MBS was publicly offered or the reports the related MBS Issuer provides the
related MBS Trustee if such MBS was privately issued.
Certificate Accounts
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which all payments and collections received or advanced
with respect to the Mortgage Assets and other assets in the Trust Fund will be
deposited to the extent described herein and in the related Prospectus
Supplement. See "Description of the Pooling Agreements-Certificate Account".
Credit Support
If so provided in the Prospectus Supplement for a series of Certificates,
partial or full protection against certain defaults and losses on the Mortgage
Assets in the related Trust Fund may be provided to one or more classes of
Certificates of such series in the form of subordination of one or more other
classes of Certificates of such series or by one or more other types of Credit
Support, which may include a letter of credit, a surety bond, an insurance
policy, a guarantee, a reserve fund, or any combination thereof. The amount and
types of such Credit Support, the identity of the entity providing it (if
applicable) and related information with respect to each type of Credit Support,
if any, will be set forth in the Prospectus Supplement for a series of
Certificates. See "Risk Factors-Credit Support Limitations" and "Description of
Credit Support".
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Cash Flow Agreements
If so provided in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include guaranteed investment contracts pursuant to
which moneys held in the funds and accounts established for such series will be
invested at a specified rate. The Trust Fund may also include interest rate
exchange agreements, interest rate cap or floor agreements, or other agreements
designed to reduce the effects of interest rate fluctuations on the Mortgage
Assets on one or more classes of Certificates. The principal terms of any such
Cash Flow Agreement, including, without limitation, provisions relating to the
timing, manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the related Prospectus Supplement. The
related Prospectus Supplement will also identify the obligor under the Cash Flow
Agreement.
YIELD AND MATURITY CONSIDERATIONS
General
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount and
timing of distributions on the Certificate. See "Risk Factors-Effect of
Prepayments on Average Life of Certificates". The following discussion
contemplates a Trust Fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying an MBS can generally
be expected to have the same effect on the yield to maturity and/or weighted
average life of a class of Certificates as will the characteristics and behavior
of comparable Mortgage Loans, the effect may differ due to the payment
characteristics of the MBS. If a Trust Fund includes MBS, the related Prospectus
Supplement will discuss the effect, if any, that the payment characteristics of
the MBS may have on the yield to maturity and weighted average lives of the
Offered Certificates of the related series.
Pass-Through Rate
The Certificates of any class within a series may have a fixed, variable or
adjustable Pass-Through Rate, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related Trust Fund. The Prospectus
Supplement with respect to any series of Certificates will specify the
Pass-Through Rate for each class of Offered Certificates of such series or, in
the case of a class of Offered Certificates with a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the effect,
if any, of the prepayment of any Mortgage Loan on the Pass-Through Rate of one
or more classes of Offered Certificates; and whether the distributions of
interest on the Offered Certificates of any class will be dependent, in whole or
in part, on the performance of any obligor under a Cash Flow Agreement.
Payment Delays
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related Trust
Fund are due and the Distribution Date on which such payments are passed through
to Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on the date they were due.
Certain Shortfalls in Collections of Interest
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest on the amount of such prepayment only
through the date of such prepayment, instead of through the Due Date for the
next
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succeeding scheduled payment. However, interest accrued on any series of
Certificates and distributable thereon on any Distribution Date will generally
correspond to interest accrued on the Mortgage Loans to their respective Due
Dates during the related Due Period. A "Due Period" will be a specified time
period (generally corresponding in length to the period between Distribution
Dates) and all scheduled payments on the Mortgage Loans in the related Trust
Fund that are due during a given Due Period will, to the extent received by a
specified date (the "Determination Date") or otherwise advanced by the related
Master Servicer, Special Servicer or other specified person, be distributed to
the holders of the Certificates of such series on the next succeeding
Distribution Date. Consequently, if a prepayment on any Mortgage Loan is
distributable to Certificateholders on a particular Distribution Date, but such
prepayment is not accompanied by interest thereon to the Due Date for such
Mortgage Loan in the related Due Period, then the interest charged to the
borrower (net of servicing and administrative fees) may be less (such shortfall,
a "Prepayment Interest Shortfall") than the corresponding amount of interest
accrued and otherwise payable on the Certificates of the related series. If and
to the extent that any such shortfall is allocated to a class of Offered
Certificates, the yield thereon will be adversely affected. The Prospectus
Supplement for each series of Certificates will describe the manner in which any
such shortfalls will be allocated among the classes of such Certificates. The
related Prospectus Supplement will also describe any amounts available to offset
such shortfalls.
Yield and Prepayment Considerations
A Certificate's yield to maturity will be affected by the rate of principal
payments on the Mortgage Loans in the related Trust Fund and the allocation
thereof to reduce the principal balance (or notional amount, if applicable) of
such Certificate. The rate of principal payments on the Mortgage Loans in any
Trust Fund will in turn be affected by the amortization schedules thereof
(which, in the case of ARM Loans, may change periodically to accommodate
adjustments to the Mortgage Rates thereon), the dates on which any balloon
payments are due, and the rate of principal prepayments thereon (including for
this purpose, voluntary prepayments by borrowers and also prepayments resulting
from liquidations of Mortgage Loans due to defaults, casualties or condemnations
affecting the related Mortgaged Properties, or purchases of Mortgage Loans out
of the related Trust Fund). Because the rate of principal prepayments on the
Mortgage Loans in any Trust Fund will depend on future events and a variety of
factors (as described below), no assurance can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend upon
the degree to which they are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans in the related Trust
Fund are in turn distributed on such Certificates (or, in the case of a class of
Stripped Interest Certificates, result in the reduction of the Notional Amount
thereof). An investor should consider, in the case of any Offered Certificate
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans in the related Trust Fund could result
in an actual yield to such investor that is lower than the anticipated yield
and, in the case of any Offered Certificate purchased at a premium, the risk
that a faster than anticipated rate of principal payments on such Mortgage Loans
could result in an actual yield to such investor that is lower than the
anticipated yield. In addition, if an investor purchases an Offered Certificate
at a discount (or premium), and principal payments are made in reduction of the
principal balance or notional amount of such investor's Offered Certificates at
a rate slower (or faster) than the rate anticipated by the investor during any
particular period, any consequent adverse effects on such investor's yield would
not be fully offset by a subsequent like increase (or decrease) in the rate of
principal payments.
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related Trust Fund or (ii) equal the Certificate
Balances of one or more of the other classes of Certificates of the same series.
Accordingly, the yield on such Stripped Interest Certificates will be inversely
related to the rate at which payments and other collections of principal are
received on such Mortgage Assets or distributions are made in reduction of the
Certificate Balances of such classes of Certificates, as the case may be.
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Consistent with the foregoing, if a class of Certificates of any series
consists of Stripped Interest Certificates or Stripped Principal Certificates, a
lower than anticipated rate of principal prepayments on the Mortgage Loans in
the related Trust Fund will negatively affect the yield to investors in Stripped
Principal Certificates, and a higher than anticipated rate of principal
prepayments on such Mortgage Loans will negatively affect the yield to investors
in Stripped Interest Certificates. If the Offered Certificates of a series
include any such Certificates, the related Prospectus Supplement will include a
table showing the effect of various constant assumed levels of prepayment on
yields on such Certificates. Such tables will be intended to illustrate the
sensitivity of yields to various constant assumed prepayment rates and will not
be intended to predict, or to provide information that will enable investors to
predict, yields or prepayment rates.
The extent of prepayments of principal of the Mortgage Loans in any Trust
Fund may be affected by a number of factors, including, without limitation, the
availability of mortgage credit, the relative economic vitality of the area in
which the Mortgaged Properties are located, the quality of management of the
Mortgaged Properties, the servicing of the Mortgage Loans, possible changes in
tax laws and other opportunities for investment. In general, those factors which
increase the attractiveness of selling a Mortgaged Property or refinancing a
Mortgage Loan or which enhance a borrower's ability to do so, as well as those
factors which increase the likelihood of default under a Mortgage Loan, would be
expected to cause the rate of prepayment in respect of any Mortgage Asset Pool
to accelerate. In contrast, those factors having an opposite effect would be
expected to cause the rate of prepayment of any Mortgage Asset Pool to slow.
The rate of principal payments on the Mortgage Loans in any Trust Fund may
also be affected by the existence of Lock-out Periods and requirements that
principal prepayments be accompanied by Prepayment Premiums, and by the extent
to which such provisions may be practicably enforced. To the extent enforceable,
such provisions could constitute either an absolute prohibition (in the case of
a Lock-out Period) or a disincentive (in the case of a Prepayment Premium) to a
borrower's voluntarily prepaying its Mortgage Loan, thereby slowing the rate of
prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be affected
by prevailing market interest rates for mortgage loans of a comparable type,
term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Even in the case of ARM Loans, as prevailing market interest
rates decline, and without regard to whether the Mortgage Rates on such ARM
Loans decline in a manner consistent therewith, the related borrowers may have
an increased incentive to refinance for purposes of either (i) converting to a
fixed rate loan and thereby "locking in" such rate or (ii) taking advantage of a
different index, margin or rate cap or floor on another adjustable rate mortgage
loan. Therefore, as prevailing market interest rates decline, prepayment speeds
would be expected to accelerate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits. The Depositor
makes no representation as to the particular factors that will affect the
prepayment of the Mortgage Loans in any Trust Fund, as to the relative
importance of such factors, as to the percentage of the principal balance of
such Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment on such Mortgage Loans.
Weighted Average Life and Maturity
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average life
of one or more classes of the Certificates of such series. Unless otherwise
specified
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in the related Prospectus Supplement, weighted average life refers to the
average amount of time that will elapse from the date of issuance of an
instrument until each dollar allocable as principal of such instrument is repaid
to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related Mortgage
Loans, whether in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes voluntary prepayments by borrowers and
also prepayments resulting from liquidations of Mortgage Loans due to default,
casualties or condemnations affecting the related Mortgaged Properties and
purchases of Mortgage Loans out of the related Trust Fund), is paid to such
class. Prepayment rates on loans are commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents
an assumed constant rate of prepayment each month (expressed as an annual
percentage) relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage) relative to
the then outstanding principal balance of a pool of mortgage loans, with
different prepayment assumptions often expressed as percentages of SPA. For
example, a prepayment assumption of 100% of SPA assumes prepayment rates of 0.2%
per annum of the then outstanding principal balance of such loans in the first
month of the life of the loans and an additional 0.2% per annum in each month
thereafter until the thirtieth month. Beginning in the thirtieth month, and in
each month thereafter during the life of the loans, 100% of SPA assumes a
constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. Thus, it is unlikely that the
prepayment experience of the Mortgage Loans included in any Trust Fund will
conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Certificates of such series with a Certificate Balance,
and the percentage of the initial Certificate Balance of each such class that
would be outstanding on specified Distribution Dates, based on the assumptions
stated in such Prospectus Supplement, including assumptions that prepayments on
the related Mortgage Loans are made at rates corresponding to various
percentages of CPR or SPA, or at such other rates specified in such Prospectus
Supplement. Such tables and assumptions will illustrate the sensitivity of the
weighted average lives of the Certificates to various assumed prepayment rates
and will not be intended to predict, or to provide information that will enable
investors to predict, the actual weighted average lives of the Certificates.
Other Factors Affecting Yield, Weighted Average Life and Maturity
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage Loans
included in a particular Trust Fund may require that balloon payments be made at
maturity. Because the ability of a borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a possibility that Mortgage Loans that require
balloon payments may default at maturity, or that the maturity of such a
Mortgage Loan may be extended in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things, bankruptcy
of the borrower or adverse conditions in the market where the property is
located. In order to minimize losses on defaulted Mortgage Loans, the Master
Servicer or the Special Servicer, to the extent and under the circumstances set
forth herein and in the related Prospectus Supplement, may be authorized to
modify Mortgage Loans that are in default or as to which a payment default is
imminent. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan may delay distributions of principal on a class of
Offered Certificates and thereby extend the weighted average life of such
Certificates and, if such Certificates were purchased at a discount, reduce the
yield thereon.
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Negative Amortization. The weighted average life of a class of Certificates
can be affected by Mortgage Loans that permit negative amortization to occur
(that is, Mortgage Loans that provide for the current payment of interest
calculated at a rate lower than the rate at which interest accrues thereon, with
the unpaid portion of such interest being added to the related principal
balance). Negative amortization on one or more Mortgage Loans in any Trust Fund
may result in negative amortization on the Offered Certificates of the related
series. The related Prospectus Supplement will describe, if applicable, the
manner in which negative amortization in respect of the Mortgage Loans in any
Trust Fund is allocated among the respective classes of Certificates of the
related series. The portion of any Mortgage Loan negative amortization allocated
to a class of Certificates may result in a deferral of some or all of the
interest payable thereon, which deferred interest may be added to the
Certificate Balance thereof. In addition, an ARM Loan that permits negative
amortization would be expected during a period of increasing interest rates to
amortize at a slower rate (and perhaps not at all) than if interest rates were
declining or were remaining constant. Such slower rate of Mortgage Loan
amortization would correspondingly be reflected in a slower rate of amortization
for one or more classes of Certificates of the related series. Accordingly, the
weighted average lives of Mortgage Loans that permit negative amortization (and
that of the classes of Certificates to which any such negative amortization
would be allocated or that would bear the effects of a slower rate of
amortization on such Mortgage Loans) may increase as a result of such feature.
Negative amortization may occur in respect of an ARM Loan that (i) limits
the amount by which its scheduled payment may adjust in response to a change in
its Mortgage Rate, (ii) provides that its scheduled payment will adjust less
frequently than its Mortgage Rate or (iii) provides for constant scheduled
payments notwithstanding adjustments to its Mortgage Rate. Accordingly, during a
period of declining interest rates, the scheduled payment on such a Mortgage
Loan may exceed the amount necessary to amortize the loan fully over its
remaining amortization schedule and pay interest at the then applicable Mortgage
Rate, thereby resulting in the accelerated amortization of such Mortgage Loan.
Any such acceleration in amortization of its principal balance will shorten the
weighted average life of such Mortgage Loan and, correspondingly, the weighted
average lives of those classes of Certificates entitled to a portion of the
principal payments on such Mortgage Loan.
The extent to which the yield on any Offered Certificate will be affected
by the inclusion in the related Trust Fund of Mortgage Loans that permit
negative amortization, will depend upon (i) whether such Offered Certificate was
purchased at a premium or a discount and (ii) the extent to which the payment
characteristics of such Mortgage Loans delay or accelerate the distributions of
principal on such Certificate (or, in the case of a Stripped Interest
Certificate, delay or accelerate the reduction of the notional amount thereof).
See "-Yield and Prepayment Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance with
their terms will affect the weighted average lives of those Mortgage Loans and,
accordingly, the weighted average lives of and yields on the Certificates of the
related series. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceedings or otherwise, may also
have an effect upon the payment patterns of particular Mortgage Loans and thus
the weighted average lives of and yields on the Certificates of the related
series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
Offered Certificates of any series will directly depend on the extent to which
such holders are required to bear the effects of any losses or shortfalls in
collections arising out of defaults on the Mortgage Loans in the related Trust
Fund and the timing of such losses and shortfalls. In general, the earlier that
any such loss or shortfall occurs, the greater will be the negative effect on
yield for any class of Certificates that is required to bear the effects
thereof.
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The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by (i) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of Certificates and/or (ii)
establishing a priority of payments among such classes of Certificates.
The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the holders
thereof to a specified portion (which may during specified periods range from
none to all) of the principal payments received on the Mortgage Assets in the
related Trust Fund, one or more classes of Certificates of any series, including
one or more classes of Offered Certificates of such series, may provide for
distributions of principal thereof from (i) amounts attributable to interest
accrued but not currently distributable on one or more classes of Accrual
Certificates, (ii) Excess Funds or (iii) any other amounts described in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, "Excess Funds" will, in general, represent that portion
of the amounts distributable in respect of the Certificates of any series on any
Distribution Date that represent (i) interest received or advanced on the
Mortgage Assets in the related Trust Fund that is in excess of the interest
currently accrued on the Certificates of such series, or (ii) Prepayment
Premiums, payments from Equity Participations or any other amounts received on
the Mortgage Assets in the related Trust Fund that do not constitute interest
thereon or principal thereof.
The amortization of any class of Certificates out of the sources described
in the preceding paragraph would shorten the weighted average life of such
Certificates and, if such Certificates were purchased at a premium, reduce the
yield thereon. The related Prospectus Supplement will discuss the relevant
factors to be considered in determining whether distributions of principal of
any class of Certificates out of such sources is likely to have any material
effect on the rate at which such Certificates are amortized and the consequent
yield with respect thereto.
THE DEPOSITOR
The Depositor is a special purpose corporation incorporated in the State of
Delaware on March 22, 1996, for the purpose of engaging in the business, among
other things, of acquiring and depositing mortgage assets in trust in exchange
for certificates evidencing interest in such trusts and selling or otherwise
distributing such certificates. The Depositor is not an affiliate of Deutsche
Bank AG. The principal executive offices of the Depositor are located at One
International Place, Room 608, Boston, Massachusetts 02110. Its telephone number
is (617) 951-7690. The Depositor's capitalization is nominal. All of the shares
of capital stock of the Depositor are held by The Deutsche Mortgage & Asset
Receiving Trust, a Massachusetts charitable lead trust (the "DMARC Trust")
formed by J H Management Corporation and J H Holdings Corporation, both of which
are Massachusetts corporations. J H Holdings Corporation is the trustee of the
DMARC Trust, which holds no assets other than the stock of the Depositor. All of
the stock of J H Holdings Corporation and of J H Management Corporation is held
by the 1960 Trust, an independent charitable organization qualified under
Section 501(c)(3) of the Code, and operated for the benefit of a Massachusetts
charitable institution.
None of the Depositor, J H Management Corporation, Deutsche Bank A.G. or
any of their respective affiliates will insure or guarantee distributions on the
Certificates of any series.
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DEUTSCHE BANK AG
It is anticipated that the assets conveyed to the Trust Fund by the
Depositor will have been acquired by the Depositor from Deutsche Bank AG or an
affiliate thereof. Deutsche Bank AG is the largest banking institution in the
Federal Republic of Germany and one of the largest in the world. It is the
parent company of a group (the "Deutsche Bank Group") consisting of commercial
banks, investment banking and fund management companies, mortgage banks and
property finance companies, installment financing and leasing companies,
insurance companies, research and consultancy companies and other domestic and
foreign companies. The Deutsche Bank Group employs over 74,000 staff members at
more than 2,400 branches and offices around the world.
DESCRIPTION OF THE CERTIFICATES
General
Each series of Certificates will represent the entire beneficial ownership
interest in the Trust Fund created pursuant to the related Pooling Agreement. As
described in the related Prospectus Supplement, the Certificates of each series,
including the Offered Certificates of such series, may consist of one or more
classes of Certificates that, among other things: (i) provide for the accrual of
interest on the Certificate Balance or Notional Amount thereof at a fixed,
variable or adjustable rate; (ii) constitute Senior Certificates or Subordinate
Certificates; (iii) constitute Stripped Interest Certificates or Stripped
Principal Certificates; (iv) provide for distributions of interest thereon or
principal thereof that commence only after the occurrence of certain events,
such as the retirement of one or more other classes of Certificates of such
series; (v) provide for distributions of principal thereof to be made, from time
to time or for designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower) than
the rate at which payments or other collections of principal are received on the
Mortgage Assets in the related Trust Fund; (vi) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology; or (vii) provide for
distributions based on collections on the Mortgage Assets in the related Trust
Fund attributable to Prepayment Premiums and Equity Participations.
If so specified in the related Prospectus Supplement, a class of
Certificates may have two or more component parts, each having characteristics
that are otherwise described herein as being attributable to separate and
distinct classes. For example, a class of Certificates may have a Certificate
Balance on which it accrues interest at a fixed, variable or adjustable rate.
Such class of Certificates may also have certain characteristics attributable to
Stripped Interest Certificates insofar as it may also entitle the holders
thereof to distributions of interest accrued on a Notional Amount at a different
fixed, variable or adjustable rate. In addition, a class of Certificates may
accrue interest on one portion of its Certificate Balance at one fixed, variable
or adjustable rate and on another portion of its Certificate Balance at a
different fixed, variable or adjustable rate.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the principal balances or, in case of certain
classes of Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully registered,
definitive form (such Certificates, "Definitive Certificates") or may be offered
in book-entry format (such Certificates, "Book-Entry Certificates") through the
facilities of DTC. The Offered Certificates of each series (if issued as
Definitive Certificates) may be transferred or exchanged, subject to any
restrictions on transfer described in the related Prospectus Supplement, at the
location specified in the related Prospectus Supplement, without the payment of
any service charges, other than any tax or other governmental
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charge payable in connection therewith. Interests in a class of Book-Entry
Certificates will be transferred on the book-entry records of DTC and its
participating organizations. If so specified in the related Prospectus
Supplement, arrangements may be made for clearance and settlement through CEDEL,
S.A. or the Euroclear System, if they are participants in DTC.
Distributions
Distributions on the Certificates of each series will be made on each
Distribution Date from the Available Distribution Amount for such series and
such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the "Available Distribution Amount" for any series of Certificates
and any Distribution Date will refer to the total of all payments or other
collections (or advances in lieu thereof) on, under or in respect of the
Mortgage Assets and any other assets included in the related Trust Fund that are
available for distribution to the holders of Certificates of such series on such
date. The particular components of the Available Distribution Amount for any
series and Distribution Date will be more specifically described in the related
Prospectus Supplement. In general, the Distribution Date for a series of
Certificates will be the 25th day of each month (or, if any such 25th day is not
a business day, the next succeeding business day), commencing in the month
immediately following the month in which such series of Certificates is issued.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such class
in proportion to the respective Percentage Interests evidenced thereby unless
otherwise specified in the related Prospectus Supplement. Payments will be made
either by wire transfer in immediately available funds to the account of a
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder has provided the person required to make
such payments with wiring instructions no later than the related Record Date or
such other date specified in the related Prospectus Supplement (and, if so
provided in the related Prospectus Supplement, such Certificateholder holds
Certificates in the requisite amount or denomination specified therein), or by
check mailed to the address of such Certificateholder as it appears on the
Certificate Register; provided, however, that the final distribution in
retirement of any class of Certificates (whether Definitive Certificates or
Book-Entry Certificates) will be made only upon presentation and surrender of
such Certificates at the location specified in the notice to Certificateholders
of such final distribution. The undivided percentage interest (the "Percentage
Interest") represented by an Offered Certificate of a particular class will be
equal to the percentage obtained by dividing the initial principal balance or
notional amount of such Certificate by the initial Certificate Balance or
Notional Amount of such class.
Distributions of Interest on the Certificates
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC Residual
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which in each case may be fixed, variable or adjustable. The related
Prospectus Supplement will specify the Pass-Through Rate or, in the case of a
variable or adjustable Pass-Through Rate, the method for determining the
Pass-Through Rate, for each class of Offered Certificates. Unless otherwise
specified in the related Prospectus Supplement, interest on the Certificates of
each series will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Distributions of interest in respect of any class of Certificates (other
than a class of Accrual Certificates, which will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified
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in the related Prospectus Supplement, and other than any class of Stripped
Principal Certificates or REMIC Residual Certificates that is not entitled to
any distributions of interest) will be made on each Distribution Date based on
the Accrued Certificate Interest for such class and such Distribution Date,
subject to the sufficiency of that portion, if any, of the Available
Distribution Amount allocable to such class on such Distribution Date. Prior to
the time interest is distributable on any class of Accrual Certificates, the
amount of Accrued Certificate Interest otherwise distributable on such class
will be added to the Certificate Balance thereof on each Distribution Date or
otherwise deferred as described in the related Prospectus Supplement. With
respect to each class of Certificates (other than certain classes of Stripped
Interest Certificates and certain classes of REMIC Residual Certificates), the
"Accrued Certificate Interest" for each Distribution Date will be equal to
interest at the applicable Pass-Through Rate accrued for a specified period
(generally the most recently ended calendar month) on the outstanding
Certificate Balance of such class of Certificates immediately prior to such
Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the Accrued Certificate Interest for each Distribution Date on a
class of Stripped Interest Certificates will be similarly calculated except that
it will accrue on a Notional Amount that is either (i) based on the principal
balances of some or all of the Mortgage Assets in the related Trust Fund or (ii)
equal to the Certificate Balances of one or more other classes of Certificates
of the same series. Reference to a Notional Amount with respect to a class of
Stripped Interest Certificates is solely for convenience in making certain
calculations and does not represent the right to receive any distributions of
principal. If so specified in the related Prospectus Supplement, the amount of
Accrued Certificate Interest that is otherwise distributable on (or, in the case
of Accrual Certificates, that may otherwise be added to the Certificate Balance
of) one or more classes of the Certificates of a series may be reduced to the
extent that any Prepayment Interest Shortfalls, as described under "Yield and
Maturity Considerations-Certain Shortfalls in Collections of Interest", exceed
the amount of any sums that are applied to offset the amount of such shortfalls.
The particular manner in which such shortfalls will be allocated among some or
all of the classes of Certificates of that series will be specified in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe the extent to which the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Certificates, that may
otherwise be added to the Certificate Balance of) a class of Offered
Certificates may be reduced as a result of any other contingencies, including
delinquencies, losses and deferred interest on or in respect of the Mortgage
Assets in the related Trust Fund. Unless otherwise provided in the related
Prospectus Supplement, any reduction in the amount of Accrued Certificate
Interest otherwise distributable on a class of Certificates by reason of the
allocation to such class of a portion of any deferred interest on or in respect
of the Mortgage Assets in the related Trust Fund will result in a corresponding
increase in the Certificate Balance of such class. See "Risk Factors-Effect of
Prepayments on Average Life of Certificates" and "-Effect of Prepayments on
Yield of Certificates" and "Yield and Maturity Considerations-Certain Shortfalls
in Collections of Interest".
Distributions of Principal of the Certificates
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of Certificates of such class will be
entitled to receive as principal out of the future cash flow on the Mortgage
Assets and other assets included in the related Trust Fund. The outstanding
Certificate Balance of a class of Certificates will be reduced by distributions
of principal made thereon from time to time and, if and to the extent so
provided in the related Prospectus Supplement, further by any losses incurred in
respect of the related Mortgage Assets allocated thereto from time to time. In
turn, the outstanding Certificate Balance of a class of Certificates may be
increased as a result of any deferred interest on or in respect of the related
Mortgage Assets being allocated thereto from time to time, and will be
increased, in the case of a class of Accrual Certificates prior to the
Distribution Date on which distributions of interest thereon are required to
commence, by the amount of any Accrued Certificate Interest in respect thereof
(reduced as described above). The initial aggregate Certificate Balance of all
classes of a series of Certificates will not be greater than the aggregate
outstanding principal balance of the related Mortgage Assets as of a specified
date (the "Cut-off Date"), after application of scheduled payments due on or
before such date, whether or not received. The initial Certificate Balance of
each class of a series of
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Certificates will be specified in the related Prospectus Supplement. As and to
the extent described in the related Prospectus Supplement, distributions of
principal with respect to a series of Certificates will be made on each
Distribution Date to the holders of the class or classes of Certificates of such
series entitled thereto until the Certificate Balances of such Certificates have
been reduced to zero. Distributions of principal with respect to one or more
classes of Certificates may be made at a rate that is faster (and, in some
cases, substantially faster) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund. Distributions of principal with respect to one or more classes of
Certificates may not commence until the occurrence of certain events, such as
the retirement of one or more other classes of Certificates of the same series,
or may be made at a rate that is slower (and, in some cases, substantially
slower) than the rate at which payments or other collections of principal are
received on the Mortgage Assets in the related Trust Fund. Distributions of
principal with respect to one or more classes of Certificates (each such class,
a "Controlled Amortization Class") may be made, subject to available funds,
based on a specified principal payment schedule. Distributions of principal with
respect to one or more other classes of Certificates (each such class, a
"Companion Class") may be contingent on the specified principal payment schedule
for a Controlled Amortization Class of the same series and the rate at which
payments and other collections of principal on the Mortgage Assets in the
related Trust Fund are received. Unless otherwise specified in the related
Prospectus Supplement, distributions of principal of any class of Offered
Certificates will be made on a pro rata basis among all of the Certificates of
such class.
Distributions on the Certificates in Respect of Prepayment Premiums or in
Respect of Equity Participations
If so provided in the related Prospectus Supplement, Prepayment Premiums or
payments in respect of Equity Participations received on or in connection with
the Mortgage Assets in any Trust Fund will be distributed on each Distribution
Date to the holders of the class of Certificates of the related series entitled
thereto in accordance with the provisions described in such Prospectus
Supplement. Alternatively, such items may be retained by the Depositor or any of
its affiliates or by any other specified person and/or may be excluded as Trust
Assets.
Allocation of Losses and Shortfalls
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may be effected by (i) a reduction in the entitlements to interest and/or the
Certificate Balances of one or more such classes of Certificates and/or (ii)
establishing a priority of payments among such classes of Certificates. See
"Description of Credit Support".
Advances in Respect of Delinquencies
If and to the extent provided in the related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the Master Servicer, the Special Servicer,
the Trustee, any provider of Credit Support and/or any other specified person
may be obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of Certificates for such Distribution Date, an
amount up to the aggregate of any payments of principal (other than the
principal portion of any balloon payments) and interest that were due on or in
respect of such Mortgage Loans during the related Due Period and were delinquent
on the related Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made
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out of a specific entity's own funds will be reimbursable out of related
recoveries on the Mortgage Loans (including amounts drawn under any fund or
instrument constituting Credit Support) respecting which such advances were made
(as to any Mortgage Loan, "Related Proceeds") and such other specific sources as
may be identified in the related Prospectus Supplement, including, in the case
of a series that includes one or more classes of Subordinate Certificates, if so
identified, collections on other Mortgage Assets in the related Trust Fund that
would otherwise be distributable to the holders of one or more classes of such
Subordinate Certificates. No advance will be required to be made by a Master
Servicer, Special Servicer or Trustee if, in the judgment of the Master
Servicer, Special Servicer or Trustee, as the case may be, such advance would
not be recoverable from Related Proceeds or another specifically identified
source (any such advance, a "Nonrecoverable Advance"); and, if previously made
by a Master Servicer, Special Servicer or Trustee, a Nonrecoverable Advance will
be reimbursable thereto from any amounts in the related Certificate Account
prior to any distributions being made to the related series of
Certificateholders.
If advances have been made by a Master Servicer, Special Servicer, Trustee
or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will be
required to replace such funds in such Certificate Account on or prior to any
future Distribution Date to the extent that funds in such Certificate Account on
such Distribution Date are less than payments required to be made to the related
series of Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer, Special Servicer,
Trustee or other entity to make advances may be secured by a cash advance
reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest on certain or all of
such advances for a specified period during which such advances are outstanding
at the rate specified in such Prospectus Supplement, and such entity will be
entitled to payment of such interest periodically from general collections on
the Mortgage Loans in the related Trust Fund prior to any payment to the related
series of Certificateholders or as otherwise provided in the related Pooling
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a party
to the related MBS Agreement.
Reports to Certificateholders
On each Distribution Date, together with the distribution to the holders of
each class of the Offered Certificates of a series, a Master Servicer, Manager
or Trustee, as provided in the related Prospectus Supplement, will forward to
each such holder, a statement (a "Distribution Date Statement") that, unless
otherwise provided in the related Prospectus Supplement, will set forth, among
other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of Offered
Certificates that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of such class of Offered
Certificates that was applied to pay Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of such class of
Offered Certificates that was allocable to (A) Prepayment Premiums and (B)
payments on account of Equity Participations;
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(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of Offered Certificates are entitled;
(v) if the related Trust Fund includes Mortgage Loans, the aggregate amount
of advances included in such distribution;
(vi) if the related Trust Fund includes Mortgage Loans, the amount of
servicing compensation received by the related Master Servicer (and, if payable
directly out of the related Trust Fund, by any Special Servicer and any
Sub-Servicer) and, if the related Trust Fund includes MBS, the amount of
administrative compensation received by the MBS Administrator;
(vii) information regarding the aggregate principal balance of the related
Mortgage Assets on or about such Distribution Date;
(viii) if the related Trust Fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of such Mortgage Loans that
are delinquent;
(ix) if the related Trust Fund includes Mortgage Loans, information
regarding the aggregate amount of losses incurred and principal prepayments made
with respect to such Mortgage Loans during the related Prepayment Period (that
is, the specified period, generally corresponding in length to the period
between Distribution Dates, during which prepayments and other unscheduled
collections on the Mortgage Loans in the related Trust Fund must be received in
order to be distributed on a particular Distribution Date);
(x) the Certificate Balance or Notional Amount, as the case may be, of such
class of Certificates at the close of business on such Distribution Date,
separately identifying any reduction in such Certificate Balance or Notional
Amount due to the allocation of any losses in respect of the related Mortgage
Assets, any increase in such Certificate Balance or Notional Amount due to the
allocation of any negative amortization in respect of the related Mortgage
Assets and any increase in the Certificate Balance of a class of Accrual
Certificates, if any, in the event that Accrued Certificate Interest has been
added to such balance;
(xi) if such class of Offered Certificates has a variable Pass-Through Rate
or an adjustable Pass-Through Rate, the Pass-Through Rate applicable thereto for
such Distribution Date and, if determinable, for the next succeeding
Distribution Date;
(xii) the amount deposited in or withdrawn from any reserve fund on such
Distribution Date, and the amount remaining on deposit in such reserve fund as
of the close of business on such Distribution Date;
(xiii) if the related Trust Fund includes one or more instruments of Credit
Support, such as a letter of credit, an insurance policy and/or a surety bond,
the amount of coverage under each such instrument as of the close of business on
such Distribution Date; and
(xiv) the amount of Credit Support being afforded by any classes of
Subordinate Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per specified
denomination of the relevant class of Offered Certificates or as a percentage.
The Prospectus Supplement for each series of Certificates may describe
additional information to be included in reports to the holders of the Offered
Certificates of such series.
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Within a reasonable period of time after the end of each calendar year, the
Master Servicer, Manager or Trustee for a series of Certificates, as the case
may be, will be required to furnish to each person who at any time during the
calendar year was a holder of an Offered Certificate of such series a statement
containing the information set forth in subclauses (i)-(iii) above, aggregated
for such calendar year or the applicable portion thereof during which such
person was a Certificateholder. Such obligation will be deemed to have been
satisfied to the extent that substantially comparable information is provided
pursuant to any requirements of the Code as are from time to time in force. See,
however, "-Book-Entry Registration and Definitive Certificates" below.
If the Trust Fund for a series of Certificates includes MBS, the ability of
the related Master Servicer, Manager or Trustee, as the case may be, to include
in any Distribution Date Statement information regarding the mortgage loans
underlying such MBS will depend on the reports received with respect to such
MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the Offered Certificates of that series
in connection with distributions made to them. The Depositor will provide the
same information with respect to any MBSs in its own reports that were publicly
offered and the reports the related MBS Issuer provides to the Trustee if
privately issued.
Voting Rights
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes of
such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except with
respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement. See
"Description of the Pooling Agreements-Amendment". The holders of specified
amounts of Certificates of a particular series will have the right to act as a
group to remove the related Trustee and also upon the occurrence of certain
events which if continuing would constitute an Event of Default on the part of
the related Master Servicer, Special Servicer or REMIC Administrator. See
"Description of the Pooling Agreements-Events of Default", "-Rights Upon Event
of Default" and "-Resignation and Removal of the Trustee".
Termination
The obligations created by the Pooling Agreement for each series of
Certificates will terminate following (i) the final payment or other liquidation
of the last Mortgage Asset subject thereto or the disposition of all property
acquired upon foreclosure of any Mortgage Loan subject thereto and (ii) the
payment (or provision for payment) to the Certificateholders of that series of
all amounts required to be paid to them pursuant to such Pooling Agreement.
Written notice of termination of a Pooling Agreement will be given to each
Certificateholder of the related series, and the final distribution will be made
only upon presentation and surrender of the Certificates of such series at the
location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the repurchase
of the Mortgage Assets in the related Trust Fund by the party or parties
specified therein, under the circumstances and in the manner set forth therein.
In addition, if so provided in the related Prospectus Supplement upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount or upon a specified date, a
party designated therein may be authorized or required to solicit bids for the
purchase of all the Mortgage Assets of the related Trust Fund,
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or of a sufficient portion of such Mortgage Assets to retire such class or
classes, under the circumstances and in the manner set forth therein. The
solicitation of bids will be conducted in a commercially reasonable manner and,
generally, assets will be sold at their fair market value. Circumstances may
arise in which such fair market value may be less than the unpaid balance of the
Mortgage Loans sold and therefore, as a result of such a sale, the
Certificateholders of one or more Classes of Certificates may receive an amount
less than the Certificate Balance of, and accrued unpaid interest on, their
Certificates.
Book-Entry Registration and Definitive Certificates
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of the Offered Certificates of such series will be offered
in book-entry format through the facilities of DTC, and each such class will be
represented by one or more global Certificates registered in the name of The
Depository Trust Company ("DTC") or its nominee. If so provided in the
Prospectus Supplement, arrangements may be made for clearance and settlement
through the Euroclear System or CEDEL, S.A., if they are participants in DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking corporation" 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 Exchange Act. DTC
was created to hold securities for its participating organizations ("DTC
Participants") and facilitate the clearance and settlement of securities
transactions between DTC Participants through electronic computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement of
securities certificates. DTC Participants that maintain accounts with DTC
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. DTC is owned by a number of
DTC Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with a DTC Participant that maintains as account with
DTC. The rules applicable to DTC and DTC Participants are on file with the
Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through, and 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 Certificates 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). Therefore, the beneficial owner must rely on the foregoing
procedures to evidence its beneficial ownership of such Certificates. The
beneficial ownership interest of the owner of a Book-Entry Certificate (a
"Certificate Owner") may only be transferred by compliance with the rules,
regulations and procedures of such Financial Intermediaries and DTC
Participants.
DTC has no knowledge of the actual Certificate Owners; DTC's records
reflect only the identity of the DTC Participants to whose accounts such
Certificates are credited, which may or may not be the Certificate Owners. The
DTC Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants
and by DTC Participants to Financial Intermediaries and Certificate Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
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Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such date.
Disbursement of such distributions by DTC Participants to Financial
Intermediaries and Certificate Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of each such DTC Participant (and not of DTC, the Depositor or
any Trustee, Master Servicer, Special Servicer or Manager), subject to any
statutory or regulatory requirements as may be in effect from time to time.
Accordingly, under a book-entry system, Certificate Owners may receive payments
after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the only
"Certificateholder" (as such term is used in the related Pooling Agreement) of
Book-Entry Certificates will be the nominee of DTC, and the Certificate Owners
will not be recognized as Certificateholders under the Pooling Agreement.
Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly through
the DTC Participants who in turn will exercise their rights through DTC. The
Depositor has been informed that DTC will take action permitted to be taken by a
Certificateholder under a Pooling Agreement only at the direction of one or more
DTC Participants to whose account with DTC interests in the Book-Entry
Certificates are credited. DTC may take conflicting actions with respect to the
Book-Entry Certificates to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Certificates.
Because DTC can act only on behalf of DTC Participants, who in turn act on
behalf of Financial Intermediaries and certain Certificate Owners, the ability
of a Certificate Owner to pledge its interest in Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of its interest in Book-Entry Certificates, may be limited
due to the lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, 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 such Certificates and the Depositor is unable to locate a
qualified successor or (ii) the Depositor, at its option, elects to terminate
the book-entry system through DTC with respect to such Certificates. Upon the
occurrence of either of the events described in the preceding sentence, DTC will
be required to notify all DTC Participants of the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the certificate or
certificates representing a class of Book-Entry Certificates, together with
instructions for registration, the Trustee for the related series or other
designated party will be required to issue to the Certificate Owners identified
in such instructions the Definitive Certificates to which they are entitled, and
thereafter the holders of such Definitive Certificates will be recognized as
"Certificateholders" under and within the meaning of the related Pooling
Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
General
The Certificates of each series will be issued pursuant to a Pooling
Agreement. In general, the parties to a Pooling Agreement will include the
Depositor, the Trustee, the Master Servicer, the Special Servicer and, if one or
more REMIC elections have been made with respect to the Trust Fund, the REMIC
Administrator. However, a Pooling Agreement that relates to a Trust Fund that
includes MBS may include a Manager as a party, but may not include a Master
Servicer, Special Servicer or other servicer as a party. All parties to each
Pooling Agreement under which Certificates of a series are issued will be
identified in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Mortgage
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Asset Seller or an affiliate thereof may perform the functions of Master
Servicer, Special Servicer, Manager or REMIC Administrator. If so specified in
the related Prospectus Supplement, the Master Servicer may also perform the
duties of Special Servicer, and the Master Servicer, the Special Servicer or the
Trustee may also perform the duties of REMIC Administrator. Any party to a
Pooling Agreement or any affiliate thereof may own Certificates issued
thereunder; however, except in limited circumstances (including with respect to
required consents to certain amendments to a Pooling Agreement), Certificates
issued thereunder that are held by the Master Servicer or Special Servicer for
the related Series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. However, the
provisions of each Pooling Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions that may appear in a Pooling
Agreement under which Certificates that evidence interests in Mortgage Loans
will be issued. The Prospectus Supplement for a series of Certificates will
describe any provision of the related Pooling Agreement that materially differs
from the description thereof contained in this Prospectus and, if the related
Trust Fund includes MBS, will summarize all of the material provisions of the
related Pooling Agreement. The summaries herein do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all of
the provisions of the Pooling Agreement for each series of Certificates and the
description of such provisions in the related Prospectus Supplement. The
Depositor will provide a copy of the Pooling Agreement (without exhibits) that
relates to any series of Certificates without charge upon written request of a
holder of a Certificate of such series addressed to it at its principal
executive offices specified herein under "The Depositor".
Assignment of Mortgage Loans; Repurchases
At the time of issuance of any series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Mortgage Loans to
be included in the related Trust Fund, together with, unless otherwise specified
in the related Prospectus Supplement, all principal and interest to be received
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. The Trustee will,
concurrently with such assignment, deliver the Certificates to or at the
direction of the Depositor in exchange for the Mortgage Loans and the other
assets to be included in the Trust Fund for such series. Each Mortgage Loan will
be identified in a schedule appearing as an exhibit to the related Pooling
Agreement. Such schedule generally will include detailed information that
pertains to each Mortgage Loan included in the related Trust Fund, which
information will typically include the address of the related Mortgaged Property
and type of such property; the Mortgage Rate and, if applicable, the applicable
index, gross margin, adjustment date and any rate cap information; the original
and remaining term to maturity; the amortization term; and the original and
outstanding principal balance.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Mortgage Loan to be included in a
Trust Fund, deliver, or cause to be delivered, to the related Trustee (or to a
custodian appointed by the Trustee as described below) the Mortgage Note
endorsed, without recourse, either in blank or to the order of such Trustee (or
its nominee), the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office), an assignment
of the Mortgage in blank or to the Trustee (or its nominee) in recordable form,
together with any intervening assignments of the Mortgage with evidence of
recording thereon (except for any such assignment not returned from the public
recording office), and, if applicable, any riders or modifications to such
Mortgage Note and Mortgage, together with certain other documents at such times
as set forth in the related Pooling Agreement. Such assignments may be blanket
assignments covering Mortgages on Mortgaged Properties located in the same
county, if permitted by law. Notwithstanding the foregoing, a Trust Fund may
include Mortgage Loans where the original Mortgage Note is not delivered to the
Trustee if the Depositor delivers, or causes to be delivered, to the related
Trustee (or such custodian) a copy
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or a duplicate original of the Mortgage Note, together with an affidavit
certifying that the original thereof has been lost or destroyed. In addition, if
the Depositor cannot deliver, with respect to any Mortgage Loan, the Mortgage or
any intervening assignment with evidence of recording thereon concurrently with
the execution and delivery of the related Pooling Agreement because of a delay
caused by the public recording office, the Depositor will deliver, or cause to
be delivered, to the related Trustee (or such custodian) a true and correct
photocopy of such Mortgage or assignment as submitted for recording. The
Depositor will deliver, or cause to be delivered, to the related Trustee (or
such custodian) such Mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office. If the Depositor
cannot deliver, with respect to any Mortgage Loan, the Mortgage or any
intervening assignment with evidence of recording thereon concurrently with the
execution and delivery of the related Pooling Agreement because such Mortgage or
assignment has been lost, the Depositor will deliver, or cause to be delivered,
to the related Trustee (or such custodian) a true and correct photocopy of such
Mortgage or assignment with evidence of recording thereon. Unless otherwise
specified in the related Prospectus Supplement, assignments of Mortgage to the
Trustee (or its nominee) will be recorded in the appropriate public recording
office, except in states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interests in
the Mortgage Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor or the originator of such Mortgage
Loan.
The Trustee (or a custodian appointed by the Trustee) for a series of
Certificates will be required to review the Mortgage Loan documents delivered to
it within a specified period of days after receipt thereof, and the Trustee (or
such custodian) will hold such documents in trust for the benefit of the
Certificateholders of such series. Unless otherwise specified in the related
Prospectus Supplement, if any such document is found to be missing or defective,
and such omission or defect, as the case may be, materially and adversely
affects the interests of the Certificateholders of the related series, the
Trustee (or such custodian) will be required to notify the Master Servicer, the
Special Servicer and the Depositor, and one of such persons will be required to
notify the relevant Mortgage Asset Seller. In that case, and if the Mortgage
Asset Seller cannot deliver the document or cure the defect within a specified
number of days after receipt of such notice, then, except as otherwise specified
below or in the related Prospectus Supplement, the Mortgage Asset Seller will be
obligated to repurchase the related Mortgage Loan from the Trustee at a price
generally equal to the unpaid principal balance thereof, together with accrued
but unpaid interest through a date on or about the date of purchase, or at such
other price as will be specified in the related Prospectus Supplement (in any
event, the "Purchase Price"). If so provided in the Prospectus Supplement for a
series of Certificates, a Mortgage Asset Seller, in lieu of repurchasing a
Mortgage Loan as to which there is missing or defective loan documentation, will
have the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of Certificates, to replace such
Mortgage Loan with one or more other mortgage loans, in accordance with
standards that will be described in the Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation will constitute the sole remedy to holders of the Certificates of any
series or to the related Trustee on their behalf for missing or defective
Mortgage Loan documentation, and neither the Depositor nor, unless it is the
Mortgage Asset Seller, the Master Servicer or the Special Servicer will be
obligated to purchase or replace a Mortgage Loan if a Mortgage Asset Seller
defaults on its obligation to do so.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage Loans
in any Trust Fund and to maintain possession of and, if applicable, to review
the documents relating to such Mortgage Loans, in any case as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Certificates will be set forth in the related Prospectus
Supplement.
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Representations and Warranties; Repurchases
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example: (i) the
accuracy of the information set forth for such Mortgage Loan on the schedule of
Mortgage Loans appearing as an exhibit to the related Pooling Agreement; (ii)
the enforceability of the related Mortgage Note and Mortgage and the existence
of title insurance insuring the lien priority of the related Mortgage; (iii) the
Warranting Party's title to the Mortgage Loan and the authority of the
Warranting Party to sell the Mortgage Loan; and (iv) the payment status of the
Mortgage Loan. It is expected that in most cases the Warranting Party will be
the Mortgage Asset Seller; however, the Warranting Party may also be an
affiliate of the Mortgage Asset Seller, the Depositor or an affiliate of the
Depositor, the Master Servicer, the Special Servicer or another person
acceptable to the Depositor. The Warranting Party, if other than the Mortgage
Asset Seller, will be identified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Certificateholders of the
related series. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will be
obligated to repurchase such Mortgage Loan from the Trustee at the applicable
Purchase Price. If so provided in the Prospectus Supplement for a series of
Certificates, a Warranting Party, in lieu of repurchasing a Mortgage Loan as to
which a breach has occurred, will have the option, exercisable upon certain
conditions and/or within a specified period after initial issuance of such
series of Certificates, to replace such Mortgage Loan with one or more other
mortgage loans, in accordance with standards that will be described in the
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, this repurchase or substitution obligation will constitute the sole
remedy available to holders of the Certificates of any series or to the related
Trustee on their behalf for a breach of representation and warranty by a
Warranting Party, and neither the Depositor nor the Master Servicer, in either
case unless it is the Warranting Party, will be obligated to purchase or replace
a Mortgage Loan if a Warranting Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan as of a date prior to the date upon which the related
series of Certificates is issued, and thus may not address events that may occur
following the date as of which they were made. However, the Depositor will not
include any Mortgage Loan in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties made in respect of such Mortgage Loan
will not be accurate in all material respects as of the date of issuance. The
date as of which the representations and warranties regarding the Mortgage Loans
in any Trust Fund were made will be specified in the related Prospectus
Supplement.
Collection and Other Servicing Procedures
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer and the Special Servicer for any Mortgage Pool, directly or through
Sub-Servicers, will each be obligated under the related Pooling Agreement to
service and administer the Mortgage Loans in such Mortgage Pool for the benefit
of the related Certificateholders, in accordance with applicable law and further
in accordance with the terms of such Pooling Agreement, such Mortgage Loans and
any instrument of Credit Support included in the related Trust Fund. Subject to
the foregoing, the Master Servicer and the Special Servicer will each have full
power and authority to do any and all things in connection with such servicing
and administration that it may deem necessary and desirable.
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As part of its servicing duties, each of the Master Servicer and the
Special Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans that it
services and will be obligated to follow such collection procedures as it would
follow with respect to mortgage loans that are comparable to such Mortgage Loans
and held for its own account, provided (i) such procedures are consistent with
the terms of the related Pooling Agreement and (ii) do not impair recovery under
any instrument of Credit Support included in the related Trust Fund. Consistent
with the foregoing, the Master Servicer and the Special Servicer will each be
permitted, in its discretion, unless otherwise specified in the related
Prospectus Supplement, to waive any Prepayment Premium, late payment charge or
other charge in connection with any Mortgage Loan.
The Master Servicer and the Special Servicer for any Trust Fund, either
separately or jointly, directly or through Sub-Servicers, will also be required
to perform as to the Mortgage Loans in such Trust Fund various other customary
functions of a servicer of comparable loans, including maintaining escrow or
impound accounts, if required under the related Pooling Agreement, for payment
of taxes, insurance premiums, ground rents and similar items, or otherwise
monitoring the timely payment of those items; attempting to collect delinquent
payments; supervising foreclosures; negotiating modifications; conducting
property inspections on a periodic or other basis; managing (or overseeing the
management of) Mortgaged Properties acquired on behalf of such Trust Fund
through foreclosure, deed-in-lieu of foreclosure or otherwise (each, an "REO
Property"); and maintaining servicing records relating to such Mortgage Loans.
The related Prospectus Supplement will specify when and the extent to which
servicing of a Mortgage Loan is to be transferred from the Master Servicer to
the Special Servicer. In general, and subject to the discussion in the related
Prospectus Supplement, a Special Servicer will be responsible for the servicing
and administration of: (i) Mortgage Loans that are delinquent in respect of a
specified number of scheduled payments; (ii) Mortgage Loans as to which the
related borrower has entered into or consented to bankruptcy, appointment of a
receiver or conservator or similar insolvency proceeding, or the related
borrower has become the subject of a decree or order for such a proceeding which
shall have remained in force undischarged or unstayed for a specified number of
days; and (iii) REO Properties. If so specified in the related Prospectus
Supplement, a Pooling Agreement also may provide that if a default on a Mortgage
Loan has occurred or, in the judgment of the related Master Servicer, a payment
default is reasonably foreseeable, the related Master Servicer may elect to
transfer the servicing thereof, in whole or in part, to the related Special
Servicer. Unless otherwise provided in the related Prospectus Supplement, when
the circumstances no longer warrant a Special Servicer's continuing to service a
particular Mortgage Loan (e.g., the related borrower is paying in accordance
with the forbearance arrangement entered into between the Special Servicer and
such borrower), the Master Servicer will resume the servicing duties with
respect thereto. If and to the extent provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Special Servicer may
perform certain limited duties in respect of Mortgage Loans for which the Master
Servicer is primarily responsible (including, if so specified, performing
property inspections and evaluating financial statements); and a Master Servicer
may perform certain limited duties in respect of any Mortgage Loan for which the
Special Servicer is primarily responsible (including, if so specified,
continuing to receive payments on such Mortgage Loan (including amounts
collected by the Special Servicer), making certain calculations with respect to
such Mortgage Loan and making remittances and preparing certain reports to the
Trustee and/or Certificateholders with respect to such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be responsible for filing and settling claims in respect of particular
Mortgage Loans under any applicable instrument of Credit Support. See
"Description of Credit Support".
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A mortgagor's failure to make required Mortgage Loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a mortgagor that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and otherwise to maintain and insure the
related Mortgaged Property. In general, the related Special Servicer will be
required to monitor any Mortgage Loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related Mortgaged Property and take such other actions as it deems necessary
and appropriate. A significant period of time may elapse before the Special
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Special Servicer can make
the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Certificateholders of the related series
may vary considerably depending on the particular Mortgage Loan, the Mortgaged
Property, the mortgagor, the presence of an acceptable party to assume the
Mortgage Loan and the laws of the jurisdiction in which the Mortgaged Property
is located. If a mortgagor files a bankruptcy petition, the Special Servicer may
not be permitted to accelerate the maturity of the Mortgage Loan or to foreclose
on the related Mortgaged Property for a considerable period of time. See
"Certain Legal Aspects of Mortgage Loans-Bankruptcy Laws."
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. In general, the Master Servicer may approve such a request if
it has determined, exercising its business judgment in accordance with the
applicable servicing standard, that such approval will not adversely affect the
security for, or the timely and full collectability of, the related Mortgage
Loan. Any fee collected by the Master Servicer for processing such request will
be retained by the Master Servicer as additional servicing compensation.
In the case of Mortgage Loans secured by junior liens on the related
Mortgaged Properties, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be required to file (or cause to be filed)
of record a request for notice of any action by a superior lienholder under the
Senior Lien for the protection of the related Trustee's interest, where
permitted by local law and whenever applicable state law does not require that a
junior lienholder be named as a party defendant in foreclosure proceedings in
order to foreclose such junior lienholder's equity of redemption. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
also will be required to notify any superior lienholder in writing of the
existence of the Mortgage Loan and request notification of any action (as
described below) to be taken against the mortgagor or the Mortgaged Property by
the superior lienholder. If the Master Servicer is notified that any superior
lienholder has accelerated or intends to accelerate the obligations secured by
the related Senior Lien, or has declared or intends to declare a default under
the mortgage or the promissory note secured thereby, or has filed or intends to
file an election to have the related Mortgaged Property sold or foreclosed,
then, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and the Special Servicer will each be required to take, on
behalf of the related Trust Fund, whatever actions are necessary to protect the
interests of the related Certificateholders and/or to preserve the security of
the related Mortgage Loan, subject to the application of the REMIC Provisions.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or Special Servicer, as applicable, will be required to advance the
necessary funds to cure the default or reinstate the Senior Lien, if such
advance is in the best interests of the related Certificateholders and the
Master Servicer or Special Servicer, as applicable, determines such advances are
recoverable out of payments on or proceeds of the related Mortgage Loan.
Sub-Servicers
A Master Servicer or Special Servicer may delegate its servicing
obligations in respect of the Mortgage Loans serviced thereby to one or more
third-party servicers (each, a "Sub-Servicer"); provided that, unless otherwise
specified in the related
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Prospectus Supplement, such Master Servicer or Special Servicer will remain
obligated under the related Pooling Agreement. Unless otherwise provided in the
related Prospectus Supplement, each sub-servicing agreement between a Master
Servicer and a Sub-Servicer (a "Sub-Servicing Agreement") must provide for
servicing of the applicable Mortgage Loans consistent with the related Pooling
Agreement. The Master Servicer and Special Servicer in respect of any Mortgage
Asset Pool will each be required to monitor the performance of Sub-Servicers
retained by it and will have the right to remove a Sub-Servicer retained by it
at any time it considers such removal to be in the best interests of
Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, a Master
Servicer or Special Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, irrespective of whether the Master Servicer's or Special
Servicer's compensation pursuant to the related Pooling Agreement is sufficient
to pay such fees. Each Sub-Servicer will be reimbursed by the Master Servicer or
Special Servicer, as the case may be, that retained it for certain expenditures
which it makes, generally to the same extent such Master Servicer or Special
Servicer would be reimbursed under a Pooling Agreement. See "-Certificate
Account" and "-Servicing Compensation and Payment of Expenses".
Certificate Account
General. The Master Servicer, the Trustee and/or the Special Servicer will,
as to each Trust Fund that includes Mortgage Loans, establish and maintain or
cause to be established and maintained the corresponding Certificate Account,
which will be established so as to comply with the standards of each Rating
Agency that has rated any one or more classes of Certificates of the related
series. A Certificate Account may be maintained as an interest-bearing or a
noninterest-bearing account and the funds held therein may be invested pending
each succeeding Distribution Date in United States government securities and
other obligations that are acceptable to each Rating Agency that has rated any
one or more classes of Certificates of the related series ("Permitted
Investments"). Unless otherwise provided in the related Prospectus Supplement,
any interest or other income earned on funds in a Certificate Account will be
paid to the related Master Servicer, Trustee or Special Servicer as additional
compensation. A Certificate Account may be maintained with the related Master
Servicer, Special Servicer, Trustee or Mortgage Asset Seller or with a
depository institution that is an affiliate of any of the foregoing or of the
Depositor, provided that it complies with applicable Rating Agency standards. If
permitted by the applicable Rating Agency or Agencies, a Certificate Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds representing payments on mortgage loans
owned by the related Master Servicer or Special Servicer or serviced by either
on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the following payments and
collections received or made by the Master Servicer, the Trustee or the Special
Servicer subsequent to the Cut-off Date (other than payments due on or before
the Cut-off Date) are to be deposited in the Certificate Account for each Trust
Fund that includes Mortgage Loans, within a certain period following receipt (in
the case of collections on or in respect of the Mortgage Loans) or otherwise as
provided in the related Pooling Agreement:
(i) all payments on account of principal, including principal prepayments,
on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion thereof retained
by the Master Servicer or the Special Servicer as its servicing compensation or
as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial condemnation of
a Mortgaged Property (other than proceeds applied to the restoration of the
property or released to the related borrower) ("Insurance
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Proceeds" and "Condemnation Proceeds", respectively) and all other amounts
received and retained in connection with the liquidation of defaulted Mortgage
Loans or property acquired in respect thereof, by foreclosure or otherwise (such
amounts, together with those amounts listed in clause (vii) below, "Liquidation
Proceeds"), together with the net operating income (less reasonable reserves for
future expenses) derived from the operation of any Mortgaged Properties acquired
by the Trust Fund through foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates;
(v) any advances made with respect to delinquent scheduled payments of
principal and interest on the Mortgage Loans;
(vi) any amounts paid under any Cash Flow Agreement;
(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller or any
other specified person as described under "-Assignment of Mortgage Loans;
Repurchases" and "-Representations and Warranties; Repurchases", all proceeds of
the purchase of any defaulted Mortgage Loan as described under "-Realization
Upon Defaulted Mortgage Loans", and all proceeds of any Mortgage Asset purchased
as described under "Description of the Certificates-Termination; Retirement of
Certificates";
(viii) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or the Special Servicer and is not
otherwise retained by the Depositor or another specified person, any payments on
account of modification or assumption fees, late payment charges, Prepayment
Premiums or Equity Participations with respect to the Mortgage Loans;
(ix) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy as described
under "-Hazard Insurance Policies";
(x) any amount required to be deposited by the Master Servicer, the Special
Servicer or the Trustee in connection with losses realized on investments for
the benefit of the Master Servicer, the Special Servicer or the Trustee, as the
case may be, of funds held in the Certificate Account; and
(xi) any other amounts received on or in respect of the Mortgage Loans
required to be deposited in the Certificate Account as provided in the related
Pooling Agreement and described in the related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, a Master Servicer, Trustee or
Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund that includes Mortgage Loans for any of the following purposes:
(i) to make distributions to the Certificateholders on each Distribution
Date;
(ii) to pay the Master Servicer or the Special Servicer any servicing fees
not previously retained thereby, such payment to be made out of payments and
other collections of interest on the particular Mortgage Loans as to which such
fees were earned;
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(iii) to reimburse the Master Servicer, the Special Servicer or any other
specified person for unreimbursed advances of delinquent scheduled payments of
principal and interest made by it, and certain unreimbursed servicing expenses
incurred by it, with respect to Mortgage Loans in the Trust Fund and properties
acquired in respect thereof, such reimbursement to be made out of amounts that
represent late payments collected on the particular Mortgage Loans, Liquidation
Proceeds, Insurance Proceeds and Condemnation Proceeds collected on the
particular Mortgage Loans and properties, and net income collected on the
particular properties, with respect to which such advances were made or such
expenses were incurred or out of amounts drawn under any form of Credit Support
with respect to such Mortgage Loans and properties, or if in the judgment of the
Master Servicer, the Special Servicer or such other person, as applicable, such
advances and/or expenses will not be recoverable from such amounts, such
reimbursement to be made from amounts collected on other Mortgage Loans in the
same Trust Fund or, if and to the extent so provided by the related Pooling
Agreement and described in the related Prospectus Supplement, only from that
portion of amounts collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of Subordinate Certificates of the related
series;
(iv) if and to the extent described in the related Prospectus Supplement,
to pay the Master Servicer, the Special Servicer or any other specified person
interest accrued on the advances and servicing expenses described in clause
(iii) above incurred by it while such remain outstanding and unreimbursed;
(v) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged Properties
that constitute security for defaulted Mortgage Loans, and for any containment,
clean-up or remediation of hazardous wastes and materials present on such
Mortgaged Properties, as described under "-Realization Upon Defaulted Mortgage
Loans";
(vi) to reimburse the Master Servicer, the Special Servicer, the REMIC
Administrator, the Depositor, the Trustee, or any of their respective directors,
officers, employees and agents, as the case may be, for certain expenses, costs
and liabilities incurred thereby, as and to the extent described under "-Certain
Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor" and "-Certain Matters Regarding the Trustee";
(vii) if and to the extent described in the related Prospectus Supplement,
to pay the fees of the Trustee, the REMIC
Administrator and any provider of Credit Support;
(viii) if and to the extent described in the related Prospectus Supplement,
to reimburse prior draws on any form of Credit Support;
(ix) to pay the Master Servicer, the Special Servicer or the Trustee, as
appropriate, interest and investment income earned in respect of amounts held in
the Certificate Account as additional compensation;
(x) to pay any servicing expenses not otherwise required to be advanced by
the Master Servicer, the Special Servicer or any other specified person;
(xi) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local taxes
imposed on the Trust Fund or its assets or transactions, as and to the extent
described under "Certain Federal Income Tax Consequences-REMICs-Prohibited
Transactions Tax and Other Taxes";
(xii) to pay for the cost of various opinions of counsel obtained pursuant
to the related Pooling Agreement for the benefit of Certificateholders;
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(xiii) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xiv) to clear and terminate the Certificate Account upon the termination
of the Trust Fund.
Modifications, Waivers and Amendments of Mortgage Loans
The Master Servicer and the Special Servicer may each agree to modify,
waive or amend any term of any Mortgage Loan serviced by it in a manner
consistent with the applicable Servicing Standard; provided that, unless
otherwise set forth in the related Prospectus Supplement, the modification,
waiver or amendment (i) will not affect the amount or timing of any scheduled
payments of principal or interest on the Mortgage Loan, (ii) will not, in the
judgment of the Master Servicer or the Special Servicer, as the case may be,
materially impair the security for the Mortgage Loan or reduce the likelihood of
timely payment of amounts due thereon and (iii) will not adversely affect the
coverage under any applicable instrument of Credit Support. Unless otherwise
provided in the related Prospectus Supplement, the Special Servicer also may
agree to any other modification, waiver or amendment if, in its judgment, (i) a
material default on the Mortgage Loan has occurred or a payment default is
imminent, (ii) such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Mortgage Loan, taking into
account the time value of money, than would liquidation and (iii) such
modification, waiver or amendment will not adversely affect the coverage under
any applicable instrument of Credit Support.
Realization Upon Defaulted Mortgage Loans
If a default on a Mortgage Loan has occurred or, in the Special Servicer's
judgment, a payment default is imminent, the Special Servicer, on behalf of the
Trustee, may at any time institute foreclosure proceedings, exercise any power
of sale contained in the related Mortgage, obtain a deed in lieu of foreclosure,
or otherwise acquire title to the related Mortgaged Property, by operation of
law or otherwise. Unless otherwise specified in the related Prospectus
Supplement, the Special Servicer may not, however, acquire title to any
Mortgaged Property, have a receiver of rents appointed with respect to any
Mortgaged Property or take any other action with respect to any Mortgaged
Property that would cause the Trustee, for the benefit of the related series of
Certificateholders, or any other specified person to be considered to hold title
to, to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator"
of such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Special Servicer has previously received a report prepared by a
person who regularly conducts environmental audits (which report will be an
expense of the Trust Fund) and either:
(i) such report indicates that (a) the Mortgaged Property is in
compliance with applicable environmental laws and regulations and (b) there
are no circumstances or conditions present at the Mortgaged Property that
have resulted in any contamination for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under
any applicable environmental laws and regulations; or
(ii) the Special Servicer, based solely (as to environmental matters
and related costs) on the information set forth in such report, determines
that taking such actions as are necessary to bring the Mortgaged Property
into compliance with applicable environmental laws and regulations and/or
taking the actions contemplated by clause (i)(b) above, is reasonably
likely to produce a greater recovery, taking into account the time value of
money, than not taking such actions. See "Certain Legal Aspects of Mortgage
Loans-Environmental Considerations".
A Pooling Agreement may grant to the Master Servicer, the Special Servicer,
a provider of Credit Support and/or the holder or holders of certain classes of
the related series of Certificates a right of first refusal to purchase from the
Trust Fund, at a predetermined price (which, if less than the Purchase Price,
will be specified in the related Prospectus Supplement),
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any Mortgage Loan as to which a specified number of scheduled payments are
delinquent. In addition, unless otherwise specified in the related Prospectus
Supplement, the Special Servicer may offer to sell any defaulted Mortgage Loan
if and when the Special Servicer determines, consistent with its normal
servicing procedures, that such a sale would produce a greater recovery, taking
into account the time value of money, than would liquidation of the related
Mortgaged Property. In the absence of any such sale, the Special Servicer will
generally be required to proceed against the related Mortgaged Property, subject
to the discussion above.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Special Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within two years of acquisition, unless
(i) the Internal Revenue Service (the "IRS") grants an extension of time to sell
such property or (ii) the Trustee receives an opinion of independent counsel to
the effect that the holding of the property by the Trust Fund for more than two
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund (or any designated portion thereof) to fail
to qualify as a REMIC under the Code at any time that any Certificate is
outstanding. Subject to the foregoing and any other tax-related limitations, the
Special Servicer will generally be required to attempt to sell any Mortgaged
Property so acquired on the same terms and conditions it would if it were the
owner. Unless otherwise provided in the related Prospectus Supplement, if title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Special Servicer will also be required to ensure
that the Mortgaged Property is administered so that it constitutes "foreclosure
property" within the meaning of Code Section 860G(a)(8) at all times, that the
sale of such property does not result in the receipt by the Trust Fund of any
income from nonpermitted assets as described in Code Section 860F(a)(2)(B), and
that the Trust Fund does not derive any "net income from foreclosure property"
within the meaning of Code Section 860G(c)(2), with respect to such property. If
the Trust Fund acquires title to any Mortgaged Property, the Special Servicer,
on behalf of the Trust Fund, may retain an independent contractor to manage and
operate such property. The retention of an independent contractor, however, will
not relieve the Special Servicer of its obligation to manage such Mortgaged
Property as required under the related Pooling Agreement.
If Liquidation Proceeds collected with respect to a defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon plus the aggregate amount of reimbursable expenses
incurred by the Special Servicer and/or the Master Servicer in connection with
such Mortgage Loan, then, to the extent that such shortfall is not covered by
any instrument or fund constituting Credit Support, the Trust Fund will realize
a loss in the amount of such shortfall. The Special Servicer and/or the Master
Servicer will be entitled to reimbursement out of the Liquidation Proceeds
recovered on any defaulted Mortgage Loan, prior to the distribution of such
Liquidation Proceeds to Certificateholders, any and all amounts that represent
unpaid servicing compensation in respect of the Mortgage Loan, unreimbursed
servicing expenses incurred with respect to the Mortgage Loan and any
unreimbursed advances of delinquent payments made with respect to the Mortgage
Loan. In addition, if and to the extent set forth in the related Prospectus
Supplement, amounts otherwise distributable on the Certificates may be further
reduced by interest payable to the Master Servicer and/or Special Servicer on
such servicing expenses and advances.
If any Mortgaged Property suffers damage such that the proceeds, if any, of
the related hazard insurance policy are insufficient to restore fully the
damaged property, neither the Special Servicer nor the Master Servicer will be
required to expend its own funds to effect such restoration unless (and to the
extent not otherwise provided in the related Prospectus Supplement) it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Special Servicer or the Master Servicer, as the case may be, for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds and/or amounts
drawn on any instrument or fund constituting Credit Support.
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Hazard Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer (or the Special Servicer with
respect to Mortgage Loans serviced thereby) to use reasonable efforts to cause
each Mortgage Loan borrower to maintain a hazard insurance policy that provides
for such coverage as is required under the related Mortgage or, if the Mortgage
permits the holder thereof to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, such coverage as is consistent
with the Master Servicer's (or Special Servicer's) normal servicing procedures.
Unless otherwise specified in the related Prospectus Supplement, such coverage
generally will be in an amount equal to the lesser of the principal balance
owing on such Mortgage Loan and the replacement cost of the related Mortgaged
Property. The ability of a Master Servicer (or Special Servicer) to assure that
hazard insurance proceeds are appropriately applied may be dependent upon its
being named as an additional insured under any hazard insurance policy and under
any other insurance policy referred to below, or upon the extent to which
information concerning covered losses is furnished by borrowers. All amounts
collected by a Master Servicer (or Special Servicer) under any such policy
(except for amounts to be applied to the restoration or repair of the Mortgaged
Property or released to the borrower in accordance with the Master Servicer's
(or Special Servicer's) normal servicing procedures and/or to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
related Certificate Account. The Pooling Agreement may provide that the Master
Servicer (or Special Servicer) may satisfy its obligation to cause each borrower
to maintain such a hazard insurance policy by maintaining a blanket policy
insuring against hazard losses on the Mortgage Loans in a Trust Fund. If such
blanket policy contains a deductible clause, the Master Servicer (or Special
Servicer) will be required, in the event of a casualty covered by such blanket
policy, to deposit in the related Certificate Account all additional sums that
would have been deposited therein under an individual policy but were not
because of such deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin and domestic animals. Accordingly, a Mortgaged
Property may not be insured for losses arising from any such cause unless the
related Mortgage specifically requires, or permits the holder thereof to
require, such coverage.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the improvements on the property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clauses generally provide that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (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.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale or
other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage Loan
upon the creation of any other lien or encumbrance upon the Mortgaged Property.
Unless otherwise
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provided in the related Prospectus Supplement, the Master Servicer (or Special
Servicer) will determine whether to exercise any right the Trustee may have
under any such provision in a manner consistent with the Master Servicer's (or
Special Servicer's) normal servicing procedures. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer or Special Servicer, as
applicable, will be entitled to retain as additional servicing compensation any
fee collected in connection with the permitted transfer of a Mortgaged Property.
See "Certain Legal Aspects of Mortgage Loans-Due-on-Sale and
Due-on-Encumbrance".
Servicing Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion of
the interest payments on each Mortgage Loan in the related Trust Fund, including
Mortgage Loans serviced by the related Special Servicer. If and to the extent
described in the related Prospectus Supplement, a Special Servicer's primary
compensation with respect to a series of Certificates may consist of any or all
of the following components: (i) a specified portion of the interest payments on
each Mortgage Loan in the related Trust Fund, whether or not serviced by it;
(ii) an additional specified portion of the interest payments on each Mortgage
Loan then currently serviced by it; and (iii) subject to any specified
limitations, a fixed percentage of some or all of the collections and proceeds
received with respect to each Mortgage Loan which was at any time serviced by
it, including Mortgage Loans for which servicing was returned to the Master
Servicer. Insofar as any portion of the Master Servicer's or Special Servicer's
compensation consists of a specified portion of the interest payments on a
Mortgage Loan, such compensation will generally be based on a percentage of the
principal balance of such Mortgage Loan outstanding from time to time and,
accordingly, will decrease with the amortization of the Mortgage Loan. As
additional compensation, a Master Servicer or Special Servicer may be entitled
to retain all or a portion of late payment charges, Prepayment Premiums,
modification fees and other fees collected from borrowers and any interest or
other income that may be earned on funds held in the related Certificate
Account. A more detailed description of each Master Servicer's and Special
Servicer's compensation will be provided in the related Prospectus Supplement.
Any Sub-Servicer will receive as its sub-servicing compensation a portion of the
servicing compensation to be paid to the Master Servicer or Special Servicer
that retained such Sub-Servicer.
In addition to amounts payable to any Sub-Servicer, a Master Servicer or
Special Servicer may be required, to the extent provided in the related
Prospectus Supplement, to pay from amounts that represent its servicing
compensation certain expenses incurred in connection with the administration of
the related Trust Fund, including, without limitation, payment of the fees and
disbursements of independent accountants, payment of fees and disbursements of
the Trustee and any custodians appointed thereby and payment of expenses
incurred in connection with distributions and reports to Certificateholders.
Certain other expenses, including certain expenses related to Mortgage Loan
defaults and liquidations and, to the extent so provided in the related
Prospectus Supplement, interest on such expenses at the rate specified therein,
may be required to be borne by the Trust Fund.
Evidence as to Compliance
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will provide that on or before a specified date in each year,
beginning the first such date that is at least a specified number of months
after the Cut-off Date, there will be furnished to the related Trustee a report
of a firm of independent certified public accountants stating that (i) it has
obtained a letter of representation regarding certain matters from the
management of the Master Servicer which includes an assertion that the Master
Servicer has complied with certain minimum mortgage loan servicing standards (to
the extent applicable to commercial and multifamily mortgage loans), identified
in the Uniform Single Attestation Program for Mortgage Bankers established by
the Mortgage Bankers Association of America, with respect to the Master
Servicer's
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servicing of commercial and multifamily mortgage loans during the most recently
completed calendar year and (ii) on the basis of an examination conducted by
such firm in accordance with standards established by the American Institute of
Certified Public Accountants, such representation is fairly stated in all
material respects, subject to such exceptions and other qualifications that, in
the opinion of such firm, such standards require it to report. In rendering its
report such firm may rely, as to the matters relating to the direct servicing of
commercial and multifamily mortgage loans by Sub-Servicers, upon comparable
reports of firms of independent public accountants rendered on the basis of
examinations conducted in accordance the same standards (rendered within one
year of such report) with respect to those Sub-Servicers. The Prospectus
Supplement may provide that additional reports of independent certified public
accountants relating to the servicing of mortgage loans may be required to be
delivered to the Trustee.
Each Pooling Agreement will also provide that, on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, the Master Servicer and Special
Servicer shall each deliver to the related Trustee an annual statement signed by
one or more officers of the Master Servicer or the Special Servicer, as the case
may be, to the effect that, to the best knowledge of each such officer, the
Master Servicer or the Special Servicer, as the case may be, has fulfilled in
all material respects its obligations under the Pooling Agreement throughout the
preceding year or, if there has been a material default in the fulfillment of
any such obligation, such statement shall specify each such known default and
the nature and status thereof. Such statement may be provided as a single form
making the required statements as to more than one Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer or Special Servicer may be obtained by Certificateholders upon
written request to the Trustee.
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor
Unless otherwise specified in the Prospectus Supplement for a series of
Certificates, the related Pooling Agreement will permit the Master Servicer, the
Special Servicer and any REMIC Administrator to resign from its obligations
thereunder only upon (a) the appointment of, and the acceptance of such
appointment by, a successor thereto and receipt by the Trustee of written
confirmation from each applicable Rating Agency that such resignation and
appointment will not have an adverse effect on the rating assigned by such
Rating Agency to any class of Certificates of such series or (b) a determination
that such obligations are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it. No such resignation will become effective until the Trustee or other
successor has assumed the obligations and duties of the resigning Master
Servicer, Special Servicer or REMIC Administrator, as the case may be, under the
Pooling Agreement. The Master Servicer and Special Servicer for each Trust Fund
will be required to maintain a fidelity bond and errors and omissions policy or
their equivalent that provides coverage against losses that may be sustained as
a result of an officer's or employee's misappropriation of funds or errors and
omissions, subject to certain limitations as to amount of coverage, deductible
amounts, conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Special Servicer, the REMIC Administrator, the Depositor or any director,
officer, employee or agent of any of them will be under any liability to the
related Trust Fund or Certificateholders for any action taken, or not taken, in
good faith pursuant to the Pooling Agreement or for errors in judgment;
provided, however, that none of the Master Servicer, the Special Servicer, the
REMIC Administrator, the Depositor or any such person will be protected against
any liability that would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of obligations or duties
thereunder or by reason of reckless disregard of such obligations and duties.
Unless otherwise specified in the related Prospectus Supplement, each Pooling
Agreement will further provide that the Master Servicer, the
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Special Servicer, the REMIC Administrator, the Depositor and any director,
officer, employee or agent of any of them will be entitled to indemnification by
the related Trust Fund against any loss, liability or expense incurred in
connection with any legal action that relates to such Pooling Agreement or the
related series of Certificates; provided, however, that such indemnification
will not extend to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations or
duties under such Pooling Agreement, or by reason of reckless disregard of such
obligations or duties. In addition, each Pooling Agreement will provide that
none of the Master Servicer, the Special Servicer, the REMIC Administrator or
the Depositor will be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its respective responsibilities under the
Pooling Agreement and that in its opinion may involve it in any expense or
liability. However, each of the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor will be permitted, in the exercise of its
discretion, to undertake any such action that it may deem necessary or desirable
with respect to the enforcement and/or protection of the rights and duties of
the parties to the Pooling Agreement and the interests of the related series of
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 related series of Certificateholders, and the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor, as the
case may be, will be entitled to charge the related Certificate Account
therefor.
Any person into which the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Master Servicer, the
Special Servicer, the REMIC Administrator or the Depositor is a party, or any
person succeeding to the business of the Master Servicer, the Special Servicer,
the REMIC Administrator or the Depositor, will be the successor of the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor, as the
case may be, under the related Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, a REMIC
Administrator will be entitled to perform any of its duties under the related
Pooling Agreement either directly or by or through agents or attorneys, and the
REMIC Administrator will not be responsible for any willful misconduct or gross
negligence on the part of any such agent or attorney appointed by it with due
care.
Events of Default
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include, without limitation, (i) any failure by the Master Servicer to
distribute or cause to be distributed to the Certificateholders of such series,
or to remit to the Trustee for distribution to such Certificateholders, any
amount required to be so distributed or remitted, which failure continues
unremedied for five days after written notice thereof has been given to the
Master Servicer by any other party to the related Pooling Agreement, or to the
Master Servicer, with a copy to each other party to the related Pooling
Agreement, by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series; (ii) any failure by the Special Servicer to remit to the Master
Servicer or the Trustee, as applicable, any amount required to be so remitted,
which failure continues unremedied for five days after written notice thereof
has been given to the Special Servicer by any other party to the related Pooling
Agreement, or to the Special Servicer, with a copy to each other party to the
related Pooling Agreement, by the Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights of such series; (iii) any failure by the Master Servicer or
the Special Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after written notice thereof has
been given to the Master Servicer or the Special Servicer, as the case may be,
by any other party to the related Pooling Agreement, or to the Master Servicer
or the Special Servicer, as the case may be, with a copy to each other party to
the related Pooling Agreement, by Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights
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for such series; (iv) any failure by a REMIC Administrator (if other than the
Trustee) duly to observe or perform in any material respect any of its covenants
or obligations under the related Pooling Agreement, which failure continues
unremedied for sixty days after written notice thereof has been given to the
REMIC Administrator by any other party to the related Pooling Agreement, or to
the REMIC Administrator, with a copy to each other party to the related Pooling
Agreement, by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series; and (v) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings in respect of or
relating to the Master Servicer, the Special Servicer or the REMIC Administrator
(if other than the Trustee), and certain actions by or on behalf of the Master
Servicer, the Special Servicer or the REMIC Administrator (if other than the
Trustee) indicating its insolvency or inability to pay its obligations. Material
variations to the foregoing Events of Default (other than to add thereto or
shorten cure periods or eliminate notice requirements) will be specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, when a single entity acts as Master Servicer, Special
Servicer and REMIC Administrator, or in any two of the foregoing capacities, for
any Trust Fund, an Event of Default in one capacity will constitute an Event of
Default in each capacity.
Rights Upon Event of Default
If an Event of Default occurs with respect to the Master Servicer, the
Special Servicer or a REMIC Administrator under a Pooling Agreement, then, in
each and every such case, so long as the Event of Default remains unremedied,
the Depositor or the Trustee will be authorized, and at the direction of
Certificateholders of the related series entitled to not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series, the Trustee will be required, to terminate all of the
rights and obligations of the defaulting party as Master Servicer, Special
Servicer or REMIC Administrator, as applicable, under the Pooling Agreement,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the defaulting party as Master Servicer, Special Servicer or
REMIC Administrator, as applicable, under the Pooling Agreement (except that if
the defaulting party is required to make advances thereunder regarding
delinquent Mortgage Loans, but the Trustee is prohibited by law from obligating
itself to make such advances, or if the related Prospectus Supplement so
specifies, the Trustee will not be obligated to make such advances) and will be
entitled to similar compensation arrangements. Unless otherwise specified in the
related Prospectus Supplement, if the Trustee is unwilling or unable so to act,
it may (or, at the written request of Certificateholders of the related series
entitled to not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series, it will be required
to) appoint, or petition a court of competent jurisdiction to appoint, a loan
servicing institution or other entity that (unless otherwise provided in the
related Prospectus Supplement) is acceptable to each applicable Rating Agency to
act as successor to the Master Servicer, Special Servicer or REMIC
Administrator, as the case may be, under the Pooling Agreement. Pending such
appointment, the Trustee will be obligated to act in such capacity.
If the same entity is acting as both Trustee and REMIC Administrator, it
may be removed in both such capacities as described under "-Resignation and
Removal of the Trustee" below.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class 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 sixty days after receipt of such
request and indemnity has neglected or refused to institute any such proceeding.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Pooling Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates covered by such Pooling
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Agreement, unless such Certificateholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement, each
Pooling Agreement may be amended by the parties thereto, without the consent of
any of the holders of Certificates covered by such Pooling Agreement, (i) to
cure any ambiguity, (ii) to correct or supplement any provision therein which
may be inconsistent with any other provision therein or to correct any error,
(iii) to change the timing and/or nature of deposits in the Certificate Account,
provided that (A) such change would not adversely affect in any material respect
the interests of any Certificateholder, as evidenced by an opinion of counsel,
and (B) such change would not adversely affect the then-current rating of any
rated classes of Certificates, as evidenced by a letter from each applicable
Rating Agency, (iv) if a REMIC election has been made with respect to the
related Trust Fund, to modify, eliminate or add to any of its provisions (A) to
such extent as shall be necessary to maintain the qualification of the Trust
Fund (or any designated portion thereof) as a REMIC or to avoid or minimize the
risk of imposition of any tax on the related Trust Fund, provided that the
Trustee has received an opinion of counsel to the effect that (1) such action is
necessary or desirable to maintain such qualification or to avoid or minimize
such risk, and (2) such action will not adversely affect in any material respect
the interests of any holder of Certificates covered by the Pooling Agreement, or
(B) to restrict the transfer of the REMIC Residual Certificates, provided that
the Depositor has determined that the then-current ratings of the classes of the
Certificates that have been rated will not be adversely affected, as evidenced
by a letter from each applicable Rating Agency, and that any such amendment will
not give rise to any tax with respect to the transfer of the REMIC Residual
Certificates to a non-permitted transferee (See "Certain Federal Income Tax
Consequences-REMICs-Tax and Restrictions on Transfers of REMIC Residual
Certificates to Certain Organizations" herein), (v) to make any other provisions
with respect to matters or questions arising under such Pooling Agreement or any
other change, provided that such action will not adversely affect in any
material respect the interests of any Certificateholder, or (vi) to amend
specified provisions that are not material to holders of any class of
Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with
the consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66-2/3% (or such other percentage
specified in the related Prospectus Supplement) of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Pooling
Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that 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 a Certificate
of any class without the consent of the holder of such Certificate or (ii)
reduce the aforesaid percentage of Certificates of any class the holders of
which are required to consent to any such amendment without the consent of the
holders of all Certificates of such class covered by such Pooling Agreement then
outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be required to consent
to any amendment to a Pooling Agreement without having first received an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Master Servicer, the Special Servicer, the Depositor, the Trustee
or any other specified person in accordance with such amendment will not result
in the imposition of a tax on the related Trust Fund or cause such Trust Fund
(or any designated portion thereof) to fail to qualify as a REMIC.
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List of Certificateholders
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders of record made for purposes
of communicating with other holders of Certificates of the same series with
respect to their rights under the related Pooling Agreement, the Trustee or
other specified person will afford such Certificateholders access during normal
business hours to the most recent list of Certificateholders of that series held
by such person. If such list is as of a date more than 90 days prior to the date
of receipt of such Certificateholders' request, then such person, if not the
registrar for such series of Certificates, will be required to request from such
registrar a current list and to afford such requesting Certificateholders access
thereto promptly upon receipt.
The Trustee
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any Master
Servicer, Special Servicer or REMIC Administrator and its affiliates.
Duties of the Trustee
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, such
Certificates or any underlying Mortgage Asset or related document and will not
be accountable for the use or application by or on behalf of any Master Servicer
or Special Servicer of any funds paid to the Master Servicer or Special Servicer
in respect of the Certificates or the underlying Mortgage Assets. If no Event of
Default has occurred and is continuing, the Trustee for each series of
Certificates will be required to perform only those duties specifically required
under the related Pooling Agreement. However, upon receipt of any of the various
certificates, reports or other instruments required to be furnished to it
pursuant to the related Pooling Agreement, a Trustee will be required to examine
such documents and to determine whether they conform to the requirements of such
agreement.
Certain Matters Regarding the Trustee
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the related
Master Servicer or other specified person or may be required to be borne by the
related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling Agreement;
provided, however, that such indemnification will not extend to any loss
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of this
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
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Resignation and Removal of the Trustee
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates of the applicable series evidencing not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee. Notwithstanding anything herein to the
contrary, if any entity is acting as both Trustee and REMIC Administrator, then
any resignation or removal of such entity as the Trustee will also constitute
the resignation or removal of such entity as REMIC Administrator, and the
successor trustee will serve as successor to the REMIC Administrator as well.
DESCRIPTION OF CREDIT SUPPORT
General
Credit Support may be provided with respect to one or more classes of the
Certificates of any series or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a surety bond, an insurance
policy or a guarantee, the establishment of one or more reserve funds, or any
combination of the foregoing. If and to the extent so provided in the related
Prospectus Supplement, any of the foregoing forms of Credit Support may provide
credit enhancement for more than one series of Certificates.
The Credit Support may not provide protection against all risks of loss and
will not guarantee payment to Certificateholders of all amounts to which they
are entitled under the related Pooling Agreement. If losses or shortfalls occur
that exceed the amount covered by the related Credit Support or that are of a
type not covered by such Credit Support, Certificateholders will bear their
allocable share of deficiencies. Moreover, if a form of Credit Support covers
the Offered Certificates of more than one series and losses on the related
Mortgage Assets exceed the amount of such Credit Support, it is possible that
the holders of Offered Certificates of one (or more) such series will be
disproportionately benefited by such Credit Support to the detriment of the
holders of Offered Certificates of one (or more) other such series.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature and
amount of coverage under such Credit Support, (ii) any conditions to payment
thereunder not otherwise described herein, (iii) the conditions (if any) under
which the amount of coverage under such Credit Support may be reduced and under
which such Credit Support may be terminated or replaced and (iv) the material
provisions relating to such Credit Support. Additionally, the related Prospectus
Supplement will set forth certain information with respect to the obligor, if
any, under any instrument of Credit Support. See "Risk Factors-Credit Support
Limitations".
Subordinate Certificates
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate Account
on any Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Certificates. If so provided in the related Prospectus
Supplement, the subordination of a class may
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apply only in the event of certain types of losses or shortfalls. The related
Prospectus Supplement will set forth information concerning the method and
amount of subordination provided by a class or classes of Subordinate
Certificates in a series and the circumstances under which such subordination
will be available.
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of the related
series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
Insurance or Guarantees with Respect to Mortgage Loans
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. The related Prospectus
Supplement will describe the nature of such default risks and the extent of such
coverage.
Letter of Credit
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or other financial institution specified in such Prospectus Supplement (the
"Letter of Credit Bank"). Under a letter of credit, the Letter of Credit Bank
will be obligated to honor draws thereunder in an aggregate fixed dollar amount,
net of unreimbursed payments thereunder, generally equal to a percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of some or all of the related Mortgage Assets on the related Cut-off
Date or of the initial aggregate Certificate Balance of one or more classes of
Certificates. If so specified in the related Prospectus Supplement, the letter
of credit may permit draws only in the event of certain types of losses and
shortfalls. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments thereunder and may
otherwise be reduced as described in the related Prospectus Supplement. The
obligations of the Letter of Credit Bank under the letter of credit for each
series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund.
Certificate Insurance and Surety Bonds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies or surety bonds provided
by one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Certificates of the related series, timely
distributions of interest or distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. The related Prospectus
Supplement will describe any limitations on the draws that may be made under any
such instrument.
Reserve Funds
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments, a
demand note or a combination thereof will be deposited, in the amounts specified
in such Prospectus Supplement. If so specified in the related Prospectus
Supplement, the reserve fund for
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a series may also be funded over time by a specified amount of certain
collections received on the related Mortgage Assets.
Amounts on deposit in any reserve fund for a series will be applied for the
purposes, in the manner, and to the extent specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, reserve funds
may be established to provide protection only against certain types of losses
and shortfalls. Following each Distribution Date, amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from the
reserve fund under the conditions and to the extent specified in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, any reinvestment income or other
gain from such investments will be credited to the related reserve fund for such
series, and any loss resulting from such investments will be charged to such
reserve fund. However, such income may be payable to any related Master Servicer
or another service provider as additional compensation for its services. The
reserve fund, if any, for a series will not be a part of the Trust Fund unless
otherwise specified in the related Prospectus Supplement.
Credit Support with respect to MBS
If so provided in the Prospectus Supplement for a series of Certificates,
any MBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify, as to each
such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by commercial and multifamily residential
properties. Because such legal aspects are governed by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular state, or to encompass the laws
of all states in which the security for the Mortgage Loans (or mortgage loans
underlying any MBS) is situated. Accordingly, the summaries are qualified in
their entirety by reference to the applicable laws of those states. See
"Description of the Trust Funds-Mortgage Loans". If a significant percentage of
Mortgage Loans (or mortgage loans underlying MBS), by balance, are secured by
properties in a particular state, relevant state laws, to the extent they vary
materially from this discussion, will be discussed in the Prospectus Supplement.
For purposes of the following discussion, "Mortgage Loan" includes a mortgage
loan underlying an MBS.
General
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages". A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the
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appropriate public recording office. However, the lien of a recorded mortgage
will generally be subordinate to later-arising liens for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property, irrevocably until the debt is paid, in trust
and generally with a power of sale, to the trustee to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties, pursuant to which the borrower, or grantor, conveys title to the
real property to the grantee, or lender, generally with a power of sale, until
such time as the debt is repaid. In a case where the borrower is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the borrower.
At origination of a mortgage loan involving a land trust, the borrower may
execute a separate undertaking to make payments on the mortgage note. In no
event is the land trustee personally liable for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed by
the express provisions of the related instrument, the law of the state in which
the real property is located, certain federal laws and, in some deed of trust
transactions, the directions of the beneficiary.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the borrower
as additional security for the loan. In general, the lender must file financing
statements in order to perfect its security interest in the room rates and must
file continuation statements, generally every five years, to maintain perfection
of such security interest. In certain cases, Mortgage Loans secured by hotels or
motels may be included in a Trust Fund even if the security interest in the room
rates was not perfected or the requisite UCC filings were allowed to lapse. Even
if the lender's security interest in room rates is perfected under applicable
nonbankruptcy law, it will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default. In the bankruptcy setting,
however, the lender will be stayed from enforcing its rights to collect room
rates, but those room rates (in light of certain revisions to the Bankruptcy
Code which are effective for all bankruptcy cases commenced on or after October
22, 1994) constitute "cash collateral" and therefore cannot be used by the
bankruptcy debtor without a hearing or lender's consent and unless the lender's
interest in the room rates is given adequate protection (e.g., cash payment for
otherwise encumbered funds or a replacement lien on unencumbered property, in
either case equal in value to the amount of room rates that the debtor proposes
to use, or other similar relief). See "-Bankruptcy Laws".
Personalty
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In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the borrower
and not previously pledged) may constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the UCC. Accordingly, if a borrower pledges personal
property as security for a mortgage loan, the lender generally must file UCC
financing statements in order to perfect its security interest therein, and must
file continuation statements, generally every five years, to maintain that
perfection. In certain cases, Mortgage Loans secured in part by personal
property may be included in a Trust Fund even if the security interest in such
personal property was not perfected or the requisite UCC filings were allowed to
lapse.
Foreclosure
General. Foreclosure is a legal procedure that allows the lender to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the lender has the right to institute foreclosure
proceedings to sell the real property at public auction to satisfy the
indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and nonjudicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, but they
are either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses are raised or counterclaims are interposed, and sometimes
requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
Upon successful completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
officer to conduct a public sale of the mortgaged property, the proceeds of
which are used to satisfy the judgment. Such sales are made in accordance with
procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain Provisions.
United States courts have traditionally imposed general equitable principles to
limit the remedies available to lenders in foreclosure actions. These principles
are generally designed to relieve borrowers from the effects of mortgage
defaults perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative actions to determine the cause of 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 and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a nonmonetary default, such as a failure to
adequately maintain the mortgaged property or an impermissible further
encumbrance of the mortgaged property. Finally, some courts have addressed the
issue of whether federal or state constitutional provisions reflecting due
process concerns for adequate notice require that a borrower receive notice in
addition to statutorily-prescribed minimum notice. For the most part, these
cases have upheld the reasonableness of the notice provisions or have found that
a public sale under a mortgage providing for a power of sale does not involve
sufficient state action to trigger constitutional protections.
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In addition, some states may have statutory protection such as the right of
the borrower to reinstate mortgage loans after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained in
any other type of mortgage instrument if applicable law so permits. A power of
sale under a deed of trust allows a nonjudicial public sale to be conducted
generally following a request from the beneficiary/lender to the trustee to sell
the property upon default by the borrower and after notice of sale is given in
accordance with the terms of the mortgage and applicable state law. In some
states, prior to such sale, the trustee under the deed of trust must record a
notice of default and notice of sale and send a copy to the borrower and to any
other party who has recorded a request for a copy of a notice of default and
notice of sale. In addition, in some states the trustee must provide notice to
any other party having an interest of record in the real property, including
junior lienholders. A notice of sale must be posted in a public place and, in
most states, published for a specified period of time in one or more newspapers.
The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without regard to the acceleration of the
indebtedness), plus the lender's expenses incurred in enforcing the obligation.
In other states, the borrower or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, state law governs the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time periods.
Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other things, redemption rights
that may exist) and because of the possibility that physical deterioration of
the property may have occurred during the foreclosure proceedings. Therefore, it
is common for the lender to purchase the mortgaged property for an amount equal
to the secured indebtedness and accrued and unpaid interest plus the expenses of
foreclosure, in which event the borrower's debt will be extinguished, or for a
lesser amount in order to preserve its right to seek a deficiency judgment if
such is available under state law and under the terms of the Mortgage Loan
documents. (The Mortgage Loans, however, may be nonrecourse. See "Risk
Factors-Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans-Limited Recourse Nature of the Mortgage Loans".) Thereafter,
subject to the borrower's right in some states to remain in possession during a
redemption period, the lender will become the owner of the property and have
both the benefits and burdens of ownership, including the obligation to pay debt
service on any senior mortgages, to pay taxes, to obtain casualty insurance and
to make such repairs as are necessary to render the property suitable for sale.
The costs of operating and maintaining a commercial or multifamily residential
property may be significant and may be greater than the income derived from that
property. The lender also will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale or lease 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.
Moreover, because of the expenses associated with acquiring, owning and selling
a mortgaged property, a lender could realize an overall loss on a mortgage loan
even if the mortgaged property is sold at foreclosure, or resold after it is
acquired through foreclosure, for an amount equal to the full outstanding
principal amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
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Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all persons
who have interests in the property that are subordinate to that of the
foreclosing lender, from exercise of their "equity of redemption". The doctrine
of equity of redemption provides that, until the property encumbered by a
mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) right which should
be distinguished from post-sale statutory 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. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted 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 because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a mortgage loan by its terms provides
for recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of trust. A deficiency judgment is a personal judgment
against the former borrower equal to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes may require the lender to exhaust the security afforded
under a mortgage 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 those states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists will usually proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
Leasehold Considerations. Mortgage Loans may be secured by a mortgage on
the borrower's leasehold interest in a ground lease. Leasehold mortgage loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of the borrower. The most significant of these risks is
that if the borrower's leasehold were to be terminated upon a lease default, the
leasehold mortgagee would lose its security. This risk may be lessened if the
ground lease requires the lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them, permits the leasehold estate to
be assigned to and by the leasehold mortgagee or the purchaser at a foreclosure
sale, and contains certain other protective provisions typically included in a
"mortgageable" ground lease. Certain Mortgage Loans, however, may be secured by
ground leases which do not contain these provisions.
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Cooperative Shares. Mortgage Loans may be secured by a security interest on
the borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto, allocable to cooperative dwelling units that may be vacant
or occupied by nonowner tenants. Such loans are subject to certain risks not
associated with mortgage loans secured by a lien on the fee estate of a borrower
in real property. Such a loan typically is subordinate to the mortgage, if any,
on the Cooperative's building which, if foreclosed, could extinguish the equity
in the building and the proprietary leases of the dwelling units derived from
ownership of the shares of the Cooperative. Further, transfer of shares in a
Cooperative are subject to various regulations as well as to restrictions under
the governing documents of the Cooperative, and the shares may be cancelled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the Cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on Cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given the debtor and
the method, manner, time, place and terms of the sale. 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. A 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 leases.
Bankruptcy Laws
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
Some bankruptcy courts have approved plans, based on the particular facts of the
reorganization case, that effected the cure of a mortgage loan default by paying
arrearages over a number of years. Also, a bankruptcy court may permit a debtor,
through its rehabilitative plan, to reinstate a loan mortgage payment schedule
even if the lender has obtained a final judgment of foreclosure prior to the
filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under the Bankruptcy
Code, a lender may be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents. Recent amendments to the
Bankruptcy code,
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however, may minimize the impairment of the lender's ability to enforce the
borrower's assignment of rents and leases. In addition to the inclusion of hotel
revenues within the definition of "cash collateral" as noted previously in the
section entitled "-Leases and Rents", the amendments provide that a pre-petition
security interest in rents or hotel revenues is designed to overcome those cases
holding that a security interest in rents is unperfected under the laws of
certain states until the lender has taken some further action, such as
commencing foreclosure or obtaining a receiver prior to activation of the
assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that ability
may be impaired by the commencement of a bankruptcy case relating to a lessee
under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition. In addition, the Bankruptcy Code generally provides that a
trustee or debtor-in-possession may, subject to approval of the court, (i)
assume the lease and retain it or assign it to a third party or (ii) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must cure any defaults under the lease, compensate the
lessor for its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease.
Environmental Considerations
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Such environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In certain circumstances, a lender
may decide to abandon a contaminated mortgaged property as collateral for its
loan rather than foreclose and risk liability for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
participated in the management of such mortgaged property or the operations of
the borrower. Such liability may exist even if the lender did not cause or
contribute to the contamination and regardless of whether the lender has
actually taken possession of a mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, such liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator", however, is a person "who without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest". This is the so called "secured creditor exemption".
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The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Act") amended, among other things, the provisions of CERCLA with respect
to lender liability and the secured creditor exemption. The Act offers
substantial protection to lenders by defining the activities in which a lender
can engage and still have the benefit of the secured creditor exemption. In
order for a lender to be deemed to have participated in the management of a
mortgaged property, the lender must actually participate in the operational
affairs of the property of the borrower. The Act provides that "merely having
the capacity to influence, or unexercised right to control" operations does not
constitute participation in management. A lender will lose the protection of the
secured creditor exemption only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property. The Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Certain Other Federal and State Laws. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption. In
addition, under federal law, there is potential liability relating to hazardous
wastes and underground storage tanks under the federal Resource Conservation and
Recovery Act.
In a few states, transfers of some types of properties are conditioned upon
cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury or damage to property) related to hazardous environmental
conditions on a property. While it may be more difficult to hold a lender liable
in such cases, unanticipated or uninsured liabilities of the borrower may
jeopardize the borrower's ability to meet its loan obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. Such costs may jeopardize the
borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard, but that individual or entity may be without
substantial assets. Accordingly, it is possible that such costs could become a
liability of the Trust Fund and occasion a loss to the Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related Prospectus Supplement, the Pooling Agreement will provide that neither
the Master Servicer nor the Special Servicer, acting on behalf of the Trustee,
may acquire title to a Mortgaged Property or take over its operation unless the
Special Servicer, based solely (as to environmental matters) on a report
prepared by a person who regularly conducts environmental audits, has made the
determination that it is appropriate to do so, as described under "Description
of the Pooling Agreements-Realization Upon Defaulted Mortgage Loans".
If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will be
required to operate the property in accordance with those laws and regulations.
Such compliance may entail substantial expense, especially in the case of
industrial or manufacturing properties.
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In addition, a lender may be obligated to disclose environmental conditions
on a property to government entities and/or to prospective buyers (including
prospective buyers at a foreclosure sale or following foreclosure). Such
disclosure may decrease the amount that prospective buyers are willing to pay
for the affected property, sometimes substantially, and thereby decrease the
ability of the lender to recoup its investment in a loan upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to the
issuance of the related Certificates. Environmental site assessments, however,
vary considerably in their content, quality and cost. Even when adhering to good
professional practices, environmental consultants will sometimes not detect
significant environmental problems because to do an exhaustive environmental
assessment would be far too costly and time-consuming to be practical.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such clauses
in many states. However, the Garn-St Germain Depository Institutions Act of 1982
(the "Garn Act") generally preempts state laws that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limitations as set forth in the Garn Act
and the regulations promulgated thereunder. Accordingly, a Master Servicer may
nevertheless have the right to accelerate the maturity of a Mortgage Loan that
contains a "due-on-sale" provision upon transfer of an interest in the property,
without regard to the Master Servicer's ability to demonstrate that a sale
threatens its legitimate security interest.
Junior Liens; Rights of Holders of Senior Liens
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens, and
the loans secured by the related Senior Liens may not be included in the
Mortgage Pool. The primary risk to holders of Mortgage Loans secured by junior
liens is the possibility that adequate funds will not be received in connection
with a foreclosure of the related Senior Liens to satisfy fully both the Senior
Liens and the Mortgage Loan. In the event that a holder of a Senior Lien
forecloses on a Mortgaged Property, the proceeds of the foreclosure or similar
sale will be applied first to the payment of court costs and fees in connection
with the foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Liens. The claims of the holders
of the Senior Liens will be satisfied in full out of proceeds of the liquidation
of the related Mortgage Property, if such proceeds are sufficient, before the
Trust Fund as holder of the junior lien receives any payments in respect of the
Mortgage Loan. In the event that such proceeds from a foreclosure or similar
sale of the related Mortgaged Property are insufficient to satisfy all Senior
Liens and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of
the junior lien, and, accordingly, holders of one or more classes of the
Certificates of the related series bear (i) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (ii) the risk
of loss if the deficiency judgment is not realized upon. Moreover, deficiency
judgments may not be available in certain jurisdictions or the Mortgage Loan may
be nonrecourse.
Subordinate Financing
The terms of certain of the Mortgage Loans may not restrict the ability of
the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be unenforceable. Where a borrower
encumbers a
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mortgaged property with one or more junior liens, the senior lender is subjected
to additional risk. First, the borrower may have difficulty servicing and
repaying multiple loans. Moreover, if the subordinate financing permits recourse
to the borrower (as is frequently the case) and the senior loan does not, a
borrower may have more incentive to repay sums due on the subordinate loan.
Second, acts of the senior lender that prejudice the junior lender or impair the
junior lender's security may create a superior equity in favor of the junior
lender. For example, if the borrower and the senior lender agree to an increase
in the principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent any existing junior lender is
harmed or the borrower is additionally burdened. Third, if the borrower defaults
on the senior loan and/or any junior loan or loans, the existence of junior
loans and actions taken by junior lenders can impair the security available to
the senior lender and can interfere with or delay the taking of action by the
senior lender. Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that 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.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or adoption)
be eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof are to be
construed in accordance with the laws of another state under which such interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that such choice of law provision would be given
effect.
Certain Laws and Regulations
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply (together
with an inability to remedy any such failure) could result in material
diminution in the value of a Mortgaged Property which could, together with the
possibility of limited alternative uses for a particular Mortgaged Property
(i.e., a nursing or convalescent home or hospital), result in a failure to
realize the full principal amount of the related Mortgage Loan.
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Americans with Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
Soldiers' and Sailors' Civil Relief Act of 1940
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 was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) 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. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of a Master Servicer or
Special Servicer to collect full amounts of interest on certain of the Mortgage
Loans. Any shortfalls in interest collections resulting from the application of
the Relief Act would result in a reduction of the amounts distributable to the
holders of the related series of Certificates, and would not be covered by
advances or, unless otherwise specified in the related Prospectus Supplement,
any form of Credit Support provided in connection with such Certificates. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer or Special Servicer to foreclose on an affected Mortgage
Loan during the borrower's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution
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of the mortgage, "reasonably without cause to believe" that the property was
used in, or purchased with the proceeds of, illegal drug or RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following general discussion of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of Offered
Certificates of any series thereof, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of counsel to
the Depositor with respect to that series on the material matters associated
with such consequences, subject to any qualifications set forth herein. Unless
otherwise specified in the related Prospectus Supplement, counsel to the
Depositor for each series will be Thacher Proffitt & Wood. This discussion is
directed primarily to Certificateholders that hold the Certificates as "capital
assets" within the meaning of Section 1221 of the Code (although portions
thereof may also apply to Certificateholders who do not hold Certificates as
"capital assets") and it does not purport to discuss all federal income tax
consequences that may be applicable to the individual circumstances of
particular investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special treatment under the Code. Further,
the authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. Prospective investors should note that no rulings have been or
will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given the IRS will not
take contrary positions. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their tax advisors and tax return preparers regarding
the preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein. In addition to the federal income tax
consequences described herein, potential investors are advised to consider the
state and local tax consequences, if any, of the purchase, ownership and
disposition of Offered Certificates. See "State and Other Tax Consequences".
Certificateholders are advised to consult their tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of Offered Certificates.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the REMIC Administrator will elect to have treated as a
real estate mortgage investment conduit ("REMIC") under Sections 860A through
860G (the "REMIC Provisions") of the Code, and (ii) Grantor Trust Certificates
representing interests in a Trust Fund ("Grantor Trust Fund") as to which no
such election will be made. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election (or elections) will be made
for the related Trust Fund and, if such an election is to be made, will identify
all "regular interests" and "residual interests" in the REMIC. For purposes of
this tax discussion, references to a "Certificateholder" or a "holder" are to
the beneficial owner of a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that Mortgage
Assets held by a Trust Fund consist solely of Mortgage Loans. To the extent that
other Mortgage Assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a Trust Fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related Prospectus
Supplement. In addition, if Cash Flow Agreements other than guaranteed
investment contracts are included in a Trust Fund, the anticipated material
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tax consequences associated with such Cash Flow Agreements also will be
discussed in the related Prospectus Supplement. See "Description of the Trust
Funds-Cash Flow Agreements".
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICs
Classification of REMICs. With respect to each series of REMIC
Certificates, counsel to the Depositor will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Trust Fund (or each applicable portion thereof) will
qualify as a REMIC and the REMIC Certificates offered with respect thereto will
be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in that REMIC within the meaning of the REMIC Provisions.
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of REMIC Certificates,
to the extent it relates to matters of law or legal conclusions with respect
thereto, represents the opinion of counsel to the Depositor for the applicable
series as specified in the related Prospectus Supplement, subject to any
qualifications set forth herein. In addition, counsel to the Depositor have
prepared or reviewed the statements in this Prospectus under the heading
"Certain Federal Income Tax Consequences--REMICs," and are of the opinion that
such statements are correct in all material respects. Such statements are
intended as an explanatory discussion of the possible effects of the
classification of any Trust Fund (or applicable portion thereof) as a REMIC for
federal income tax purposes on investors generally and of related tax matters
affecting investors generally, but do not purport to furnish information in the
level of detail or with the attention to an investor's specific tax
circumstances that would be provided by an investor's own tax advisor.
Accordingly, each investor is advised to consult its own tax advisors with
regard to the tax consequences to it of investing in REMIC Certificates.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling Agreement with respect to each REMIC will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be inadvertently terminated.
Characterization of Investments in REMIC Certificates. In general, unless
otherwise provided in the related Prospectus Supplement, the REMIC Certificates
will be "qualifying real property loans" within the meaning of Section 593(d) of
the Code, "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC underlying such Certificates would be so
treated. However, to the extent that the REMIC assets constitute mortgages on
property not used for residential or certain other prescribed purposes, the
REMIC Certificates will not be treated as assets qualifying under Section
7701(a)(19)(C). Moreover, if 95% or more of the assets of the REMIC qualify for
any of the foregoing characterizations at all times during a calendar year, the
REMIC Certificates will qualify for the corresponding status in their entirety
for that calendar year.
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Interest (including original issue discount) on the REMIC Regular Certificates
and income allocated to the REMIC Residual Certificates will be interest
described in Section 856(c)(3)(B) of the Code to the extent that such
Certificates are treated as "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. In addition, the REMIC Regular Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code. The
determination as to the percentage of the REMIC's assets that constitute assets
described in the foregoing sections of the Code will be made with respect to
each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The REMIC
Administrator will report those determinations to Certificateholders in the
manner and at the times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale, and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections of the Code)
otherwise would receive the same treatment as the Mortgage Loans for purposes of
all of the foregoing sections of the Code. In addition, in some instances
Mortgage Loans may not be treated entirely as assets described in the foregoing
sections of the Code. If so, the related Prospectus Supplement will describe the
Mortgage Loans that may not be so treated. The REMIC Regulations do provide,
however, that cash received from payments on Mortgage Loans held pending
distribution is considered part of the Mortgage Loans for purposes of Sections
593(d) and 856(c)(5)(A) of the Code, and Treasury regulations provide that real
property acquired by foreclosure constitutes "qualifying real property loans"
for purposes of section 593(d) of the Code.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. As to
each such series of REMIC Certificates, in the opinion of counsel to the
Depositor, assuming compliance with all provisions of the related Pooling
Agreement, the Tiered REMICs will each qualify as a REMIC and the REMIC
Certificates issued by the Tiered REMICs, will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates.
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the "constant yield" method described below,
in advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
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The Code requires that a reasonable prepayment assumption be used with
respect to Mortgage Loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor nor any other person will
make any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest".
"Qualified stated interest" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) at a single fixed rate, or
at a "qualified floating rate", an "objective rate", a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate", or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such REMIC
Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the IRS.
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on a
Distribution Date, in some cases, as a consequence of this "long first accrual
period", some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns provided to
the Certificateholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing
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Date to the first Distribution Date should be included in the stated redemption
price of such REMIC Regular Certificate. However, the OID Regulations state that
all or some portion of such accrued interest may be treated as a separate asset
the cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "-Taxation
of Owners of REMIC Regular Certificates-Market Discount" below for a description
of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated in the
related Prospectus Supplement, each period that begins on a date that
corresponds to a Distribution Date (or in the case of the first such period,
begins on the Closing Date) and ends on the day preceding the immediately
following Distribution Date, a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (a) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (b) the distributions made on
such REMIC Regular Certificate during the accrual period of amounts included in
the stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate will
be received in future periods based on the Mortgage Loans being prepaid at a
rate equal to the Prepayment Assumption, (ii) using a discount rate equal to the
original yield to maturity of the Certificate and (iii) taking into account
events (including actual prepayments) that have occurred before the close of the
accrual period. For these purposes, the original yield to maturity of the
Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
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accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price", in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest and
discount (including de minimis market or original issue discount) in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the Certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"-Taxation of Owners of REMIC Regular Certificates-Premium" below. Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest would be irrevocable except with the
approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment.
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Until regulations are issued by the Treasury Department, certain rules described
in the Committee Report apply. The Committee Report indicates that in each
accrual period market discount on REMIC Regular Certificates should accrue, at
the Certificateholder's option: (i) on the basis of a constant yield method,
(ii) in the case of a REMIC Regular Certificate issued without original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the stated interest paid in the accrual period bears to the total
amount of stated interest remaining to be paid on the REMIC Regular Certificate
as of the beginning of the accrual period, or (iii) in the case of a REMIC
Regular Certificate issued with original issue discount, in an amount that bears
the same ratio to the total remaining market discount as the original issue
discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount" above. The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171 of
the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be
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entitled to deduct a loss under Section 166 of the Code until such holder's
Certificate becomes wholly worthless (i.e., until its Certificate Balance has
been reduced to zero) and that the loss will be characterized as a short-term
capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates.
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"-Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "-Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC until the
REMIC's termination. Ordinary income derived from REMIC Residual Certificates
will be "portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses".
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate from the
seller of such Certificate in connection with the acquisition of such REMIC
Residual Certificate will be taken into account in determining the income of
such holder
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for federal income tax purposes. Although it appears likely that any such
payment would be includible in income immediately upon its receipt, the IRS
might assert that such payment should be included in income over time according
to an amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of such
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions",
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return. Such disparity between income and
distributions may not be offset by corresponding losses or reductions of income
attributable to the REMIC Residual Certificateholder until subsequent tax years
and, then, may not be completely offset due to changes in the Code, tax rates or
character of the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt losses with respect
to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under "-Taxation
of Owners of REMIC Regular Certificates-Original Issue Discount". The issue
price of a REMIC Certificate received in exchange for an interest in the
Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the REMIC
Administrator may be required to estimate the fair market value of such
interests in order to determine the basis of the REMIC in the Mortgage Loans and
other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "-Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price.
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Any such discount will be includible 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 REMIC Regular Certificates. It is anticipated that each REMIC will elect
under Section 171 of the Code to amortize any premium on the Mortgage Loans.
Premium on any Mortgage Loan to which such election applies may be amortized
under a constant yield method, presumably taking into account a Prepayment
Assumption. Further, such an election would not apply to any Mortgage Loan
originated on or before September 27, 1985. Instead, premium on such a Mortgage
Loan should be allocated among the principal payments thereon and be deductible
by the REMIC as those payments become due or upon the prepayment of such
Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount", except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "-Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other noninterest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "-Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders
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to deduct net losses may be subject to additional limitations under the Code, as
to which REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "-Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder see "-Taxation of Owners of REMIC
Residual Certificates-General" above.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will, with an exception discussed below for certain REMIC Residual
Certificates held by thrift institutions, be subject to federal income tax in
all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to
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the 30% United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "-Foreign Investors
in REMIC Certificates" below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value". The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Although it
has not done so, the Treasury also has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value". The related Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered to have "significant
value" under the REMIC Regulations; provided, however, that any disclosure that
a REMIC Residual Certificate will have "significant value" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will have "significant value" for purposes of the
above-described rules. The above-described exception for thrift institutions
applies only to those residual interests held directly by, and deductions,
losses and loss carryovers incurred by, such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income tax
return with such thrift institution) or by certain wholly-owned direct
subsidiaries of such institutions formed or operated exclusively in connection
with the organization and operation of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax". If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the
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prospective transferee, as to which the transferor is also required to make a
reasonable investigation to determine such transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
Prior to purchasing a REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules which would result in
the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "-Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
Mark-to-Market Rules. On December 28, 1993, the IRS released temporary
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a "negative value" REMIC Residual Certificate is not
treated as a security and thus generally may not be marked to market. This
exclusion from the mark-to-market requirement is expanded to include all REMIC
Residual Certificates under proposed Treasury regulations published January 4,
1995 which provide that any REMIC Residual Certificate issued after January 4,
1995 will not be treated as a security and therefore generally may not be marked
to market. Prospective purchasers of a REMIC Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate 2% of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over such amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of such a holder of a REMIC Certificate that is an individual, estate or trust,
or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's
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gross income. Accordingly, such REMIC Certificates may not be appropriate
investments for individuals, estates, or trusts, or pass-through entities
beneficially owned by one or more individuals, estates or trusts. Such
prospective investors should consult with their tax advisors prior to making an
investment in such Certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described above
under "-Taxation of Owners of REMIC Residual Certificates-Basis Rules, Net
Losses and Distributions". Except as provided in the following four paragraphs,
any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code. The Code as of the date of this
Prospectus provides for a top marginal tax rate of 39.6% for individuals and a
maximum marginal rate for long-term capital gains of individuals of 28%. No such
rate differential exists for corporations. In addition, the distinction between
a capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be a
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate), determined as of
the date of purchase of such REMIC Regular Certificate, over (ii) the amount of
ordinary income actually includible in the seller's income prior to such sale.
In addition, gain recognized on the sale of a REMIC Regular Certificate by a
seller who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "-Taxation of Owners of REMIC Regular Certificates-Market
Discount" and "-Premium".
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits
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the deduction of interest on indebtedness incurred to purchase or carry property
held for investment to a taxpayer's net investment income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions" (a
"Prohibited Transactions Tax"). In general, subject to certain specified
exceptions a prohibited transaction means the disposition of a Mortgage Loan,
the receipt of income from a source other than a Mortgage Loan or certain other
permitted investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the Mortgage Loans
for temporary investment pending distribution on the REMIC Certificates. It is
not anticipated that any REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property", determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related REMIC Administrator, Master Servicer, Special Servicer, Manager or
Trustee, in any case out of its own funds, provided that such person has
sufficient assets to do so, and provided further that such tax arises out of a
breach of such person's obligations under the related Pooling Agreement and in
respect of compliance with applicable laws and regulations. Any such tax not
borne by a REMIC Administrator, a Master Servicer, Special Servicer, Manager or
Trustee will be charged against the related Trust Fund resulting in a reduction
in amounts payable to holders of the related REMIC Certificates.
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Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations. If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate) of the total anticipated
excess inclusions with respect to such REMIC Residual Certificate for periods
after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The anticipated excess inclusions must be determined
as of the date that the REMIC Residual Certificate is transferred and must be
based on events that have occurred up to the time of such transfer, the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that (i) residual interests in
such entity are not held by disqualified organizations and (ii) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in each Pooling Agreement, and will be discussed in any Prospectus
Supplement relating to the offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination. A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Mortgage
Loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder should
(but may not) be treated as realizing a loss equal to the amount of such
difference, and such loss may be treated as a capital loss.
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Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, the REMIC
Administrator, which generally will hold at least a nominal amount of REMIC
Residual Certificates, will file REMIC federal income tax returns on behalf of
the related REMIC, and will be designated as and will act as the "tax matters
person" with respect to the REMIC in all respects.
As the tax matters person, the REMIC Administrator, subject to certain
notice requirements and various restrictions and limitations, generally will
have the authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders generally will be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the REMIC Administrator, as tax matters person, and the IRS concerning
any such REMIC item. Adjustments made to the REMIC tax return may require a
REMIC Residual Certificateholder to make corresponding adjustments on its
return, and an audit of the REMIC's tax return, or the adjustments resulting
from such an audit, could result in an audit of a REMIC Residual
Certificateholder's return. No REMIC will be registered as a tax shelter
pursuant to Section 6111 of the Code because it is not anticipated that any
REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a REMIC Residual Certificate as a nominee for
another person may be required to furnish to the related REMIC, in a manner to
be provided in Treasury regulations, the name and address of such person and
other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other nonindividuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the IRS. Reporting with respect
to REMIC Residual Certificates, including income, excess inclusions, investment
expenses and relevant information regarding qualification of the REMIC's assets
will be made as required under the Treasury regulations, generally on a
quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount".
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the REMIC Administrator.
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Backup Withholding with Respect to REMIC Certificates. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax. Furthermore, certain penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular Certificateholder
that is not a "United States Person" (as defined below) and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate will
not, unless otherwise disclosed in the related Prospectus Supplement, be subject
to United States federal income or withholding tax in respect of a distribution
on a REMIC Regular Certificate, provided that the holder complies to the extent
necessary with certain identification requirements (including delivery of a
statement, signed by the Certificateholder under penalties of perjury,
certifying that such Certificateholder is not a United States Person and
providing the name and address of such Certificateholder). For these purposes,
"United States Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof, or an estate or
trust whose income from sources without the United States is includible in gross
income for United States federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States. It
is possible that the IRS may assert that the foregoing tax exemption should not
apply with respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest in
the REMIC Residual Certificates. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a tax rate of 30%,
subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a nonresident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are nonresident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling Agreement.
Grantor Trust Funds
Classification of Grantor Trust Funds. With respect to each series of
Grantor Trust Certificates, counsel to the Depositor will deliver its opinion to
the effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. The following general discussion of the
anticipated federal income tax consequences of the purchase, ownership and
disposition of Grantor Trust Certificates, to the extent it relates to matters
of law or legal conclusions with respect thereto, represents the opinion of
counsel to the Depositor for the applicable series as specified in the related
Prospectus Supplement, subject to any qualifications set forth herein. In
addition, counsel to the Depositor have prepared or reviewed the statements in
this Prospectus under the heading "Certain Federal Income Tax
Consequences--Grantor Trust Funds," and are of the opinion that such statements
are correct in all material respects. Such
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statements are intended as an explanatory discussion of the possible effects of
the classification of any Grantor Trust Fund as a grantor trust for federal
income tax purposes on investors generally and of related tax matters affecting
investors generally, but do not purport to furnish information in the level of
detail or with the attention to an investor's specific tax circumstances that
would be provided by an investor's own tax advisor. Accordingly, each investor
is advised to consult its own tax advisors with regard to the tax consequences
to it of investing in Grantor Trust Certificates.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate". A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees) and interest paid to the holders of Grantor Trust
Fractional Interest Certificates issued with respect to such Grantor Trust Fund
will be referred to as a "Grantor Trust Strip Certificate". A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
Characterization of Investments in Grantor Trust Certificates.
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Depositor will deliver an opinion
that, in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "qualifying real property loans" within the meaning of Section
593(d) of the Code; (ii) "loans . . . secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; (iii)
"obligation[s] (including any participation or Certificate of beneficial
ownership therein) which . . .[are] principally secured by an interest in real
property" within the meaning of Section 860G(a)(3) of the Code; and (iv) "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code. In
addition, counsel to the Depositor will deliver an opinion that interest on
Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of Mortgage Loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, "qualifying real property loans" within
the meaning of Section 593(d) of the Code, and "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code, and the interest on which is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(A) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying such sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that such characterization is appropriate. Counsel to the
Depositor will not deliver any opinion on these questions. Prospective
purchasers to which such characterization of an investment in Grantor Trust
Strip Certificates is material should consult their tax advisors regarding
whether the Grantor Trust Strip Certificates, and the income therefrom, will be
so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
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Taxation of Owners of Grantor Trust Fractional Interest Certificates.
General. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses) and
will be entitled to deduct their shares of any such reasonable servicing fees
and other expenses. Because of stripped interests, market or original issue
discount, or premium, the amount includible in income on account of a Grantor
Trust Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a Mortgage Asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. The
related Prospectus Supplement will include information regarding servicing fees
paid to a Master Servicer, a Special Servicer, any Sub-Servicer or their
respective affiliates.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-Market Discount" below. Under the stripped bond rules, the
holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser of the Grantor Trust Fractional Interest Certificate. The stated
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redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest", if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest". In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "-Sales of Grantor Trust Certificates" below) and the yield of such Grantor
Trust Fractional Interest Certificate to such holder. Such yield would be
computed as the rate (compounded based on the regular interval between payment
dates) that, if used to discount the holder's share of future payments on the
Mortgage Loans, would cause the present value of those future payments to equal
the price at which the holder purchased such Certificate. In computing yield
under the stripped bond rules, a Certificateholder's share of future payments on
the Mortgage Loans will not include any payments made in respect of any
ownership interest in the Mortgage Loans retained by the Depositor, the Master
Servicer, the Special Servicer, any Sub-Servicer or their respective affiliates,
but will include such Certificateholder's share of any reasonable servicing fees
and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a reasonable prepayment assumption may be required or permitted without
reliance on these rules. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Fractional
Interest Certificate or, with respect to any holder, at the time of purchase of
the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "-REMICs-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount" above. It is
unclear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the
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"Prepayment Assumption") that will be disclosed in the related Prospectus
Supplement and on a constant yield computed using a representative initial
offering price for each class of Certificates. However, neither the Depositor
nor any other person will make any representation that the Mortgage Loans will
in fact prepay at a rate conforming to such Prepayment Assumption or any other
rate and Certificateholders should bear in mind that the use of a representative
initial offering price will mean that such information returns or reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate only
as to the initial Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "-Taxation of Owners of Grantor
Trust Fractional Interest Certificates-If Stripped Bond Rules Do Not Apply" and
"-Market Discount" below.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply, even if the stripped bond rules do not apply, to a
Grantor Trust Fractional Interest Certificate to the extent it evidences an
interest in Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. For a definition of "stated redemption price," see "-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount" above. In general,
the issue price of a Mortgage Loan will be the amount received by the borrower
from the lender under the terms of the Mortgage Loan, less any "points" paid by
the borrower, and the stated redemption price of a Mortgage Loan will equal its
principal amount, unless the Mortgage Loan provides for an initial "teaser," or
below-market interest rate. The determination as to whether original issue
discount will be considered to be de minimis will be calculated using the same
test as in the REMIC discussion. See "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee or
Master Servicer, as applicable, in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the
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stripped bond rules. However, Section 1272(a)(6) of the Code may require that a
prepayment assumption be made in computing yield with respect to all
mortgage-backed securities. Certificateholders are advised to consult their own
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
Unless otherwise provided in the related Prospectus Supplement, the Trustee
or Master Servicer, as applicable, will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may reasonably
request from time to time with respect to original issue discount accruing on
Grantor Trust Fractional Interest Certificates. See "-Grantor Trust Reporting"
below.
Market Discount. If the stripped bond rules do not apply to a Grantor Trust
Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount", that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in "-Taxation of Owners of REMIC Regular
Interests-Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
holder's option: (i) on the basis of a constant yield method, (ii) in the case
of a Mortgage Loan issued without original issue discount, in an amount that
bears
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the same ratio to the total remaining market discount as the stated interest
paid in the accrual period bears to the total stated interest remaining to be
paid on the Mortgage Loan as of the beginning of the accrual period, or (iii) in
the case of a Mortgage Loan issued with original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining at the beginning of the accrual period. The prepayment
assumption, if any, used in calculating the accrual of original issue discount
is to be used in calculating the accrual of market discount. The effect of using
a prepayment assumption could be to accelerate the reporting of such discount
income. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect such regulations might have on
the tax treatment of a Mortgage Loan purchased at a discount in the secondary
market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above within the exception that it is less
likely that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
Further, under the rules described above in "-REMICs-Taxation of Owners of
REMIC Regular Certificates-Market Discount", any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption and the actual rate of prepayments.
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Taxation of Owners of Grantor Trust Strip Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "-Taxation of Owners of Grantor Trust
Fractional Interest Certificates-If Stripped Bond Rules Apply", no regulations
or published rulings under Section 1286 of the Code have been issued and some
uncertainty exists as to how it will be applied to securities such as the
Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their tax advisors concerning the method to be used
in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons", although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "-Possible Application of Proposed Contingent Payment Rules"
below and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "-Taxation of Owners of Grantor Trust Fractional
Interest Certificates-If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated
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as an interest in discrete Mortgage Loans, or if the Prepayment Assumption is
not used, then when a Mortgage Loan is prepaid, the holder of a Grantor Trust
Strip Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of the Grantor Trust Strip Certificate that is allocable to
such Mortgage Loan.
Possible Application of Proposed Contingent Payment Rules. The coupon
stripping rules' general treatment of stripped coupons is to regard them as
newly issued debt instruments in the hands of each purchaser. To the extent that
payments on the Grantor Trust Strip Certificates would cease if the Mortgage
Loans were prepaid in full, the Grantor Trust Strip Certificates could be
considered to be debt instruments providing for contingent payments. Under the
OID Regulations, debt instruments providing for contingent payments are not
subject to the same rules as debt instruments providing for noncontingent
payments, but no final regulations have been promulgated with respect to
contingent payment debt instruments. Proposed regulations were promulgated on
December 16, 1994 regarding contingent payment debt instruments. As in the case
of the OID Regulations, such proposed regulations do not specifically address
securities, such as the Grantor Trust Strip Certificates, that are subject to
the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply a "noncontingent bond method." Under that method, the issuer of a Grantor
Trust Strip Certificate would determine a projected payment schedule with
respect to such Grantor Trust Strip Certificate. Holders of Grantor Trust Strip
Certificates would be bound by the issuer's projected payment schedule, which
would consist of all noncontingent payments and a projected amount for each
contingent payment based on the projected yield (as described below) of the
Grantor Trust Strip Certificate. The projected amount of each payment would be
determined so that the projected payment schedule reflected the projected yield
reasonably expected to be received by the holder of a Grantor Trust Strip
Certificate. The projected yield referred to above would be a reasonable rate,
not less than the "applicable Federal rate" that, as of the issue date,
reflected general market conditions, the credit quality of the issuer, and the
terms and conditions of the Mortgage Loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the projected yield, and would add to, or subtract
from, such income any variation between the payment actually received in such
month and the payment originally projected to be made in such month.
In the absence of final Treasury regulations relating to debt instruments
providing for contingent payments, a projected payment schedule under the
"noncontingent bond method" is not intended to be provided to holders.
Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.
Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this Prospectus provides a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
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Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for that taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Grantor Trust Reporting. Unless otherwise provided in the related
Prospectus Supplement, the Trustee or Master Servicer, as applicable, will
furnish to each holder of a Grantor Trust Certificate with each distribution a
statement setting forth the amount of such distribution allocable to principal
on the underlying Mortgage Loans and to interest thereon at the related
Pass-Through Rate. In addition, the Trustee or Master Servicer, as applicable,
will furnish, within a reasonable time after the end of each calendar year, to
each holder of a Grantor Trust Certificate who was such a holder at any time
during such year, information regarding the amount of servicing compensation
received by the Master Servicer, the Special Servicer or any Sub-Servicer, and
such other customary factual information as the Depositor or the reporting party
deems necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are uncertain
in various respects, there is no assurance the IRS will agree with the Trustee's
or Master Servicer's, as the case may be, information reports of such items of
income and expense. Moreover, such information reports, even if otherwise
accepted as accurate by the IRS, will in any event be accurate only as to the
initial Certificateholders that bought their Certificates at the representative
initial offering price used in preparing such reports.
Backup Withholding. In general, the rules described above in
"-REMICs-Backup Withholding with Respect to REMIC Certificates" will also apply
to Grantor Trust Certificates.
Foreign Investors. In general, the discussion with respect to REMIC Regular
Certificates in "-REMICs-Foreign Investors in REMIC Certificates" above applies
to Grantor Trust Certificates except that Grantor Trust Certificates will,
unless otherwise disclosed in the related Prospectus Supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
nonresident alien individual.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Offered Certificates. State tax law may differ substantially from the
corresponding federal law, and the discussion above does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their tax advisors with respect to the
various tax consequences of investments in the Offered Certificates.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans, and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts (and as applicable, insurance company general accounts) in which such
plans, accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code ("Plans"), and
on persons who are fiduciaries with respect to such Plans, in connection with
the investment of Plan assets. 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 Section
3(33) of ERISA) are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Offered Certificates without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal and state law. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons ("parties in interest" within the meaning of ERISA and "disqualified
persons" within the meaning of the Code; collectively, "Parties in Interest")
who have certain specified relationships to the Plan, unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code or a penalty imposed pursuant to Section
502(i) of ERISA, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
Plan Asset Regulations
A Plan's investment in Offered Certificates may cause the underlying
Mortgage Assets and other assets included in a related Trust Fund to be deemed
assets of such Plan. Section 2510.3-101 of the regulations (the "Plan Asset
Regulations") of the United States Department of Labor (the "DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets include
both such equity interest and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions not applicable here apply, or
unless the equity participation in the entity by "benefit plan investors" (i.e.,
Plans and certain employee benefit plans not subject to ERISA) is not
"significant", both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. Equity participation in a Trust Fund will be significant
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on any date if immediately after the most recent acquisition of any Certificate,
25% or more of any class of Certificates is held by benefit plan investors.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Depositor, the Master
Servicer, any Special Servicer, any Sub-Servicer, any Manager, the Trustee, the
obligor under any credit enhancement mechanism or certain affiliates thereof to
be considered or become Parties in Interest with respect to an investing Plan
(or of a Plan holding an interest in an investing entity). If so, the
acquisition or holding of Certificates by or on behalf of the investing Plan
could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Certificates
acquired by a Plan may be assets of that Plan. Under the Plan Asset Regulations,
the Trust Fund, including the Mortgage Asset Loans and the other assets held in
the Trust Fund, may also be deemed to be assets of each Plan that acquires
Certificates. Special caution should be exercised before Plan Assets are used to
acquire a Certificate in such circumstances, especially if, with respect to such
assets, the Depositor, the Master Servicer, any Special Servicer, any
Sub-Servicer, any Manager, the Trustee, the obligor under any credit enhancement
mechanism or an affiliate thereof either (i) has investment discretion with
respect to the investment of Plan Assets; or (ii) has authority or
responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such advice
will serve as a primary basis for investment decisions with respect to such Plan
assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Assets and other assets included in a Trust Fund
constitute Plan assets, then any party exercising management or discretionary
control regarding those assets, such as the Master Servicer, any Special
Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism, or certain affiliates thereof may be deemed to be a Plan
"fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code with respect to the
investing Plan. In addition, if the Mortgage Assets and other assets included in
a Trust Fund constitute Plan assets, the purchase of Certificates by a Plan, as
well as the operation of the Trust Fund, may constitute or involve a prohibited
transaction under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a "guaranteed
governmental mortgage pool certificate", the Plan's assets include such
certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Plan
Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" FHLMC Certificates, GNMA Certificates and FNMA
Certificates, but do not include FAMC Certificates. Accordingly, even if such
MBS (other than FAMC Certificates) included in a Trust Fund were deemed to be
assets of Plan investors, the mortgages underlying such MBS (other than FAMC
Certificates) would not be treated as assets of such Plans. Private label
mortgage participations, mortgage pass-through certificates, FAMC Certificates
or other mortgage-backed securities are not "guaranteed governmental mortgage
pool certificates" within the meaning of the Plan Asset Regulations. Potential
Plan investors should consult their counsel and review the ERISA discussion in
the related Prospectus Supplement before purchasing any such Certificates.
Prohibited Transaction Exemptions
In considering an investment in the Offered Certificates, a Plan fiduciary
should consider the availability of prohibited transaction exemptions
promulgated by the DOL including, among others, Prohibited Transaction Class
Exemption ("PTCE") 75-1, which exempts certain transactions involving Plans and
certain broker-dealers, reporting dealers and banks; PTCE 90-1, which exempts
certain transactions between insurance company separate accounts and Parties in
Interest; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest; PTCE 84-14, which exempts
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certain transactions effected on behalf of a Plan by a "qualified professional
asset manager"; PTCE 95-60, which exempts certain transactions between insurance
company general accounts and Parties in Interest; and PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by an "in-house asset
manager". There can be no assurance that any of these class exemptions will
apply with respect to any particular Plan investment in the Certificates or,
even if it were deemed to apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such investment. The
Prospectus Supplement with respect to a series of Certificates may contain
additional information regarding the availability of other exemptions with
respect to the Certificates offered thereby.
Insurance Company General Accounts
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Notes should consult with their legal counsel with
respect to the applicability of Section 401(c) of ERISA, including the general
account's ability to continue to hold the Certificates after the date which is
18 months after the date the 401(c) Regulations become final.
Consultation With Counsel
Any Plan fiduciary which proposes to purchase Offered Certificates on
behalf of or with assets of a Plan should consider its general fiduciary
obligations under ERISA and should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investment and the
availability of any prohibited transaction exemption in connection therewith.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences-REMICs-Taxation of
Owners of REMIC Residual Certificates-Excess Inclusions".
<PAGE>
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LEGAL INVESTMENT
If so specified in the related Prospectus Supplement, the Offered
Certificates will constitute "mortgage related securities" for purposes of
SMMEA. Generally, only classes of Offered Certificates that (i) are rated in one
of the two highest rating categories by one or more Rating Agencies and (ii) are
part of a series evidencing interests in a Trust Fund consisting of loans
secured by a single parcel of real estate upon which is located a dwelling or
mixed residential and commercial structure, such as certain Multifamily Loans,
and originated by types of Originators specified in SMMEA, will be "mortgage
related securities" for purposes of SMMEA. "Mortgage related securities" are
legal investments to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, insurance companies and pension
funds created pursuant to or existing under the laws of the United States or of
any state, the authorized investments of which are subject to state regulation).
Under SMMEA, if a state enacted legislation prior to October 3, 1991 that
specifically limits the legal investment authority of any such entities with
respect to "mortgage related securities", Offered Certificates would constitute
legal investments for entities subject to such legislation only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
Upon the issuance of final implementing regulations under the Riegle
Community Development and Regulatory Improvement Act of 1994 and subject to any
limitations such regulations may impose, a modification of the definition of
"mortgage related securities" will become effective to expand the types of loans
to which such securities may relate to include loans secured by "one or more
parcels of real estate upon which is located one or more commercial structures".
In addition, the related legislative history states that this expanded
definition includes multifamily residential loans secured by more than one
parcel of real estate upon which is located more than one structure. Until
September 23, 2001 any state may enact legislation limiting the extent to which
"mortgage related securities" under this expanded definition would constitute
legal investments under that state's laws.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities". The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS (as defined herein). The
Policy Statement generally indicates that a mortgage derivative product will be
deemed to be high risk if it exhibits greater price volatility than a standard
fixed rate thirty-year mortgage security. According to the Policy Statement,
prior to purchase, a depository institution will be required to determine
whether a mortgage derivative product that it is considering acquiring is
high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance as
to which classes of Certificates, including Offered Certificates, will be
treated as high-risk under the Policy Statement.
<PAGE>
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The predecessor to the Office of Thrift Supervision (the "OTS") issued a
bulletin, entitled "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Offered Certificates. In addition, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes of Offered Certificates. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Offered Certificates or to purchase any class of
Offered Certificates representing more than a specified percentage of the
investor's assets. The Depositor will make no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all investors whose investment activities are subject
to legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Certificates of any class
constitute legal investments or are subject to investment, capital or other
restrictions.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or will
be used by the Depositor to cover expenses related thereto. The Depositor
expects to sell the Certificates from time to time, but the timing and amount of
offerings of Certificates will depend on a number of factors, including the
volume of Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Depositor from such sale.
The Depositor intends that Offered Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the Offered
Certificates of a particular series may be made through a combination of two or
more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public offering by one or more underwriters specified in the related
Prospectus Supplement;
2. By placements by the Depositor with institutional investors through
dealers; and
<PAGE>
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3. By direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, the Offered
Certificates of a series may be offered in whole or in part to the seller of the
related Mortgage Assets that would comprise the Trust Fund for such
Certificates.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. The
managing underwriter or underwriters with respect to the offer and sale of
Offered Certificates of a particular series will be set forth on the cover of
the Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Offered Certificates may be
deemed to be underwriters in connection with such Certificates, and any
discounts or commissions received by them from the Depositor and any profit on
the resale of Offered Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
the Offered Certificates of any series will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Depositor will indemnify the
several underwriters and the underwriters will indemnify the Depositor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Depositor and purchasers of
Offered Certificates of such series.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended, in connection with reoffers and sales by them of
Offered Certificates. Holders of Offered Certificates should consult with their
legal advisors in this regard prior to any such reoffer or sale.
As to any series of Certificates, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any unrated
class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or institutional investors.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the Depositor
by Thacher Proffitt & Wood.
<PAGE>
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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. The Depositor has determined that its financial statements will not
be material to the offering of any Offered Certificates.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by borrowers 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 Interest Certificates might, in extreme
cases fail to recoup their initial investments. Furthermore, ratings on mortgage
pass-through certificates do not address the price of such certificates or the
suitability of such certificates to the investor.
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.
<PAGE>
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INDEX OF PRINCIPAL DEFINITIONS
401(c) Regulations.......................................................99
Accrual Certificates......................................................4
Accrual Period .......................................................74
Accrued Certificate Interest.............................................33
Act .......................................................66
ADA .......................................................69
ARM Loans .......................................................20
Assisted Living Facilities...............................................21
Available Distribution Amount............................................32
Book-Entry Certificates..................................................31
Call Risk .......................................................10
Cash Flow Agreement.......................................................6
CERCLA .......................................................65
Certificate Account......................................................24
Certificate Balance.......................................................4
Certificate Owner .......................................................38
Certificates ........................................................i
Closing Date .......................................................73
Code ........................................................7
Commercial Properties..............................................i, 2, 17
Commission .......................................................iv
Committee Report .......................................................73
Companion Class .......................................................34
Concept .......................................................22
Condemnation Proceeds....................................................46
Contributions Tax .......................................................84
Controlled Amortization Class............................................34
Controlled Amortization Classes...........................................3
Cooperatives .......................................................17
CPR .......................................................28
Credit Support ........................................................6
Crime Control Act .......................................................69
Cut-off Date ....................................................5, 33
Debt Service Coverage Ratio..............................................18
Definitive Certificates..................................................31
Depositor ........................................................i
Determination Date...................................................26, 32
Deutsche Bank Group......................................................31
Distribution Date ........................................................4
Distribution Date Statement..............................................35
DMARC Trust .......................................................30
DOL .......................................................97
DTC ....................................................v, 38
DTC Participants .......................................................38
Due Dates .......................................................19
Due Period .......................................................26
Equity Participation.....................................................20
ERISA ....................................................7, 97
Exchange Act ........................................................v
Extension Risk .......................................................10
FAMC .......................................................23
FHLMC .......................................................23
Financial Intermediary...................................................38
FNMA .......................................................23
Garn Act .......................................................67
GNMA .......................................................23
Grantor Trust Certificates................................................7
Grantor Trust Fractional Interest Certificate............................88
Grantor Trust Fund.......................................................70
Health Care-Related Facilities...........................................20
Insurance Proceeds.......................................................45
IRS ...................................................49, 70
Issue Premium .......................................................79
Letter of Credit Bank....................................................58
Liquidation Proceeds.....................................................46
Loan-to-Value Ratio......................................................18
Lock-out Date .......................................................19
Lock-out Period .......................................................19
Manager ........................................................1
Mark-to-Market Regulations...............................................82
Master Servicer ........................................................1
MBS .................................................i, 3, 16
MBS Administrator ........................................................1
MBS Agreement .......................................................23
MBS Issuer .......................................................23
MBS Servicer .......................................................23
MBS Trustee .......................................................23
Mortgage .......................................................17
Mortgage Asset Pool.......................................................i
Mortgage Asset Seller....................................................16
Mortgage Assets ....................................................i, 16
Mortgage Loans .................................................i, 1, 16
Mortgage Notes .......................................................17
Mortgage Rate ........................................................2
Mortgaged Properties.....................................................17
Mortgages .......................................................59
Multifamily Properties..........................................i, 1, 2, 17
Net Leases .......................................................18
Net Operating Income.....................................................18
Nonrecoverable Advance...................................................35
Notional Amount ........................................................4
Offered Certificates......................................................i
OID Regulations .......................................................71
Originator .......................................................17
OTS ......................................................101
Parties in Interest......................................................97
<PAGE>
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Pass-Through Rate ........................................................4
Percentage Interest......................................................32
Permitted Investments....................................................45
Plan Asset Regulations...................................................97
Plans .......................................................97
Policy Statement ......................................................100
Pooling and Servicing Agreement...........................................3
Prepayment Assumption................................................73, 91
Prepayment Interest Shortfall............................................26
Prepayment Period .......................................................36
Prepayment Premium.......................................................19
Prohibited Transactions Tax..............................................84
Prospectus Supplement.....................................................i
PTCE .......................................................98
Purchase Price .......................................................41
Rating Agency ........................................................7
Record Date .......................................................32
Related Proceeds .......................................................35
Relief Act .......................................................69
REMIC ..................................................iii, 70
REMIC Administrator...................................................iv, 1
REMIC Certificates.......................................................70
REMIC Provisions .......................................................70
REMIC Regular Certificates................................................7
REMIC Regulations .......................................................71
REMIC Residual Certificates...............................................7
REO Property .......................................................43
Residual Owner .......................................................77
Restaurants .................................................i, 2, 17
RICO .......................................................69
Security Interest .......................................................22
Senior Certificates.......................................................3
Senior Housing Facilities................................................20
Senior Liens .......................................................17
Skilled Nursing Facilities...............................................21
SMMEA ........................................................7
SPA .......................................................28
Special Servicer ........................................................1
Stripped Interest Certificates............................................3
Stripped Principal Certificates...........................................3
Sub-Servicer .......................................................44
Sub-Servicing Agreement..................................................45
Subordinate Certificates..................................................3
Superlien .......................................................65
Tax Exempt Investor......................................................99
Tiered REMICs .......................................................72
Title V .......................................................68
Trust Assets .......................................................iv
Trust Fund ........................................................i
Trustee ........................................................1
UBTI .......................................................99
UCC .......................................................60
Value .......................................................19
Voting Rights .......................................................37
Warranting Party .......................................................42
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below.
Filing Fee for Registration Statement ..................... $ 151,556.74
Legal Fees and Expenses ................................... 250,000.00
Accounting Fees and Expenses .............................. 100,000.00
Trustee's Fees and Expenses
(including counsel fees) ........................... 40,000.00
Blue Sky Fees and Expenses ................................ 6,000.00
Printing and Engraving Fees ............................... 40,000.00
Rating Agency Fees ........................................ 100,000.00
Miscellaneous ............................................. 12,000.00
--------------
Total ..................................................... $ 699,556.74
==============
Indemnification of Directors and Officers (Item 15 of Form S-3).
The Pooling Agreements will provide that no director, officer, employee or
agent of the Registrant is liable to the Trust Fund or the Certificateholders,
except for such person's own willful misfeasance, bad faith, gross negligence in
the performance of duties or reckless disregard of obligations and duties. The
Pooling Agreements will further provide that, with the exceptions stated above,
a director, officer, employee or agent of the Registrant is entitled to be
indemnified against any loss, liability or expense incurred in connection with
legal action relating to such Pooling Agreements and related Certificates other
than such expenses related to particular Mortgage Assets.
Any underwriters who execute an Underwriting Agreement in the form filed as
Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
(the "Act") from certain information furnished to the Registrant by or on behalf
of such indemnifying party.
It is contemplated that the Registrant will enter into an Indemnification
Agreement with Deutsche Bank North America Holding Corp., a Delaware
corporation, pursuant to which Deutsch Bank North America Holding Corp. will be
obligated to indemnify the Registrant and each officer, director or employee of
the Registrant and certain others against certain liabilities under the
Securities Act of 1933 or the Securities Exchange Act of 1934 or other laws to
the extent such liabilities arise in connection with the issuance of securities
under this Registration Statement.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
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<PAGE>
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of the State of Delaware, the Registrant (i) shall
indemnify and hold harmless each person who was or is a party or is threatened
to be made a party to any action, suit or proceeding described in subsections
(a) and (b) by reason of the fact that he is or was a director or officer, or
his testator or intestate is or was a director or officer of the Registrant,
against expenses, judgments, fines and amounts paid in settlement, and (ii)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
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<PAGE>
Exhibits (Item 16 of Form S-3).
Exhibits--
1.1* -- Form of Underwriting Agreement.
3.1* -- Certificate of Incorporation.
3.2* -- By-Laws.
4.1* -- Form of Pooling and Servicing Agreement.
5.1* -- Opinion of Thacher Proffitt & Wood with respect to legality.
8.1* -- Opinion of Thacher Proffitt & Wood with respect to certain tax
matters (included with Exhibit 5.1).
23.1* -- Consent of Thacher Proffitt & Wood (included as part of
Exhibit 5.1 and Exhibit 8.1).
24.1* -- Power of Attorney.
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* Previously filed.
Undertakings (Item 17 of Form S-3).
A. Undertakings Pursuant to Rule 415.
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement, and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement; provided however, that paragraphs
(a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included
in a post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration
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<PAGE>
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
B. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, reasonably believes that the security
rating requirement contained in Transaction Requirement B.5. of Form S-3 will be
met by the time of the sale of the securities registered hereunder and has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston, The
Commonwealth of Massachusetts on the 21st day of November 1996.
DEUTSCHE MORTGAGE & ASSET
RECEIVING CORPORATION
By: /s/ Nancy D. Smith
--------------------------
Nancy D. Smith
Director (President)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Nancy D. Smith Director (President November 21, 1996
- ------------------------------------------ Chief Executive Officer)
Nancy D. Smith
* (Treasurer and Chief November 21, 1996
- ------------------------------------------
R. Douglas Donaldson Financial Officer)
* Director November 21, 1996
- ------------------------------------------
Louise E. Colby
*By: /s/ Nancy D. Smith
---------------------
Nancy D. Smith
Attorney-in-fact pursuant to a previously filed power of attorney
</TABLE>
